Gold Beat the S&P 500 in 2024 and Is Already Up More Than 6% in 2025. Should You Buy a Gold ETF Now?

The price of gold in U.S. dollars jumped 25.5% in 2024, barely outperforming the total return (including dividends) of the S&P 500, which amounted to 25%. And in January, gold popped another 6.4% to a record high -- compared to a 2.8% total return for the S&P 500.

Let's consider why gold continues to outperform the index, what role gold can play in a diversified portfolio, ways to invest in gold, and whether gold is a better buy than stocks right now.

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A hedge against uncertainty

Gold has continued climbing in 2025 despite the Federal Reserve's decision to hold interest rates steady as inflation remains a concern. Lower interest rates are generally a catalyst that pushes gold prices higher because they reduce borrowing costs. However, geopolitical uncertainty can have an even bigger influence on gold prices.

On Feb. 1, President Trump imposed tariffs on the United States' three top trading partners -- Canada, Mexico, and China. Those 25% tariffs on goods imported from Canada and Mexico, and the 10% tariffs on imports from China could cause higher inflation and a slowdown in economic growth, which may lead some investors to gravitate toward the perceived safety of gold.

In 2023, the People's Bank of China (PBOC) was the largest official sector buyer of gold. Reports indicate that the PBOC was also the largest buyer in 2024. Ongoing economic uncertainty could lead to more gold purchases from China in 2025, driving prices.

Higher interest rates can reduce consumer spending on luxury goods made from gold, but they can also lead to lower capital spending on gold production, which in turn reduces supply. In sum, a lot of factors impact the price of gold. But geopolitical uncertainty is probably the most likely reason gold has gotten off to such a hot start in 2025.

How to buy gold

The reliability of gold as a store of value in times of uncertainty can make it a good role player in a diversified portfolio. And the advent of low-cost gold-backed exchange-traded funds (ETFs) has made it easy to buy gold without the liquidity and safety concerns of holding physical gold bullion, coins, or jewelry.

The SPDR Gold Shares ETF (NYSEMKT: GLD) and the iShares Gold Trust (NYSEMKT: IAU) use custodians that hold physical gold on their behalf. Both ETFs charge for their services -- the SPDR Gold Shares ETF has an expense ratio of 0.40%, while the iShares Gold Trust's fees amount to 0.25%. But these fees can still amount to less than it would cost an investor to arrange for the security needed to protect physical gold.

Perhaps most importantly, these ETFs can be bought and sold with ease in a brokerage account, making them a highly liquid way to invest in gold, and with potentially simpler tax reporting than buying and selling physical gold.

Another way to get exposure to the precious metal would be to invest in gold mining stocks like Newmont (NYSE: NEM), although the prices of gold mining stocks can still fall even when gold prices are increasing. The SPDR Gold Shares ETF and the iShares Gold Trust, however, should move in lockstep with gold prices.

Investing in commodities versus stocks

Commodities like gold should be viewed entirely differently than stocks. Whether one is discussing oil, natural gas, wheat, steel, or gold, a commodity's price will reflect the balance between supply and demand. A stock's price, by contrast, represents the market's consensus view of the company's value based on its expected future earnings.

The biggest issue with gold is that its value isn't based on earnings. Nor does it pay a dividend. However, gold is viewed as having an intrinsic value regardless of the currency in which it is denoted.

Gold versus other safe investments

The price of gold can swing dramatically based on sentiment and global changes in supply and demand. Right now, it's important to understand that traders are having big impacts on gold, and that its price could be moving up for short-term reasons rather than the long-term value of the commodity.

For retail investors, it's probably a bad idea to think of gold as an asset to jump into and out of depending on market dynamics. Rather, a better approach could be to decide what allocation of gold you want in your portfolio -- typically, a small one -- and your preferred way of getting it (whether through an ETF or a different investment vehicle). Then buy it, and let it ride for the long haul. That way, you can have exposure to gold without getting too caught up with its short-term gyrations.

Some investors may prefer to avoid gold altogether. If you're looking to park some of your savings in safe assets, alternatives to gold include a high-yield savings account or a risk-free asset like a 10-year Treasury note, which currently yields 4.5%. This way, you can collect passive income from assets outside of the stock market without needing the price of gold to go up to get a return on your investment.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.