Gold hit a record high in 2023 amid expectations that interest rate rises are over and may even be cut. I am not a gold bull, but I do accept that investing in gold can be a great way to add diversification and protection to a portfolio.
As my fellow MoneyWeek writer Dominic Frisby likes to point out, gold has been money “forever” and it is likely to retain this title, as it is a good hedge against periods of economic or political upheaval.
Tom Stevenson, investment director, personal investing at Fidelity International, says gold would normally be expected to underperform in an environment of high interest rates because it does not pay investors an income. That makes it relatively unattractive when a decent yield is available from other lower-risk assets like bonds and cash. But there are different fundamentals driving demand.
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“The expectation that interest rates are poised to fall back again is reducing the opportunity cost of holding gold.,” says Stevenson.
“At the same time, a weakening dollar is reducing its cost to buyers in other currencies. Finally, gold is benefiting from its safe haven reputation at a time of heightened geo-political uncertainty.”
There are three ways investors can get exposure to gold in their portfolios: they can buy physical gold, buy gold miners, or buy a fund that focuses on both.
There are benefits and drawbacks to all of these approaches.
- Owning physical gold can come with significant costs such as storage fees and insurance.
- Using an ETF (exchange-traded fund) can cut these costs and make it easier to buy and sell – and you won’t have to store it yourself – but it won’t eliminate the drawbacks entirely. There are usually management fees to pay and because gold doesn’t generate any cash flow, there’s no chance of a dividend.
- Picking gold-mining stocks has its own set of challenges. These companies quite literally mint money, but they’ve struggled to turn that money into shareholder value. The challenge is mining can be unpredictable. It takes years and costs billions to find a gold prospect that’s worth mining and to turn that prospect into a productive asset. It is hard enough for a skilled geologist to determine if a prospect is worth exploring, let alone analysts and investors based in London or New York (although Dominic disagrees with me on this point). Still miners, especially the big established players, tend to offer a dividend. That’s favourable to the charges that come with owning physical gold.
My favourite method for getting exposure to gold is to use funds, specifically, investment trusts. While I want to hold gold as part of a diversified portfolio, I’d rather leave the process of stock selection to the professionals.
Funds that specialise in gold and gold miners
The BlackRock World Mining Trust’s objective is to provide a “diversified investment in mining and metal assets worldwide”. It offers exposure not only to gold miners but also to other key resources such as copper and iron ore. Considering the role copper plays in the global economy, it makes a lot of sense for investors to have some exposure to this metal as well as gold. However, it’s not as sought after as gold as a store of value (gold is a byproduct of copper mining).
As well as equity investments, the trust also buys other assets to build exposure to the mining sector. Josef Licsauer, investment analyst at Hargreaves Lansdown notes, “A smaller portion of the trust is dedicated to bonds, debentures (a type of bond or debt instrument) and certain royalties”.
The World Mining Trust is managed by Evy Hambro, who has 25 years of experience investing in the mining industry. And with the World Mining Trust, Hambro has the flexibility to invest where he believes the best returns can be found.
“The managers attempt to identify the biggest trends or themes in the industry to help work out areas of opportunity in the market. Some of the more recent trends, electric vehicles and transition to clean energy, for example, saw the managers increase their investments in certain precious metals,” Licsauer says.
Hambro also manages BlackRock Gold & General. This fund aims to “grow investors’ money over the long term by investing primarily in gold mining companies from across the globe,” as Licsauer explains.
“Hambro is confident in his long-term outlook for the gold price, expecting rising incomes in emerging markets to fuel demand for gold products, such as jewellery, while the absence of large gold discoveries could constrain supply and lead to a rising gold price,” the analyst adds.
Ruffer Investment Company also offers a specialist gold fund, LF Ruffer Gold Fund. Like Gold & General, it concentrates on gold mining stocks. With an ongoing charge of 1.5%, it’s a bit pricey although its accumulation shares have returned 94.1% over the past five years – so perhaps you get what you pay for.
Lastly, two smaller unique funds are Jupiter Gold & Silver and Golden Prospect Precious Metals Limited. Both focus on gold equities but have a mixed record.
All of these funds offer exposure to gold and gold miners. Some are more diversified with a better record than others.
Gold ETFs
If, unlike me, you’d rather invest in physical gold, then ETFs are a great way to own the metal without having to worry about carting around huge lumps of gold.
The iShares Physical Gold ETC tracks the gold spot price and is one of the cheapest products on the market for tracking the gold price. As Licsauer explains,
“This ETC only accepts gold that meets the London Bullion Market Association (LBMA) Good Delivery rules and the LBMA’s Responsible Sourcing Programme, making sure that 100% of the gold bullion backing the ETC is responsibly sourced. With an ongoing charge of 0.12%, it’s also competitively priced in the market versus its competitors. Exposure to the metal is an attractive option for those who want to diversify their portfolios or who believe that the price of gold will rise in the future.”
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