Recent months have seen investors rushing to put money into gold, which is often seen as a safe haven during times of uncertainty.
The price of gold jumped to a record high of $2,364 (£1,852) an ounce this month, due to various central banks buying up the precious metal for their reserves. It has also risen due to the fact that many believe that interest rates have now peaked and may fall in coming months and years. The gold price has historically moved in the opposite direction to real rates.
If you’re thinking about investing in gold, or perhaps have gold you want to sell, there are several things you might want to consider.
1. It can be a good hedge against inflation
Gold is often seen as a traditional hedge against inflation, or the rate at which living costs are rising. This essentially means it can provide investors with protection against a decrease in the purchasing power of their cash, or in other words, it can maintain its value in times when prices are going up.
Prices of anything are typically set by supply and demand. What we have seen since the financial crisis of 2008, and again in the wake of the coronavirus pandemic, is that governments across the world acted to increase the supply of money in circulation. This resulted in an increase in living costs, which has helped boost gold’s popularity.
Gold also proves popular when geopolitical risks are high and stock markets are turbulent.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said: “When the stock market is performing poorly, investors will often use gold to help diversify their portfolios. This is because the price of gold can behave differently to shares.
“Gold is a finite resource. You can’t make it in a factory. The relatively fixed supply (it takes time to find and dig up more gold) means that prices are very sensitive to demand. This means that the price of gold doesn’t always move in the same direction as share prices. In fact, quite often it will increase in price when share prices fall. But of course, this isn’t guaranteed.
“The reason the price can move in different directions is because when things become uncertain in stock markets, investors sell shares and want to buy something with a value that’s considered ‘safer’. Gold’s a popular choice because it’s recognised globally as something of value. It’s also highly liquid, so you can buy and sell it quickly and cheaply. So, it can be a useful diversifier in a portfolio, particularly during periods of market stress.”
2. There are lots of different ways to invest in gold
There are several different ways to gain exposure to gold.
Physical gold
Gold coins are often a popular choice for those who want to own physical gold. They offer more flexibility than gold bars, because you can sell just a few if you want to, rather than having to sell a whole bar. There are numerous gold dealers selling gold coins, but make sure you do plenty of research before choosing one so that you can be certain they are reputable and you understand the costs involved.
You’ll need to have a safe place to store your gold if you plan to keep it at home and you should let your home insurer know – they may charge an additional premium to cover it.
Buying and owning substantial amounts of physical gold simply isn’t practical for most of us. After all, stashing away a gold bar or two would require some hefty security and insurance. Some gold dealers will store gold on your behalf, such as BullionVault, and you can sell it or withdraw your gold at any time.
Exchange-traded commodities
For investors considering putting money into gold, but who don’t want to physically own it, there are a number of exchange traded funds (ETFs) (often known as exchange-traded commodities or ETCs) which follows the price of bullion and backs its gold holding with physical gold. These are a type of pooled investment which track the performance of either an individual commodity such as gold, or a basket of commodities.
Myron Jobson, personal finance campaigner at investment platform interactive investor, said: “One of the easiest and cheapest ways to invest in the asset is through an exchange traded commodity that tracks the price of gold. We like the iShares Physical Gold ETC. Unlike many commodity funds, this one buys gold bullion instead of gaining exposure to the metal by buying derivatives (financial contracts that are derived from the asset but have no direct value in and of themselves). With low ongoing charges of 0.15%, it is an easy, flexible and cheap way to invest in the asset.”
Jason Hollands, managing director at investment platform Bestinvest, said he currently likes the Invesco Physical Gold ETC which is listed on the London Stock Exchange. Mr Hollands said: “It replicates the performance of the London Bullion Market Association Gold Price. Each certificate is secured by physical bars held in the London vaults of JP Morgan Chase Bank. The ongoing costs are a low 0.19% per annum.”
