Gold is neither cheap nor risk-free – but it holds its value and helps to diversify your portfolio, says Chris Carter.
We’ve been fans of gold here at MoneyWeek since we launched in the early 2000s. Back then gold was detested, and extremely cheap, trading at below $300 an ounce. Nowadays, gold is a lot more popular, trading at around $1,250. That’s well below its 2011 high of more than $1,900, but it’s hardly cheap. So why would we still suggest that you hold around 5%-10% of your wealth in gold? It boils down to diversification. There’s an old saying in finance: “Put 10% of your portfolio in gold and hope it doesn’t go up.” Gold is one of the few assets around that has no counterparty – a bond or a share can go to zero if the issuer goes bust, and cash can be destroyed by inflation, but gold will always retain some value.
To be clear, this doesn’t mean that gold is risk-free. It is a volatile asset (ie, the price goes up and down a lot), and it pays no income (in fact, you have to pay to hold it). However, if faith in the financial system is battered again in years to come, or central banks succeed in creating the inflation they so crave and it then overshoots, or capital controls are imposed by concerned governments, then you’ll be glad to hold a bit of gold in your portfolio. So how do you go about buying it? There are three main options when it comes to buying gold (rather than gold mining shares, which we won’t discuss here). You can buy physical bullion (gold bars and coins); invest in bullion online; or use exchange-traded funds (ETFs). Let’s look at each in turn.
Buying gold coins and bars
Bullion, or physical gold, comes in two main forms: gold bars (or ingots), and coins, such as sovereigns and Britannias. A one kilo bar of gold costs around £32,000 at current prices, and if you’re buying gold in bulk, then bars may be the way to go. But coins are more practical for most investors. They can be bought and sold in smaller quantities (although this means incurring more transaction costs). They’re also easier to store at home, for those who’d prefer to take possession of their gold, rather than pay the vendor to store it on their behalf. Remember though that if you do this you’ll have to let your home insurer know, and will also have to invest in a safe.
Many countries around the world issue gold coins. There’s the Chinese Panda, the South African Krugerrand, and, of course, British Britannias and sovereigns, among others. We’d generally opt for the latter two. For one thing, Britannias and sovereigns are straightforward for investors in Britain to get their hands on. More importantly, because they are deemed to be legal tender, they are not liable to capital gains tax (CGT), whereas if you sell bullion, or shares in ETFs (for more, see below), or coins that aren’t deemed legal tender, you will have to pay CGT on any profits made over and above your annual personal allowance (currently £11,100). Also you don’t have to pay VAT on any form of gold (whereas you do have to pay VAT on physical silver).
For the most part, when buying coins, you will pay a premium to the dealer on top of the “spot price” – ie, the current gold price. This can be quite significant – typically around 4% to 6%, depending on how many coins you are buying. For example, a single one-ounce 2017 24-carat gold Britannia costs around £1,063 from the Royal Mint – around £55 more than the gold spot price at the time of writing. You’ll pay a similar charge when you sell (ie, the dealer will pay 4% to 6% below “spot”).
Older coins, such as those minted in the 19th century, may be more expensive, but this reflects their “numismatic” value as collectables, rather than their intrinsic value as gold bullion – in other words, unless you’re an avid coin collector, stick with the sovereigns. There are many coin dealers offering online delivery (such as GoldCore.com), and several have physical branches too (such as Atkinsons Bullion in Birmingham or Sharps Pixley in London). In recent years, vending machines selling gold coins have popped up in shopping malls around the world. These are best avoided, as they will charge you significantly more in transaction costs.
Owning a bag of coins that you can gaze upon for reassurance during hard economic times has its appeal. However, it’s also a relatively expensive way to invest in gold. An alternative is to open an account with an online gold investment service, such as BullionVault (BullionVault.com), BullionByPost (BullionbyPost.co.uk), or GoldMoney (GoldMoney.com) – where you own gold stored in a vault, specifically allocated to you. You will pay a small premium to the spot price when buying, and again, there are fees when selling, but overall costs are lower. For example, to buy £4,991.28 of gold from BullionVault.com, hold it for a year, then sell, would incur total costs of 1.77%, according to the company’s website. That’s significantly lower than the “spread” you would pay on an equivalent bag of coins. If you do want to take physical delivery of your gold, these companies will provide that service too, although that’s not their main purpose.
Another variant of buying gold online is through the Perth Mint Certificate Program (PerthMint.com). This government-backed scheme allows you to buy and sell gold and other precious metals via a select list of distributors. Australia’s Perth Mint will then look after your gold, and will issue you with a unique Precious Metal Certificate proving your ownership of the quantity of gold you have bought.
ETFs provide a quick and easy way to buy exposure to gold. The ETF is a stock-exchange listed fund
that merely tracks the price of gold – you can buy and sell shares in the ETF just as you would any other listed fund or company. Make sure you buy a “physically backed” gold ETF (the most popular ones, such as ETFS Physical Gold (LSE: PHAU), are). This means the ETF itself is physically backed by gold stored in a vault, although that gold is not allocated to individual investors (it is possible to take possession of ETF gold, but they’re not really designed for this). Annual fees come in at around 0.4% – that’s cheaper than buying and selling individual gold coins, but whether or not it’s cheaper than online bullion dealers depends on how much you are investing. Where ETFs are useful is that they can be tucked away in tax-efficient individual savings accounts (Isas), which shields them from CGT, for example.
If you want to know where to buy gold bullion, we have compiled a directory of leading gold brokers where you can buy gold bullion, coins and bars online, over the phone or even in branch: How and where to buy gold coins and bars.