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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 Commodities (ETCs) 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 expected to broadly keep pace with inflation over the very long term.

But buying physical gold bars and coins can be expensive and impractical – you’ve got to find a way to keep them safe after all. Fortunately there are other ways to invest in gold, most commonly Exchange Traded Commodities (ETCs) and gold mining shares.

This article isn’t personal advice. All investments can fall as well as rise in value so you could get back less than you invest. If you’re unsure whether an investment is right for you seek advice.

What's happened to the gold price?

The price of gold has risen this year, up 4.3% since January, from $1,514 a troy ounce to $1,579*. 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, 02/03/20.

Clearly gold’s not a one way street. If you had bought at the peak, the value of your shiny stuff would have fallen over 16%. And that’s before you count any costs associated with holding it.

But gold can be used to diversify a portfolio. Its value often rises when traditional investments fall – 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, Exchange Traded Commodities (ETCs) 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 derivative contracts.

Physical gold ETCs - which actually hold the metal itself - are among the easiest and cheapest ways to invest in gold. They’re easy to buy and sell, and can even be held in a Stocks and Shares ISA.

They’ve remained popular around the world in 2019/20. Around 12m troy ounces have been added to ETCs in the last 12 months despite gold's roller-coaster ride.

There are a wide range of gold ETCs available. The biggest sterling denominated physical gold ETC on the London Stock Exchange is iShares Physical Gold (SGLN), with a market value close to $7.8bn.

Some ETCs use derivatives to the 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 the factsheet.

More gold ETCs

Read more: ETC Knowledge Centre

Gold miners

Two factors set investing in a gold miner apart from investing in ETCs – the potential for price-beating returns, and dividends.

Gold miners’ 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.

As you can see there are a lot of moving parts, meaning profits can be volatile.

But the ability to reduce costs and increase output means a well-managed gold miner with high quality assets has the potential to 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 as a whole underperforming the gold price since 2011. Past performance should not be seen as a guide to the future.

The chart below compares the performance of Randgold, formerly the UK’s largest gold miner, but which has merged with US listed Barrick Gold, with both the price of gold and a listed gold miners index.

The combined group has high quality assets, and is able to produce at a relatively low cost of $894 per ounce. Going forwards, Barrick is expected to pay investors a steady, even if small, dividend, with a prospective yield this year of 1%.

Gold Miners vs. the Gold Price (Total Return)

Past performance isn’t a guide to the future. Source: Lipper IM, Refinitiv 02/03/20.

Other major gold miners have more mixed track records. As a whole they've lost around a third of their value over the last ten years – a pretty healthy period for gold overall.

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.

Given the unpredictability 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. The fund has the flexibility to invest in emerging markets and smaller companies which adds risk. 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 a 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 other types of ETC.

Mining shares could also be an option, but they carry additional risks as they can over or underperform movements in the gold price. A gold fund can help reduce some of those risks, but is still an adventurous option compared with a fund that invests across a wider range of companies.

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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    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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