Deciding between fixed term deposits and gold? Aside from exchange-traded funds , these two investment types are popular among long-term investors. Both have their perks, but they work in different ways. Fixed term deposits offer stability and guaranteed returns, while gold is known for its potential to hold value, especially when inflation kicks in.

In this article, we’ll break down the key differences – like risk, returns, and inflation – so you can figure out which one fits your objectives. Whether you’re after security or long-term growth, the goal is to choose what works best for your investment strategy. Let’s explore how fixed term deposits and gold compare.

What are fixed term deposits?

Fixed term deposits are a type of investment where you deposit a lump sum with a bank for a set period. In return, you receive a fixed interest rate over that time. These deposits are known for their stability and predictable returns, making them a popular choice for risk-averse investors. Let’s look at the potential pros and cons of investing in fixed term deposits.

Potential pros

• Guaranteed returns : Because the interest rate is fixed, you know exactly how much you’ll earn by the end of the term.
• Low risk : Fixed term deposits are comparatively low-risk investments. Your initial deposit is protected, and many are covered by the Australian Government's Financial Claims Scheme . This means they’ve got your back if something goes wrong with the banking institution holding your deposit.
• Stable income : These deposits provide steady, predictable income over the investment period.

Potential cons

• Limited growth potential : The returns have historically been lower than riskier investments like shares or property , which could potentially limit long-term wealth growth.
• Impact of inflation : Fixed term deposits may not keep up with inflation, which could reduce the real value of your returns over time.
• Lack of flexibility : Once your money is deposited, it’s locked in until the term ends. Withdrawing early can lead to penalties.

What is gold as an investment?

Gold has long been considered a "gold standard" in conservative investing, particularly during times of economic uncertainty. Its reputation as a store of value makes it a go-to asset for investors looking to protect their wealth. Gold is often used as a hedge against inflation and economic uncertainty.

Unlike fixed term deposits, gold doesn’t provide regular income but can offer potential growth over the long term. This can especially be the case during times of market instability. Let’s discover the pros and cons of investing in gold.

Potential pros

• Hedge against inflation : Gold has historically tended to hold its value or even increase during periods of high inflation, preserving purchasing power.
• Diversification : Adding gold to your portfolio can potentially reduce risk, as it usually behaves differently than other assets like shares or property.
• Liquidity : Gold is highly liquid, meaning it can be easily bought and sold without waiting for a fixed term to end.

Potential cons

• No passive income : Unlike fixed term deposits, gold doesn’t provide interest or dividends , which may not suit income-focused investors.
• Price volatility : Gold prices can be volatile in the short term, meaning its value can rise or fall quickly.
• Storage and costs : Physical gold requires secure storage, and there may be costs associated with buying, selling, or storing it.

What are the key differences between fixed term deposits and gold?

Fixed term deposits and gold belong to different asset classes . Fixed term deposits fall under cash or fixed-income assets. On the other hand, gold is considered a commodity.

When comparing fixed term deposits and gold, it’s important to understand what each brings to the table. Both offer something different, depending on your goals and the market conditions. Here are some quick facts to help you weigh up each option based on your financial goals and risk tolerance .

Criteria	Fixed-term deposits	Gold
Risk levels	Low risk, with guaranteed returns and protection by government schemes.	Higher risk due to price volatility, though seen as a safe haven in uncertain times.
Returns	Fixed interest rate provides steady income, but lower long-term growth potential.	No fixed returns, but potential for long-term value appreciation, especially in inflationary periods.
Inflation impact	Inflation can reduce the real value of returns over time.	Typically holds value during inflation, acting as a hedge against rising costs.
Interest rate sensitivity	Rising interest rates, determined by the Reserve Bank of Australia (RBA) , may increase returns on new fixed term deposits.	Rising rates can make gold less attractive, as higher returns are available elsewhere.
Liquidity	Funds are locked until the term ends and early withdrawal may incur penalties.	Highly liquid, can be sold anytime, though prices can fluctuate.
Income generation	Provides predictable, fixed income over the term.	Doesn’t generate regular income like interest or dividends.
Potential costs	Early withdrawal penalties apply if you access funds before the term ends. No other ongoing fees.	Purchasing physical gold may involve transaction fees and storage costs. Selling gold may also include fees.
Tax implications	Interest earned is usually taxed as income.	Gains from selling gold may be subject to capital gains tax , depending on how long you hold it.

Both fixed term deposits and gold have their perks. Fixed term deposits potentially offer more security and predictability. Gold can potentially hedge against inflation with long-term growth. Understanding these differences can help you decide if one, or maybe even both, belong in your portfolio.

How do market conditions affect each?

Market conditions can have a big impact on both fixed term deposits and gold. But each investment is affected in different ways. Keeping an eye on market conditions can give you an idea of which investment might suit your needs at any given time.

