Gold is back in vogue among cagey investors - and for good reason.
The gold price is up 12.6% annually at $1,913 as of mid September, although growth has slowed in recent months.
Investing in the precious metal has long been seen as a proactive hedge against high inflation and economic uncertainty, and there is plenty of that around at the moment.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
The rate of inflation has been slowing, falling to a 17-month low in July. But at 6.8%, it remains more than 3 times higher than the Bank of England’s (BoE) target.
Efforts by the BoE to tackling inflation by raising interest rates are also slowing the economy.
The latest gross domestic product (GDP) data shows the UK economy shrank by a larger than expected 0.5% during July.
Analysts predict growth in 2024 will be sluggish due to the delayed effect of the rate hikes.
These events, as well as the fall of a few financial institutions earlier this year, have prompted cautious investors to reconsider how well their portfolios are protected against risks within the banking sector, pushing up the price of the yellow metal.
Upwards movements in the price of gold indicate that investors, concerned by the events across the Atlantic and in Europe, are seeking the protection of safe haven assets as they try to protect their portfolios from the fallout.
The Pure Gold Company CEO Josh Saul says: “Investors are already concerned about the economic outlook in the face of a continued cost-of-living crisis, inflation, recession fears, and the unrelenting geo-political situation. A bank collapse may just be the tipping point for some investors looking for a safe haven in the storm.”
These factors have pushed gold prices higher, according to The Royal Mint. It predicts that demand for physical gold set to continue deeper into 2023.
As Dominic explained a little while ago, it’s important to understand the nuances of investing in gold in sterling terms as well as in US dollars, but the key principles remain the same - gold can help protect your portfolio returns.
As such, owning one or two of the best gold ETFs could help diversity and protect your portfolio returns in 2023, but it’s something we always recommend you hold – just 5%-10% as “insurance” for your portfolio.
Dzmitry Lipski, head of funds research at interactive investor says, "The historic role of gold has been as a store of value during economic crisis. It is generally accepted that gold could also be used as an inflation hedge and, therefore, rising inflation is necessary for the cost of gold to increase, That's because gold is priced in US dollars, so when each dollar becomes less valuable it takes more of them to buy the same amount of gold.
"Conversely, low inflation and a strengthening US dollar should be seen as negative for gold prices," he adds.
THE BEST GOLD ETFS: HOW TO INVEST IN GOLD
So what’s the best way to invest in gold?
One option is to stock up on jewellery or buy gold bullion in the form of physical coins or bars. That will give you some nice shiny trinkets to hold and admire, but it can be expensive and there is the worry of storing them safely.
If you’re feeling adventurous, you could buy shares in gold miners. But these often don’t track the price of gold very closely so you aren’t getting the best exposure, plus you need to worry about choosing the best stock and trading and platform fees. Mining is a very cyclical business that regularly goes from boom to bust so it can be very volatile.
Josh Saul, CEO at The Pure Gold Company says, "ETFs are easy to invest in and very liquid but they are one half of a transaction with a bank or investment vehicle, so they come with counterparty risk. Meanwhile, mining stocks are intrinsically linked to the operations and profitability of the company rather just than the gold price."
"At a time when people are worried about the strength or integrity of counterparties, physical gold bullion reduces that risk because it sits outside the banking system. It can also have tax benefits (VAT and CGT free depending on individual circumstances) which add to its value as an investment," Saul adds.
THE BEST GOLD ETFS: THE SIMPLE WAY TO INVEST IN GOLD
An alternative is to invest in a gold exchange-traded fund (ETF). This is a fund that aims to track the price of gold.
The most straightforward gold ETFs are backed by physical gold – they buy gold bullion and store it in secure vaults. The most complicated use derivatives or options to “leverage” your investment and magnify gains. But they will also magnify losses, so be careful.
Leveraged ETFs also tend to have higher fees than those that are backed by physical gold. So, if you’re buying gold to provide security, you should stay away from leveraged funds. When investing in ETFs, simplicity is the key.
A word on European gold ETFs. The EU does not allow ETFs that track a single commodity. Instead, the funds that do this are called “exchange-traded commodities”. The difference between an ETF and an ETC is negligible, but ETFs backed by physical gold are ETCs, not ETFs.
As well as funds that track the price of gold, there are also funds that invest in gold mining stocks. But, as mentioned above, they do not track the price of gold very closely.
WHAT ARE SOME OF THE BEST GOLD ETFS AND ETCS?
One of the biggest issues with gold is its environmental footprint. It requires a lot of energy to dig up, refine and store gold. There are also issues around potential labour abuses in the supply chain.
The HANetf Royal Mint Responsibly Sourced Physical Gold (LSE: RMAP) tries to deal with these issues for investors. It only owns 100% post-2019 LBMA-approved gold bars. These are bars from refiners that "have been found, when originally tested, to meet the required standard for acceptability in the London bullion market."
The Mint is also building the world's first plant to recover gold from electronic waste, creating circular economy gold with a low environmental footprint. It is traded on the London Stock Exchange and charges just 0.25% per annum.
Wisdom Tree Physical Gold (LSE:PHGP) is a physically backed gold ETC that comes in two flavours. It is denominated in sterling and is backed by physical allocated gold held by HSBC Bank. It has an ongoing charge of 0.39%. WisdomTree Physical Gold Individual Securities ETC (LSE:PHAU) is essentially the same fund denominated in US dollars and carries the same ongoing charge of 0.39%.
If you’d rather have your gold stored in Switzerland, the WisdomTree Physical Swiss Gold ETC (LSE: SGBS) stores its gold in secure vaults in Zurich on behalf of JPMorgan Chase Bank. The ongoing charge is 0.15%.
The iShares Physical Gold ETC (LSE: SGLN) invests in physical gold kept by JPMorgan Chase Bank in London. The ongoing charge is 0.12%.
"Alternatively, investors may also want to consider investing in gold mining stocks via passive ETF such as VanEck Gold Miners ETF (GDX)," says Dzmitry Lipski.
"However, investors should be aware that physical gold and gold mining stocks are quite different asset classes. While physical gold is better for inflation hedging and diversification, gold mining stocks provide an operating leverage for investors comfortable with greater risk. As the gold price appreciates, the mining company's margins improve, so the potential return to investors likely goes up at a faster rate than the rise in gold. In this case, mining stocks become a better option than holding physical gold," Lipski adds.
All of the above funds can be held in an Isa and a Sipp.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
10 vinyl records worth up to £10,000 - is one in your collection?
News Vinyl is experiencing a resurgence and collectors will pay up to £10,000 for some albums - is it time to dust off your old records?
By Marc Shoffman Published
FCA: Banks are still short-changing savers
The latest FCA review finds that while public shaming has encouraged providers into offering better deals on savings, many of those with closed accounts are still being shortchanged.
By John Fitzsimons Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in
Tips Investors put Scottish Mortgage Investment Trust back on top, and India is the new investment hotspot - We look at what investors have been adding to their portfolios in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published