How to invest in gold

With a history stretching back to the dawn of civilization, investing in gold is perhaps one of the most tried-and-tested economic transactions you can make.

Gold’s recent history has also been a prosperous period for gold investors. Strong demand from various sources has driven global gold prices to new all-time highs above $3,500 in September.

That follows a relatively subdued period, when gold prices generally traded between $3,280 and $3,440 throughout July and August.

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“Gold is undeniably popular again with investors,” says Ian Samson, multi asset portfolio manager at Fidelity International. “It was one of the best performing assets in our portfolios last year, rising 27%, and it’s already up another 28% this year (to 25 August).”

The gold rally could once again gather pace, depending on world events. “Bullish environments for gold can run strongly for many years,” says Samson.

The Federal Reserve (Fed) looks set to start cutting US interest rates, which is typically a positive signal for gold. Gold pays no interest, so when interest rates are higher other investments can be more attractive for investors. But its ability to preserve value gives it greater appeal in environments where there are limited returns available elsewhere.

“With a macro base case of a US slowdown or even stagflationary environment in the coming months, we remain positive on the outlook for gold,” says Samson. He notes that, given the US macro environment, “[a] mix of falling interest rates, sticky inflation, and subdued growth should all bolster gold”.

Any beginner investors that are bullish on the outlook for gold or want to introduce the metal to their portfolio as a hedge, can select from various means of exposure. These range from buying gold bullion to investing in a gold ETF.

We take a look at the pros and cons of each approach.

Gold investing for beginners

If you’re just getting started in investing, it’s worth considering the role that gold could play in your portfolio. It’s obviously tempting to buy gold during a bull run like the one it has been enjoying, but even when gold prices aren’t climbing there are good reasons to include an allocation in your portfolio.

“Gold can be a highly effective hedge against governments’ monetary and fiscal profligacy (monetary debasements and currency devaluations) and tends to become the ultimate safe haven when global geopolitical shocks start to occur,” says James Luke, manager of the Schroder ISF Global Gold Fund.

Traditionally, bonds are used to diversify a portfolio away from equities, the theory being that when bonds underperform, stocks overperform, and vice versa.

However, as Luke explains, bonds have shown a greater degree of correlation with equities in the current market. As such, gold currently offers a greater level of protection against a downturn in equities markets, given its lower degree of correlation.

Despite this, most investors are relatively underweight gold. “We absolutely believe gold deserves a place in investors’ portfolios,” says Luke. “In our view a traditional 60:40 portfolio would benefit from diversifying 10% into a gold allocation.”

“Gold continues to provide diversification even when bonds do not,” says Samson, adding that the yellow metal “maintains an ultimate ‘safe haven’ status, offers protection against inflation and loose economic policies, and benefits from structural trends.”

How to invest in physical gold

One way to add gold to your portfolio is by buying physical gold in the form of gold bars and gold coins. And though it isn’t usually purchased for investment purposes, bear in mind that any gold jewellery you buy will store value in the same way that other gold investments will.

Physical gold can be purchased from government mints such as the UK’s Royal Mint, precious metal dealers such as Sharps Pixley or GoldCore, and jewellers.

It is an unregulated market so you should be careful to avoid scams. One way to protect yourself is to always check whether a dealer is part of the London Bullion Market Association (LBMA), which sets standards across the industry.

As with any investment, it is important to do your own research on prices. Gold dealers make their money by selling for more than the spot price and buying for less. The difference – or spread – will vary depending on the gold content and weight of the bullion, who you buy from, and current supply and demand.

There are tax advantages to investing in physical gold as there is no stamp duty or VAT to pay on purchases. Additionally, sales of coins produced by the Royal Mint, including gold sovereigns and the popular Britannia, are tax-exempt as they are considered legal tender.

Gold coins can have more value than bars as they may be rarer and are often viewed as collectables, known as numismatic coins. The one-ounce South African Krugerrand, first produced in 1967, is the most common gold coin and normally trades at the cheapest premium over the spot price. Other popular coins are the UK gold sovereign, which is 22-carat gold, and the one-ounce Britannia.

As attractive as buying a gold bar or coin may be, you should also consider the cost of delivery, insurance and secure storage. One solution may be using an online investment service such as BullionVault, which lets you invest in gold bars or coins which are stored in its vaults. The Royal Mint also has a digital option that lets you invest in physical gold, silver or platinum based on monetary value instead of weight. It can then be stored in the Royal Mint’s vault.

