Gold prices surged to an unprecedented high last week, surpassing the previous record set during the uncertainties of the COVID-19 pandemic in 2020. The precious metal reached $2,531 per troy ounce.

Historically, gold has been considered a safe haven asset, indicating that rising prices are often reflective of underlying global concerns. The current increase can be attributed to geopolitical instability, inflation worries, fiscal deficits, and decreasing interest rates.

Analysts at JP Morgan anticipate that gold may continue its ascent, potentially reaching $2,600 by the first quarter of the coming year, driven by increased investor interest ahead of the U.S. presidential election in November.

Central banks, particularly in the U.S. and China, have been purchasing gold due to its liquidity and lack of credit risk.

Should individual investors consider following suit?

Gold has long been promoted as an “insurance policy” within investment portfolios, typically making up about 5 to 10 percent of an investor’s total allocation. There are two principal methods of investing in gold: through a fund that tracks gold prices or by purchasing physical gold bullion for secure storage.

However, gold prices are susceptible to market sentiment, which can result in significant volatility—perhaps an unexpected attribute for something considered an insurance policy. One could argue that cryptocurrencies, like Bitcoin, might serve a similar purpose in a portfolio, given their price fluctuations are also tied to investor sentiment and are not directly linked to global stock market movements.

Gold’s primary advantage over Bitcoin is its physical presence, something that may matter in extreme circumstances. However, this advantage diminishes when investing through funds instead of owning tangible gold bars.

Nevertheless, many investors find value in gold as a stabilizing component of their portfolios. On August 5, dubbed Meltdown Monday, the Royal Mint recorded an astonishing 336 percent surge in bullion trading as global markets experienced declines.

What drives this interest? Gold often spikes during periods of uncertainty, such as notable price increases in 2022 during the Russian invasion of Ukraine and again in December 2023 amid speculation about interest rate reductions. While countries like India and China remain consistent buyers for jewelry, demand has softened due to the rising prices. One of gold’s appeals is its liquidity, allowing easy buying and selling.

While some proponents deem gold an effective inflation hedge, skepticism persists. Gold does not yield income, meaning any potential gains rely solely on price appreciation, which is not ensured. Historically, equities have proven to offer more reliable returns that outpace inflation.

The volatility and unpredictability of gold present real concerns for investors.

What alternative options exist for investors seeking a reliable safe haven?

Bonds offer one solution. These financial instruments represent a loan to entities such as corporations, where investors receive regular interest payments, or coupons, and repayment of the principal at maturity. Bonds typically exhibit inverse relationships with stock markets, making them suitable for portfolio diversification.

Investing in bonds through funds can effectively mitigate risk by providing exposure to numerous bonds. A low-cost option like the iShares Corporate Bond Index fund aims to mirror the performance of the broader UK bond market, while the highly regarded Royal London Corporate Bond fund holds securities from major institutions, including HSBC and Aviva.

Government bonds, known as gilts, are also an option. Given their backing by the UK government, they are viewed as highly secure. However, in an environment of low interest rates amidst high inflation, gilts have proven less favorable, experiencing losses in real terms. Currently, a 30-year gilt offers about 4.4 percent, making them a viable consideration.

With current savings rates around 5 percent, cash deposits may represent a safer choice. Not only do they provide guaranteed returns, but deposits are insured up to £85,000 in the event of bank insolvency. While it’s not advisable to allocate an entire retirement fund to cash, it may serve as an effective short-term refuge. Options include earning 4.8 percent through Cynergy Bank’s easy-access account or 4.93 percent with SmartSave if funds are locked for a year.

Reflecting on my own experience, investing in a gold tracker fund about 12 years prior proved to be a source of significant anxiety due to the lack of underlying fundamentals affecting price movements, coupled with exchange rate exposure since gold is primarily priced in U.S. dollars.

Currently, I consider cash my preferred safety net: it offers inflation-beating returns and guaranteed interest, fitting my notion of an insurance policy.