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What's the best way to invest in gold?

20 September 2017

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Gold is viewed by some as a ‘safe haven’. It’s a physical asset, not easily created or destroyed and many believe the gold price will keep track of inflation over the very long term.

But buying physical gold bars and coins can be expensive and impractical. Here I examine gold as an investment and look at two ways you can invest in gold - Exchange Traded Commodities (ETCs) and gold mining shares. Remember that past performance is not an indicator of future returns – investments can fall as well as rise in value so you could get back less than you invest.

What’s happened to the gold price?

The price of gold has crept up this year, rising 15% since January, from $1,161 a troy ounce to over $1,300 today. That’s still way below the 2011 peak of around $1,900, achieved in the aftermath of the financial crisis.

Past performance is not a guide to future returns Source: Lipper IM, 06/09/17

Nevertheless, gold can be used to add diversification to a portfolio of shares and bonds, as its value often rises when traditional asset prices are falling – although since it does not generate dividends or interest, its relative appeal may fall when interest rates rise.

Investing in gold

Aside from buying physical gold, there are two main ways of investing in gold, Exchange Traded Commodities (ETCs) and gold mining shares.

Exchange Traded Commodities (ETCs)

ETCs are investments which are listed and traded on a stock exchange in the same way as shares. They aim to track the price of a given commodity, either by holding the commodity directly or gaining exposure via derivative contracts.

Physical gold ETCs - which actually hold the metal itself - are among the easiest and cheapest way for people to invest in gold. They’re easy to buy and sell, and can even be held in an ISA.

They’ve remained popular around the world in 2017 – around 5m troy ounces have been added to ETCs since the start of the year, as investors have tried to take advantage of the rally in the gold price.

There’s a wide range of gold ETCs available. The largest physical gold ETC on the London Stock Exchange is ETFS Physical Gold (PHGP), with a market value close to $6bn. However, Source Physical Gold ETC (SGLD) is a lower cost option; with an annual management fee of 0.29%.

Some ETCs use complex derivatives to the track the price of gold, rather than holding the physical asset. While their prices will reflect movement in the metal over the short run, their performance can diverge over a longer time period. They’re a higher risk way of tracking the price of gold and should only be considered by sophisticated investors. You can find out how a given ETC tracks the price of gold by looking at the ‘replication method’ on our factsheet.

More gold ETCs

Read more: ETC Knowledge Centre

Gold miners

Two factors set investing in gold miners apart from investing in ETCs - the potential for gold price-beating returns and dividends.

As you’d expect, gold miners’ fortunes are closely linked to the gold price. When gold prices are high, miners can be highly profitable - able to invest in new mines and return cash to shareholders. When gold prices are low, some miners will struggle.

Revenues depend on the price of gold and the quantity produced, but also the cost of production. Currencies have a role too. While gold is priced in dollars, mines can be located anywhere on the planet, with costs incurred in often volatile local currencies.

That’s a lot of moving parts, meaning profits are often volatile too.

Nonetheless, the ability to reduce costs and increase output means a well-managed gold miner with high quality assets can deliver good returns even when the gold price is flat.

This helps to explain why some individual gold miners have put in strong performances despite the global gold mining sector underperforming the gold price since 2011.

The chart below compares the performance of the London Stock Exchange’s largest dedicated gold miner, Randgold Resources, with both the price of gold and the FTSE Gold Miners Index, reflecting the performance of global gold mining companies.

Randgold has high quality assets, and is able to produce at a relatively low cost of $595 per ounce. The company has offered investors a dividend since 2006, with a prospective yield for 2018 of 2.6%.

Past performance is not a guide to future returns Source: Lipper IM, 15/09/17

So far in 2017, other major gold miners on the London Stock Exchange, such as Centamin and Petropavlovsk have also outperformed the gold price, as costs have been cut and production raised. However, they have delivered much more variable results over a five-year period.

These ‘more variable’ returns can spring up even when the gold price is rising. For example, earlier this year shares in Acacia Mining tumbled after the Tanzanian government banned exports of mineral concentrates, preventing the group selling production from its major mines. With assets in Egypt and Russia, Centamin and Petropavlovsk are far from immune to geopolitical risk themselves.

Track or mine?

For those looking to simply track the price of gold, ETCs are a low cost option. We prefer Physical ETCs as they tend to more accurately track the price of gold and are generally more consistent than their non-physical counterparts. Gold miners, on the other hand, should be able to improve efficiency over time, and there’s also the possibility of investors receiving a stream of dividends. However, it is clear that these potential rewards come with an additional layer of risk.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
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