Is buying gold a worthwhile investment?

The price of gold has been rising in recent months. It appears that there is serious interest in the precious metal from small and large investors around the world?

If we had put money into gold a year ago, the investment would have yielded a dividend of over 20% today. Of that 21 percent, 13 percent is the rise in the price of gold since the beginning of the year. The precious metal could see appreciation for the third consecutive quarter, although there has been a decline in its price of about one percent in the past month. On world exchanges, its price remains high - above $2300.

What's behind all these numbers and what's driving the price up?

One reason is increased demand for gold. There is economic logic in this. As a financial instrument, gold is often used by investors - whether they are individuals or large financial institutions - as a safe haven asset against turbulence in the global economy and finance. And there has been plenty of that in recent years - supply chain problems during the Covid-19 pandemic, geopolitical conflicts from the war in Ukraine, the situation in the Middle East. Such uncertainty is leading to more interest in gold, and that is pushing up the price, including from people looking for a way to save their savings from rising inflation.

This brings us to another reason and that is the relationship between inflation and gold. What we are seeing now follows this economic pattern: the price of gold is increasing because of high inflation. Investors are turning to safe-haven assets for their savings. This closes the loop - high inflation, expectations of rise in the price of gold, the price of gold is driven up further by the increased demand. And so on until the economic situation changes.

Who buys the most gold?

For the first quarter of this year, countries such as Turkey, China, India, Kazakhstan and Singapore increased their gold reserves the most.

That's according to the World Gold Council. By comparison, Bulgaria's gold reserve is nearly 41 tonnes, and in the first three months of this year alone, Turkey bought 30 tonnes. Bulgaria has the 55th largest gold reserve in the world. It accounts for nearly 7% of the country's total reserves.

However, more attention should be paid to China, which is also a factor in the increased price. The Asian country's central bank is buying gold very actively, and the aim is to diversify its reserves to reduce its dependence on the US dollar. This policy has been pursued for more than ten years. What is different now, however? If in the past Beijing used the national currency, the Chinese yuan, to buy gold, more recently it has been using its reserves of foreign currencies - mainly the US dollar. This has been triggered by the decision of a number of countries to freeze Russian assets in US dollars following sanctions against Moscow.

But Chinese citizens also have an interest in gold as the real estate sector remains in crisis. In terms of total reserves, China ranks 6th in the world. The US, Germany, Italy and France hold the most gold.

Does this mean that gold around the world is mainly used by central banks? What proportion is used to make jewellery?

Indeed, most of the available gold is used to create beautiful jewellery.

Gold jewellery represents the largest source of annual demand for gold per sector. This has declined over recent decades, but it still accounts for around 50% of total gold demand.

India and China are by far the largest jewellery markets, together accounting for over 50% of the global total. The Asian and Middle Eastern markets are dominated by demand for purer, higher-carat gold.

Another major precious metal is investment gold.

Gold plays an important part in global central bank reserves, and they are significant holders of gold.

Gold is used as an industrial metal in a broad range of applications, but demand is driven by the electronics sector which accounts for ~80% of gold used in technology. The metal is ubiquitous in most consumer electronics and automotive applications, where its chemical and physical properties combine to make it irreplaceable in many high-end devices. Most types of semiconductor chips use gold along with other precious metals.

Should we invest in gold then?

That is entirely indiviidual decision. But we should not forget that, like any financial instrument, an investment in gold also carries risks of loss. In one year the price of gold has increased by over 20%, but that does not mean that it will not fall in the next year. The economic situation is changing and an example of this is the policy of central banks. The Federal Reserve is expected to lower its key interest rate and the European Central Bank is expected to make two more interest rate cuts by the end of this year. The rate of increase in inflation is slowing. This and other factors could change the direction of the gold price.