Five facts about investing in gold

Recent weeks have seen investors rushing to put money into gold, which is often seen as a safe haven during times of uncertainty.

The price of the precious metal soared to a new record high of $2,000 an ounce earlier this month before falling back to below $1,900, amid ongoing uncertainty surrounding the coronavirus pandemic, political turmoil and investor fears that government stimulus will turn into rampant inflation when the pandemic recedes.

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 rising living costs. 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 rising.

Prices of anything are typically set by supply and demand. What we have seen since the financial crisis, and again today in the wake of the coronavirus pandemic, is that governments across the world have acted to increase the supply of money in circulation. This would usually mean that the price of money would fall, as there is more supply of it, relative to its demand. But how can the value of money fall – £1 is still £1 surely? But that is exactly how inflation works – £1 is still worth £1, but that same £1 will buy you less actual ‘stuff’. Gold on the other hand is much harder to increase the supply of – there will only ever be a certain amount available. So whilst central banks can easily increase money supply, the supply of gold is relatively steady, providing the potential for it to maintain its value when inflation takes hold.

Many people are worried that economic stimulus measures introduced in response to the coronavirus pandemic could lead to a sharp increase in living costs in months to come, which has helped boost gold’s popularity.

Adrian Lowcock, head of personal investing at online investment service provider Willis Owen, said: “It might not be an issue now, with investors more concerned about deflation, but with so much money being pumped into the system there is the potential for inflation later on. Gold has a long history of protecting against inflation over the longer term.

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 invest in a fund that enables you to invest in a diversified portfolio of companies involved in gold-mining,  such as the Blackrock Gold & General fund, for example.

Adrian Lowcock of investment platform Willis Owen said: “Evy Hambro manages this fund and looks for well-managed, larger gold miners to invest in. He is conscious of risk so focuses on companies with strong balance sheets that are well managed. The fund invests primarily in gold miners but will have exposure to other precious metals and minerals.

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. The last time gold 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, said: “The period which prevails now is wracked with emotion and uncertainty. Bearing in mind gold is inherently a drama queen, the road ahead is clear in only one respect – very sharp moves. But we don’t know in which direction. No-one does. You could make a fortune or lose a fortune. If you want to play this one, don’t overdo it.

Mr Dennehy 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 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.

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. It’s 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, but as we are now in a period of all-time low interest rates and decimated government bond yields, that opportunity cost is extremely low.

Have you invested in gold because you think the price has further to go, or have you recently sold any gold? If so, we’d love to hear from you. You can get in touch with us at [email protected] or leave a comment below.

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One thought on “Five facts about investing in gold

  1. Avatar
    Kay Coomber on Reply

    I invested a few thousand pounds in physical gold with BullionVault some years ago. I watch the highs and lows and buy a s sell when the time is right. BullionVault are very user friendly but I haven’t got enough invested to make mega amounts but I have done well recently!

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