It has been another good year for the yellow metal, with strong demand driving the gold price up more than 30% so far this year.
“High prices have predominantly been driven by a shift in investor sentiment,” says John Reade, market strategist at the World Gold Council, “in particular among Western investors who contributed to the gold ETF rally.” He adds that demand has reached “several record-breaking levels” so far this year, “exceeding $100 billion for the first time”.
It makes sense when you consider the geopolitical and monetary policy backdrop. Gold is often considered a ‘safe-haven’ asset, with investors turning to it as a store of value in an increasingly volatile world. Gold also becomes more attractive as interest rates fall. Unlike cash, it doesn’t pay any interest but this matters less when interest rates drop down to lower levels.
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Central bank buying has also been an important driver of the gold price in recent years. Emerging market nations, particularly those hostile to the US, have been looking for an alternative to the dollar and this surge in demand has pushed the gold price up.
If investors are bullish on the outlook for the gold price or want to introduce the metal to their portfolio as a hedge, there are several strategies they can take from buying gold bullion to investing in a gold ETF.
We take a look at the pros and cons of each approach.
How to invest in physical gold
One way to add gold to your portfolio is by buying physical gold, or bullion, in the form of bars and gold coins. 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.
How to invest in gold ETFs
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, 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 costs of investing in gold ETFs will be the ongoing charge and any platform fees. You won’t actually own any gold directly – although provider HANetf offers a product which allows investors to redeem their shares for physical bars and coins stored at the Royal Mint.
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.
How to invest in gold-mining stocks
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.
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.
While this can come with greater rewards too, you have to consider the possibility of losses.
The pros and cons of investing in gold
When highlighting the cons of investing in gold, critics often cite the lack of income you can get 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.
While the worst of inflation might be in the rear-view mirror, developments on the global stage (such as an escalation in the Middle East or new tariffs under the Trump presidency) could fan the embers. Against this backdrop, gold could look attractive.
Hopefully we won't experience any major shocks, but even if we don't, gold could still make sense as an investment. 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?”
