A beginner's guide to investing in gold

Gold is the ultimate insurance policy - an essential part of your portfolio. Here's how to invest in it.

Gold can be a very useful way to diversify your portfolio. It's relatively rare, and its value often doesn't move in line with other assets such as equities or property. At MoneyWeek, we've consistently said that gold provides insurance for your portfolio, and we believe that most people should probably allocate around 5%-15% of their portfolios to gold or gold-related investments. So the follow-up question is: how should you invest in gold?

Invest in physical gold

Physical gold is worth holding because it's a universal finite currency, held by most central banks. In the same way that the family home should not be regarded as an investment, gold bullion is not an investment per se, rather a form of saving for a rainy day or of financial insurance. You shouldn't trade your gold. You wouldn't trade an insurance policy, so don't trade your gold.

Gold is a good way to ensure wealth preservation and for passing wealth from one generation to the next. Once you've got some gold bullion in your portfolio, then other investments such as mining shares, investment funds and other more speculative gold investments can be considered.

If you want to know where to buy gold bullion, read on here

Modern bullion coins and bars

Modern bullion coins allow investors to own investment-grade gold legal tender coins at a small premium to the spot price of gold as quoted on the markets. The value of bullion coins and bars is determined almost solely by the price of gold, and thus follows the bullion price.

Gold, silver, and platinum are all available in the form of bullion coins, minted in the UK, the US, in Canada, South Africa, Austria, Australia, China and other countries. Most bullion coins are minted in 1/10oz, 1/4oz, 1/2oz & 1oz form (and some can be bought in 2oz, 10oz & 1 kilo). However, one-ounce gold bullion coins such as Krugerrands or Britannias are by far the most popular for both small investors and high-net-worth individuals who see the advantages of owning legal tender bullion coins, either in their possession or in depositories, and recognise the advantages of the divisibility afforded by them.

Buying investment-grade gold bullion for investment is stamp-duty free and tax free (VAT exempt) in the UK and EU due to the EU Gold Directive of 2000.

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.

Semi-numismatic and numismatic gold coins

Numismatic or older and rare coins are bought not solely for their precious metal content, but also for their rarity and their historical, aesthetic appeal. They are leveraged to the gold price, which means that the price of these coins will generally increase faster than the gold price in a bull market and will decrease by more when gold is in a bear market.

The British gold sovereign (originally the one pound coin) is the most widely traded and owned semi-numismatic gold coin in the world. It's worth noting that British gold sovereigns are also exempt from capital gains tax (CGT).

Read more on why you should buy British gold sovereigns here

Gold certificates

The Perth Mint Certificate Programme is the only government backed precious metal certificate programme in the world. It allows you to own investment grade gold which is stored in vaults in the Perth Mint of Western Australia. The gold is stored in a government mint and insured by Lloyds of London. That said, this is unallocated gold'. That means that you don't own actual gold, you own a promise from the Perth Mint to give you back your gold if you want it. (With allocated gold', you are the legal owner of the gold, and the account provider is the custodian.) There are no initial or ongoing shipping, insurance, holding or custodial fees and thus it is one of the most cost effective ways for investors to own bullion over the long term.

Most investors opt to own their bullion in unallocated accounts as there are no insurance or holding fees on them, and there is the flexibility of being able to transfer to an allocated account simply by paying small fabrication fees should the investor deem it necessary.

Allocated accounts

Allocated gold accounts allow an investor to buy gold coins and bars from a bullion brokerage which will transfer or ship the bullion to an individual's account in a depository or bank. Allocated accounts involve ownership of specific gold and the owner has title to the individual coins or bars. Due diligence should be done on allocated gold account providers and the history, security, credit rating and net worth of the provider is of vital importance.

Providers include BullionVault and Gold Money. They offer allocated accounts where gold can be instantly bought or sold, and where every gold bar is audited and accounted for and it is considered a safe way to own bullion.

Investing in paper gold

Another approach is to invest in companies that either mine gold or are exploring for new gold deposits. Some companies are both miners and explorers. If you're going to invest in mining companies, it's a good idea to diversify your investment across several companies. Investing in a miner is riskier than investing in gold itself.

You can also invest in gold via financial products such as options, futures and spread betting. With all of these products, you're betting on the future movements in the gold price. You don't own any gold, and you don't have the right to take possession of any gold.

All of these products give you the opportunity to leverage' your investment. In other words, you can borrow to boost the size of your bet. That will boost your profits if the gold price goes in the right direction, but it can also increase your losses if things go wrong. You could end up losing all of your original investment, or potentially a sum greater than your original investment.

Find out more about investing in mining stocks here

Gold exchange-traded funds (ETFs)

Gold ETFs are funds that track the price of gold. Two of the more popular are the Streettracks Gold Shares (NYSE:GLD) and in London, ETF Securities' Gold Bullion Securities (LSE:GBS). They can be bought through stockbrokers. There is normally an annual administration fee of between 0.4% and 0.5%.

Worried about the safety of gold ETFs? Find out more about how they work here

Recommended

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Unilever slides and GSK bounces after GSK knocks back £50bn bid
UK stockmarkets

Unilever slides and GSK bounces after GSK knocks back £50bn bid

Unilever shares fell to their lowest level in around five years, after its £50bn takeover bid for GSK’s consumer health unit was rejected. 
17 Jan 2022
Cladding crisis: what new proposals for mean for housebuilders and leaseholders
Property

Cladding crisis: what new proposals for mean for housebuilders and leaseholders

The government has said that no leaseholder living in a block of flats more than 11 metres tall should “ever face any costs” for fixing dangerous clad…
17 Jan 2022
Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
Which investment trusts performed the best in 2021?
Investment trusts

Which investment trusts performed the best in 2021?

Shivani Khandekar runs through the top ten investment trusts of 2021 – and the worst performing trusts – and looks ahead to 2022.
7 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022