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What's the best way to invest in gold?

23 July 2018

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’s viewed by some as a ‘safe haven’. It’s a physical asset, not easily created or destroyed, and expected to keep track of 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. But there’s more than one way to invest in gold. Two of the most common are Exchange Traded Commodities (ETCs) and gold mining shares.

What’s happened to the gold price?

The price of gold has slipped this year, falling 5.8% since January, from $1,302 a troy ounce to $1,227 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, 18/07/18

Clearly gold’s not a one way bet. If you’d bought at the peak, the value of your shiny stuff would have fallen by as much as 35%. And that’s before you count any costs associated with holding it.

Nevertheless, gold can be used to diversify a wider portfolio of shares and bonds. Its value often rises when traditional investments fall – but since it doesn’t pay dividends or interest, it generally doesn’t perform so well when interest rates rise.

Investing in gold

Exchange Traded Commodities (ETCs)

ETCs are 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 some of the easiest and lowest-cost ways for people to invest in gold. They’re easy to buy and sell, and can be held in tax efficient wrappers such as an ISA.

Some ETCs use complex derivatives to track the price of gold, rather than holding gold itself. While their prices will reflect movement in the metal over the short term, their performance can be quite different 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.

Read more - Exchange Traded Investments knowledge centre

Gold miners

Two things set investing in a gold miner 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 able to 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. Gold is priced in dollars, but miners can be 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.

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, a global gold mining index.

Randgold has high quality assets, and is able to produce at a relatively low cost of $620 per ounce. The company has offered investors a dividend since 2006, with a prospective yield for 2018 of 4.1% . This should not be seen as a guide to future income and all yields are variable and not guaranteed.

Past performance is not a guide to future returns. Source: Lipper IM, 18/07/18

Randgold Resources share price, charts and research

Another major gold miner on the London Stock Exchange is Centamin. And in the past it’s outperformed the gold price as costs have fallen and production increased.

‘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 production from its major mines. With assets in Egypt, Centamin is far from immune to geopolitical risk itself.

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 as well.

Read more - Exchange Traded Investments knowledge centre

Mining shares are also an option for more adventurous investors, but carry extra risks.

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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