Shares of gold-mining firms
Another option is to invest in the shares of gold-mining firms, although these don’t necessarily move in line with the price of the metal itself. Unlike gold itself, gold miners typically come with political risk (the risk that local residents or politicians change the rules about mining), environmental risk, and operational risk (the risk that the mine becomes dangerous, or has smaller supplies of gold than first forecast). So if you are investing in gold as a safe haven, it’s probably best to stay away from gold miners.
Some investors are passionate about gold miners as they can often amplify any price movements in gold itself – meaning that gains can be bigger, and importantly losses can be much greater based on what the price of gold does. This type of investment is therefore usually only appropriate for sophisticated investors or those who have a financial advisor to help them make any decisions. If you do decide to dip a toe in the water, make sure you do your due diligence and only pick firms with strong balance sheets and good operational track records. To avoid the risk of any individual company going bust, you may want to consider investing in a fund that enables you to invest in a diversified portfolio of companies involved in gold-mining to help spread risk.
If you’re considering investing in gold or aren’t sure which funds might be right for you, always seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, read our guide on How to find the right financial advisor for you. You can also learn more about investing in our article Investing – the basics.
3. It’s not as safe as you might think
Although many people choose to invest in gold because they see it as a supposedly stable investment, gold itself can be very volatile,as recent sharp swings in the gold price have shown. Lots of different factors can affect the price of gold, including demand and supply, the strength of the US dollar and the state of the global economy. It’s therefore important to remember that just because gold has performed strongly recently, there are no guarantees that it will continue to do so. Prices can fall and fees can eat into the value of your holding. For example, one of the times gold previously topped $1,900 an ounce back in 2011, it went on to lose a third of its value between October 2012 and June 2013, falling to a low of $1,060 per ounce in January 2016.
Brian Dennehy, of financial advisers Dennehy Weller, suggests holding no more than 5% of your portfolio in gold and only with a tight stop-loss policy in place. A stop-loss policy is designed to limit an investor’s loss from an investment if that investment falls in value. If the price of your investment falls, the stop-loss order automatically kicks in and the investment is sold. For example, if you set a stop-loss order for 10% below the price at which you bought your investment, your losses will be limited to 10%.
4. If you’re selling gold jewellery, never accept the first quote you’re offered
With the price of gold at near record highs, many people might be tempted to consider selling any old gold they have. When selling gold jewellery, make sure you always get quotes from at least three jewellers so you can be certain you’re getting the best possible price for your items.
If jewellers aren’t interested in buying your jewellery, or you’ve only got scrap gold to sell such as broken or damaged items, there are plenty of websites which will buy your gold from you and melt it down. Most of these will have online calculators which will provide you with a valuation for the items you’re selling. If you accept their valuation, you must then usually complete an online form and post the items off to them. Make sure you properly insure your items and pack them carefully. Once they arrive at the company that is buying them, they will transfer payment into your account, or send you a cheque if you prefer.
Read our article What is the best way to sell gold? for more tips on the best ways to sell your gold jewellery.
Sites which buy gold include Sellmygold.co.uk, Hattongardenmetals.com and Gerrardsonline.co.uk, Lois-bulllion.com. Always do plenty of research before using any site, and check for official reviews from people who have used them.
5. Gold won’t pay you an income
Many people approaching retirement or who have recently stopped work are seeking a regular income from their investments. If you’re considering investing in gold, bear in mind you can’t get an income from it, and storage and management fees will erode the value of your holding over time, so if income is a priority, you may want to consider other types of investment instead.
Mr Hollands of Bestinvest said: “Gold is fundamentally a largely unproductive asset that either sits idle in a vault or is used for jewellery. Unlike shares in a business, a bar of gold won’t pay you out a dividend and unlike a bond, or cash in a savings account, it won’t pay you interest. Its value ultimately reflects whatever the next person is willing to pay you for it. There is therefore an opportunity cost to owning an investment that pays you no income and just sits there in the meantime.”
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