Fixed term deposits

In stable or rising interest rate environments, fixed term deposits can become more appealing. Banks offer higher returns, and you benefit from locked-in, predictable income. However, during periods of high inflation, your real returns might take a hit because the interest rate might not keep up with rising costs. At the same time, economic uncertainty has traditionally tended to favour safer, low-risk options like fixed term deposits. Here’s a fictional case study on what that could look like:

Arlo is a cautious investor who prefers predictable returns. Five years ago, he invested in a 3-year fixed term deposit with a competitive interest rate during a period of rising interest rates. Over the term, he earned consistent returns without worrying about market fluctuations. Although inflation ticked up, his principal was protected, and he avoided any risk of losing his initial investment. However, the RBA increased interest rates even higher after he locked in, so Arlo missed out on better returns elsewhere.

This scenario shows how fixed term deposits can be reliable during stable or rising interest rates, but they may not always keep pace with inflation. Keep in mind that past experience isn’t always a reliable indicator of future results.

Gold

Gold tends to shine in times of uncertainty or economic instability. As mentioned earlier, investors often flock to gold during market downturns or when inflation soars, making it a go-to hedge. But when the economy is booming and interest rates rise, gold can lose its lustre as investors seek out assets with higher, more predictable returns. Let’s consider another fictional case study for investing in gold:

Mira is more focused on long-term growth and hedging against inflation. She invested in gold 10 years ago when inflation was starting to rise. Over the years, gold prices have been volatile, but in times of economic instability, Mira saw the value of her gold holdings increase. Despite short-term dips in price, Mira believes gold has helped protect her wealth from inflation over the long term. However, during periods of economic growth and rising interest rates, her gold underperformed compared to other assets.

While Mira benefited from gold’s inflation protection, this example highlights that gold’s performance can fluctuate, and returns aren’t guaranteed.

Fixed term deposits vs gold – how can I choose?

Choosing between fixed term deposits and gold depends on your financial goals, risk tolerance, and investment timeline. Both options have ups and downs, so seek to understand what works best for you. You can answer these questions to get a clearer idea of which option could be right for you:

• Are you focused on safety or growth?
  Fixed term deposits can offer stability and guaranteed returns. Gold provides potential growth, especially during inflation – but it comes with more risk.
• What’s your risk tolerance?
  If you prefer low risk, fixed term deposits might be a better fit. Gold’s volatility means it’s suited for investors comfortable with price swings.
• How long do you plan to invest?
  Fixed term deposits can work well for short- to medium-term goals. Gold is generally a long-term game, particularly for hedging against inflation.
• How sensitive are you to costs?

  If you’re looking for a lower-cost investment mix in your portfolio, you might prefer to lean towards more affordable fixed deposits. The costs of gold can add up, from transaction fees to storage costs.

• How do you view inflation and interest rates?
  If you expect inflation to rise, gold may be appealing. If you anticipate the RBA will increase interest rates, fixed term deposits might offer better returns. But remember: without a crystal ball no-one can accurately predict either.
• Could a mix of both work?
  Consider whether combining fixed term deposits and gold in your portfolio could potentially balance risk and return.

After reflecting on these questions, you might discover that you want one, both, or even none to achieve your investment goals.

Role in a diversified portfolio

Fixed term deposits and gold can each serve different purposes within a diversified portfolio . Each offers unique characteristics that can potentially help balance risk and reward.

Fixed term deposits

Fixed term deposits tend to provide a steady, predictable return that can help balance riskier investments. As mentioned, they act as a low-risk foundation, offering capital protection and stable returns. They can be preferred by investors seeking relative stability within their overall strategy.

Gold

Gold can be a layer of protection during economic downturns or inflationary periods. As discussed earlier, gold doesn’t offer regular income but tends to hold value when other investments, like shares, may falter. Its ability to hedge against inflation and market volatility can be a valuable counterbalance.

Finding balance

Including both fixed term deposits and gold could potentially strengthen your portfolio’s resilience with diversification of asset classes. Fixed term deposits can offer certainty, while gold’s value typically rises in uncertain times. Together, they can create a more flexible, risk-managed approach. This can potentially help you weather different market conditions without putting all your eggs in one basket.

Before deciding, though, understand how each investment fits your financial goals, risk tolerance, and market outlook.

Fixed deposits vs gold: take your pick

Both fixed term deposits and gold have their place, depending on market conditions – and your portfolio. The key takeaway? Know your goals, preferences, and risk tolerance. As we’ve said, fixed term deposits can give you some stability, while gold can shine in uncertain times. Whether you choose one or both, make sure it fits your long-term plan before you click ‘buy’ or 'transfer'. Pick what works for you and your financial future.