Investing in gold explained

How to invest in gold 

Gold is a commodity, or raw material, that trades based on supply and demand. The difference between supply and demand ultimately determines what the price of gold is at any given time.

There are several ways to invest in gold, so if you wish to do so, you should ensure you take time to find out which method best suits you.

Here, we explain the pros and cons of buying gold, and how you can invest.

Why invest in gold?

Gold has long been one of the most prized metals on Earth. It has played a major role in the economies of many countries, and used to be used as a form of currency.

Although this is no longer the case, gold can still be a reliable, long-term investment and may be a valuable portfolio addition, particularly in times of economic downturn.

Here are the main advantages:

Outperformance

The price of gold can fluctuate in the short-term, but in the long term it can out perform asset classes such as equities and property (but do consider storage costs).

Inflation hedging

The price of gold tends to rise when the cost of living increases.  

Diversification

The value of gold doesn't move in the same way as bonds or stocks. Historically, stock market dips don't appear to dent gold. Therefore, it's a good way to diversify your portfolio. 

What are the risks of buying gold?

Like with any investment, investing in gold involves some risk that you could lose some or all of your money:

Price falls

Gold's price is ultimately determined by investor sentiment. If it is in demand, the price goes up, if it is out of favour, the price falls. To limit the impact of gold price falls on your portfolio’s value, you’ll need to limit the percentage of gold in it.

Fewer ways to diversify

While you can diversify equity investments over different industries and regions, there are fewer ways to diversify your gold holdings.

No yield or dividends

Gold isn't a fixed-income investment such as gilts or corporate bonds, or a stock that pays dividends. It doesn't pay any sort of yield or dividends and you'll only see any returns when you sell.

Costs

It might end up costing you to store and insure it. Some sellers will store the gold for you for a fee, or you could pay for a safe deposit box. 

You could also keep gold at home in a safe, but make sure you inform your home insurer as it may not be automatically covered. 

Environment

Gold mining has a severe negative impact on the environment  - from huge carbon emissions to deforestation to mercury pollution.

As well as causing harm to the environment, these risks will in turn affect the value of gold as an investment.

• Find out more: what is investment risk?

How to buy physical gold

You can buy physical gold either as

• Bullion bars
• Coins
• Jewellery

While a bar's value is always the same as the price of gold, some coins also have numismatic value - which means they could be worth more than their gold content alone.

When buying gold, make sure you opt for a seller with a good track record.

Sovereign mints, such as the Royal Mint in the UK or the Perth Mint of Australia, have the advantage of being government regulated as the bullion they produce is legal tender, albeit with higher mark-ups than private mints.

You could also buy gold jewellery, although items will likely cost far more than the value of the gold they contain, making them less effective as an investment strategy.

Some investors see gold as a way to pass on wealth rather than generate earnings, although gold is not exempt from inheritance tax.

• Find out more: Inheritance tax planning and tax-free gifts 

What are gold investment funds?

Gold investment funds can be a good alternative to buying physical gold if you think the latter may be too much hassle.

This method can be cheaper, as you don't have to buy whole bars or coins or pay for storage, though there will be a fee.

You can invest in gold using exchange-traded funds (ETFs) or exchange traded commodities (ETCs):

• ETFs buy and sell gold, or its futures, meaning investors effectively own the gold.
• ETCs are debt notes, which are backed up by gold.

They can be held in a stocks and shares Isa through an investment platform, protecting you from capital gains tax when you sell them.

You can also buy shares in gold-related firms like mining companies, although this is a much riskier option.

If a mining company is badly managed, owns unproductive mines or operates in unstable countries, its price may shrink even if gold itself is at a good price.

• Find out more: investing directly in shares