Investing in gold with ETFs and ETCs

A simpler and cheaper way to invest in gold is through exchange-traded funds (ETFs) or exchange-traded commodity (ETC) products. Take a look at our article on the best gold ETFs for more information. Analysts typically favour physical-backed ETFs or ETCs, such as iShares Physical Gold (LON:SGLN), over leverage-style products that rely on derivatives, adding extra complexity.

“An ETC owns physical gold and tracks the price,” says Ben Yearsley, investment director at Shore Financial Planning. “It’s as close as most people get as it’s simple and can be held in your SIPP and ISA.”

The main benefit of using ETCs to invest in gold, according to Paul Syms, head of EMEA ETF fixed income and commodity product management at Invesco, is their simplicity and cost-effectiveness.

“It’s low cost, and [an ETC] trades throughout the day,” he says.

The main costs of investing in gold ETFs will be the ongoing charge and any platform fees. You won’t actually own any gold directly – although The Royal Mint Responsibly Sourced Physical Gold ETF (LON:RMAP) allows investors to exchange shares for physical gold coins or bars.

Owning a gold ETF or ETC will allow you to benefit from any growth in prices. Of course, you will also lose money if the gold price drops.

Investing in gold miners

Rather than buying actual gold, you could consider backing the companies involved in gold exploration or mining. This would mean buying shares in gold miners. This requires significantly more research than tracking the gold price, as a company’s success will be linked to its exploration activities, business strategy and management.

“Many investors believe that gold mining stocks essentially give you a leveraged play on the gold price – sometimes they are right, sometimes they are wrong,” says Ben Seager-Scott, chief investment officer at Forvis Mazars.

While investing in gold miners can come with greater rewards too, you have to consider the possibility of losses.

It largely depends on how the company is run. “You need to consider all the additional impacts of investing in an operating business, such as direct mining costs, operating costs, taxes, [and the] business environment,” he adds.

Investors should also pay attention to the size of the company, says Evangelos Assimakos, investment director at Rathbones Investment Management.

“Smaller companies will usually have a greater proportion of their operations in mines that have yet to start production and thus carry more execution risk should their plans get pushed further into the future or see a reduction in expected output,” he explains.

All that said, there are reasons why investing in gold miners could be a savvy play on the current gold bull run.

“Within an allocation to gold, we think an allocation to gold equities currently makes clear strategic sense,” says Luke. “That is because record high gold prices are supporting record high gold producer margins while equity valuations are at multi-decade lows.

“The sector is exhibiting all the characteristics required to outperform the underlying gold price; good balance sheets, cost inflation under control, disciplined management and very strong free cash flow that allows for dividends and share buybacks.

“Despite this, equity valuations remain close to secular lows. Given these dynamics, it is not hyperbolic to say that gold equities could rally 50% from here and still look inexpensive.”

While investing in gold miners can come with greater rewards too, you have to consider the possibility of losses.

Rather than picking individual gold mining stocks, you could select a fund consisting of gold mining stocks. For example, the L&G Gold Mining UCITS ETF (LON:AUCP) tracks the Global Gold Miners Index, and as such holds companies like Agnico-Eagle Mines (LON:0R2J) and Newmont (LON:0R28).

Opting for a gold fund theoretically reduces some of the individual company risk involved when investing in gold miners.

The pros and cons of investing in gold

One drawback of investing in gold is the lack of income available from physical gold or through gold ETFs which don’t pay dividends.

What’s more, the price of gold can be volatile over the short or medium term, making it hard to know if you are buying at the top or bottom of the market.

However, advocates see the metal as a useful diversifier, as its value and performance don’t correlate with those of other assets. It also has a reputation for retaining its value well in periods of inflation.

“The loss of paper [currency] purchasing power is encouraging people to think about other things,” says Evy Hambro, global head of thematic and sector-based investing at BlackRock. “Gold is coming into that place. It's really positioned as a mainstream tool for people to use in portfolio construction.”

Interest rates are now on a downward trajectory across most major economies, which should also be supportive of the gold price. We take a closer look at gold’s fortunes in: “Is now a good time to invest in gold?”