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Investing in gold – what does it offer investors?

As some investors shift their portfolios towards more gold, we look at what gold can offer investors and how to invest through Exchange Traded Commodities (ETCs).

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.

Commodities are a raw material or agricultural product that can be bought and sold, like coffee, wheat, oil or gold.

Commodity prices respond to wider economic events, like supply constraints, political tensions and changes in global demand. Uncertainty from these events can often drive prices higher. This is what makes them more of a perceived ‘safe haven’ during stock markets wobbles.

The price of gold goes up and down depending on supply and demand and often moves in the opposite direction to shares. This means it could increase in price when shares fall and vice versa, though there’s no guarantee.

At the beginning of March, market uncertainty drove the price of gold to over $2,000 per troy ounce. But, it’s fallen back down since then.

Past performance isn’t a guide to the future. Source: Lipper IM, from 14/05/2002 to 13/05/2022.

For most investors, it’s difficult to get direct exposure to commodities like gold. After all, it’s unlikely you’ll want to hide any gold nuggets under your mattress.

One way you can though is through Exchange Traded Commodities (ETCs).

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

How do ETCs track gold?

There are two main ways ETCs track a commodity:

Physical ETCs – these buy and store the commodity in vaults or warehouses. This is common in precious metals, like gold and silver.

Synthetic ETCs – in some cases, buying and storing a commodity is difficult or impractical. For example, wheat and similar commodities which perish over time. Instead, a synthetic ETC will agree to purchase or sell a certain amount of a commodity at a fixed price or rate in the future. If the commodity price changes, the value of the contract will too. This is known as a futures derivative.

While physically holding the commodity might reduce the counterparty risk compared to a synthetic ETC, storing the asset can add costs and weigh on the returns to investors. Investors need to decide if they’re happy to pay more for that extra security.

Hedging for inflation?

Inflation tends to be a good sign in a healthy economy, it’s often a signal of an economy gathering pace and growing. But too much of it can be hard to control. In the UK, inflation has hit 9% – the highest it’s been in 40 years.

Higher inflation can often put pressure on the performance of shares and bonds, so what about alternatives?

Commodities, particularly gold, are often referred to as an inflation hedge – something that could potentially provide a return, when other assets like shares are struggling.

While gold has often held its value and provided an alternative in uncertain times, it’s far from a perfect inflation hedge. In the past, there have been times where inflation and the price of gold have acted in tandem. But more recently, the opposite’s also been true.

Whatever your view on gold and inflation, investors should be cautious. Gold, silver and other commodities are volatile – we think investing anything over 5% of a portfolio in them is pretty adventurous.

An expert view from the industry

Nitesh Shah, Head of Commodities and Macroeconomic Research at WisdomTree Europe.

“For most of the past year, gold has been ignoring the red-hot inflation that we have been living in. WisdomTree’s model indicates that gold, when factoring in a US inflation rate of 8.5% in March 2022, should be trading at closer to US$2150/oz rather than US$1875/oz where it is currently trading (3 May 2022). It’s as if gold has been living in an alternate universe. But there are many signs that it is returning to our universe.

However, gold has been picking up recently, catalysed by safe-haven demand driven by the war in Ukraine. We have periodically observed such instances of geopolitical shocks bringing gold back to life, for example in 1990 before the first Gulf War and in 2001 around the time of the 9/11 attacks. If sustained, gold could be on an upward trajectory.

In the month to 22 April 2022, there were US$2.8bn inflows into European domiciled gold Exchange Trade Products (ETPs) and US$2.2bn inflows into gold ETPs domiciled outside of Europe. There was a sharp pick up in flows in March 2022. That coincides with strong net positioning in gold futures.”

Hargreaves Lansdown may not share these same views.

One way to invest in gold?

Investing in exchange traded products aren’t suitable for everyone. Investors should only invest if the investments’ objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks before they invest, and make sure any new investment forms part of a diversified portfolio.

iShares Physical Gold ETC

The iShares Physical Gold ETC offers the opportunity to track the price of gold. It tracks the gold spot price, which is the current price in the marketplace at which a given security, commodity or currency can be bought or sold for immediate delivery.

This ETC only accepts gold that meets The London Bullion Market Association (LBMA) Good Delivery rules. In-line with these rules, the bars also aim to comply with LBMA’s Responsible Sourcing Programme, making sure that 100% of the gold bullion backing the ETC is responsibly sourced.

iShares continue to work with their gold custodian to only allocate gold mined post-2012 to the ETC.

Annual percentage growth
Apr 17 -
Apr 18
Apr 18 -
Apr 19
Apr 19 -
Apr 20
Apr 20 -
Apr 21
Apr 21 -
Apr 22
iShares Physical Gold ETC -2.85 2.91 36.92 -5.58 19.08
London Gold Bullion GBP -2.44 3.12 35.95 -4.37 17.83

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2022.

Find out more about iShares Physical Gold ETC, including charges

View iShares Physical Gold ETC Key Investor Information

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    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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