With prices rising 40% over the last 12 months, gold funds are an increasingly significant component of investors’ portfolios.
You’ll have heard plenty of talk during gold’s excellent run about the importance of investing in gold. While allocations vary, most experts recommend allocating anywhere between 2% and 10% of a portfolio to gold, with 5% often being cited as a guideline amount for those unsure where they stand.
Laith Khalaf, head of investment analysis at AJ Bell, says gold “should be seen as a means of diversification for equity holdings alongside bonds and cash, and as such should not normally exceed 5% to 10% of a portfolio”.
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At face value, that might sound like you’re being told to spend up to 10% of your savings on gold bullion, in the form of bars or gold coins. Thankfully, that’s not the only way to gain exposure to changes in the price of gold. Gold funds offer exposure to price movements, without the challenges of storing physical gold.
Physical gold ETCs
An ETC is similar to an exchange-traded fund (ETF) but, importantly, it only tracks the price of a specific commodity.
Physical gold ETCs back the spot price of gold and, crucially, do so by holding physical gold, rather than synthetically replicating its movements.
One to consider is the iShares Physical Gold ETC (LON:SGLN), an ETC that tracks spot gold prices and is reasonably priced with a 0.12% total expense ratio.
There are plenty of good alternatives available, though. In general, gold ETCs are a great way to allocate to gold in a stocks and shares ISA, without having to worry about carting piles of gold around.
Physical gold ETCs hold actual gold as their underlying assets – in some respects, shares in a gold ETC represent ownership of this physical gold. There’s two important considerations at play here:
- Where does the gold come from?
- Could I access the gold if I wanted to?
If you are particularly concerned about the ethics of your investments, then that first question is key. Conflict gold has been linked to civil wars and militia groups, and the environmental impacts of mining gold can be substantial. Industry standards exist to limit these social and environmental harms, but it’s important to ensure that any gold ETC complies with these standards.
While gold ETFs and ETCs offer exposure to gold price movements, some might say the investment thesis of gold – certainly in terms of its historical origins as a store of value – boils down to its chemical properties. Proponents of this view would say that being able to access the physical gold you own through an exchange-traded product is vital.
If accessible physical gold is important to you, then The Royal Mint Responsibly Sourced Physical Gold ETC (LON:RMAU) is a good one to consider.
Like SGLN, RMAU’s gold is completely London Bullion Market Association (LBMA)-compliant, and the fund targets at least 50% of its underlying gold to be recycled – lessening the negative social and environmental impacts of gold.
RMAU allows shareholders to redeem shares in the ETC in exchange for equivalent amounts of the physical gold, which is stored at the Mint’s highly secure vault in Llantrisant, Wales.
Gold mining funds
Besides tracking gold spot prices, gold funds can also act as funds of gold mining stocks.
Gold mining funds offer a degree of gold exposure, but it’s important to remember that this is a distinct investment from physical gold or gold ETCs. Each holding in a gold mining fund is a distinct company.
The Superpit is Australia's largest open pit gold mine, and one of the largest open pit mines in the world
While gold prices are a key driver of their financial performance, there are other factors at play, including some risk factors (such as the viability of individual mines, or management’s strategy) that are particular to individual stocks. So they don’t necessarily move in line with gold prices.
That said, some interesting gold mining funds include:
- The VanECk Gold Miners UCITS ETF (LON:GDGB), a passive ETF which tracks the NYSE Arca Gold Miners Index, and has a total expense ratio of 0.53%;
- The AuAg ESG Gold Mining UCITS ETF (LON:ESGP), an equal-weighted ETF tracking 25 ESG-screened companies that are active in the gold mining industry and has a 0.60% total expense ratio;
- The L&G Gold Mining UCITS ETF (LON:AUCP) which tracks the Global Gold Miners Index and which reduced its total expense ratio from 0.65% to 0.55% in January;
- The WS Ruffer Gold Fund; this actively-managed fund isn’t cheap, charging a 1.2% annual management charge, but it has outperformed its benchmark, the FTSE Gold Mines TR Index, in three of the last five years and all-time since its inception.
Gold funds with broader exposure
There’s lots to be said for having pure gold exposure in your portfolio, but there are funds that combine gold exposure with other metals.
The Jupiter Gold & Silver Fund gives dual access to gold and silver by investing in listed securities (some funds, some miners) with exposure to gold and/or silver prices. Investing in silver is a slightly different prospect to gold; while both are precious metals, silver prices are more heavily influenced by demand for its industrial applications, rather than its role as currency. The gold-silver ratio tracks the relationship between the two metals.
Alternatively, investors could consider a gold-focused investment trust, such as Golden Prospect Precious Metals (LON:GPM). This investment trust invests in small-mid cap (c. £200 million to £2 billion in value) mining stocks globally. In terms of the primary metals produced by its portfolio mines, the portfolio is weighted 88.5% towards gold and 7.9% towards silver (with the remainder accounted for by platinum group metals and base metals).
The investment trust wrapper makes an excellent vehicle for investing in relatively early-stage mining outfits: “sticky money in general is well-suited to this type of longer-term sector,” Keith Watson, one of the trust’s portfolio managers, told MoneyWeek. At time of writing the trust trades on a 20% discount to net asset value.
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