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What’s the best way to invest in gold?

Nicholas Hyett looks at two ways to gain exposure to gold - Exchange Traded Investments (ETIs) and gold mining shares.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Gold is often viewed as a ‘safe haven’. It’s a physical asset, not easily created or destroyed, and is expected to keep track of inflation over the long term.

Buying physical gold bars and coins can be expensive and impractical – you’ve got to find a way to keep them safe after all. But there are other ways to invest in gold, usually Exchange Traded Investments (ETIs) and gold mining shares.

What’s happened to the gold price?

The price of gold has risen this year, up 2.6% since January, from $1,280 a troy ounce to $1,313. That’s still way below the 2011 peak of around $1,900, achieved in the aftermath of the financial crisis.

Gold price ($)

Past performance isn’t a guide to the future. Source: Lipper IM, 11/02/19.

Clearly gold’s not a one way investment. If you had bought at the peak, the value of your shiny stuff would have fallen about 30%. And that’s before you count any costs associated with holding it.

Nevertheless, gold can be used to diversify a wider portfolio. Its value has often risen when traditional investments have fallen – although since it doesn’t generate dividends or interest, it generally hasn’t performed so well when interest rates rise.

Investing in gold

Aside from buying physical gold, there are two main ways of investing in gold, ETIs and gold mining shares.

Exchange Traded Commodities (ETCs)

ETCs 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 derivatives.

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 2018. Around 3.7m troy ounces have been added to ETCs in the last 12 months despite gold's roller-coaster ride.

There’s a wide range of gold ETCs available. The largest physical gold ETC on the London Stock Exchange is ETFS Physical Gold ETC (PHGP), with a market value close to $7bn. 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 track the price of gold, rather than holding the physical asset. While their prices reflect movement in the metal over the short term, 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: ETI Knowledge Centre

Gold miners

Two factors set investing in a 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, and can invest in new mines and return cash to shareholders. When gold prices are low, some miners will struggle.

Profits 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.

There are a lot of moving parts, meaning profits are often volatile.

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 gold miners have put in strong performances despite the overall global gold mining sector underperforming the gold price since 2011. Past performance is not a guide to the future.

The chart below compares the performance of Randgold, formerly the UK’s largest gold miner, but which recently merged with US listed Barrick Gold, with both the price of gold and the FTSE Gold Miners Index (a global gold mining index).

Randgold, and now Barrick, has high quality assets, and is able to produce at a relatively low cost of $586 per ounce. Going forwards Barrick is expected to pay investors a steady, albeit small, dividend, with a prospective yield this year of 1% (variable and not an indicator of future income).

Gold price ($USD), FTSE Gold Mines and Randgold/Barrick

Past performance isn’t a guide to the future. Source: Lipper IM, 11/02/19.

Other major gold miners on the London Stock Exchange have more mixed track records. Of the three FTSE 250 specialist goldminers, two (Polymetal and Centmin) have outperformed the gold price while Acacia has done significantly worse.

These ‘more variable’ returns can spring up even when the gold price is rising. For example, shares in Acacia Mining tumbled in early 2017 after the Tanzanian government banned exports of mineral concentrates, preventing the group selling output from its major mines. With assets in Egypt and Russia, Centamin and Polymetal are hardly immune to geopolitical risk themselves.

Given the unpredictably of the sector, it could be sensible to consider a more diversified fund of gold miners, like BlackRock's Gold & General Fund.

It mainly invests in large and medium-sized gold mining companies and is managed by an experienced and well-resourced team. We think it's a reasonable choice for exposure to this specialist area.

Find out more about BlackRock Gold & General

Our top tips

Investing in gold certainly isn’t for everyone, and should usually only make up small portion of a wider investment portfolio.

The easiest way to invest is through an ETC. We prefer physical ETCs since they’re more likely to accurately track the gold price, and they’re lower risk than more complex options.

Find out more about Exchange Traded Investments

Mining shares are also an option for more adventurous investors, but they carry extra risks as they can over or underperform movements in the gold price. A gold fund can help minimise some of those risks.

This article is not personal advice. If you’re not sure of the suitability of an investment for your circumstances please seek advice. Investments rise and fall in value, so you could get back less than you invest.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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