The Big Theme
Gold is known for offering wealth preservation and portfolio diversification in times of crisis, and with the possibility of more market stress, more monetary stimulus and more turmoil in the eurozone, some experts say the precious metal could be set to shine again.
Not that you'd know it from the gold price, which has moved sideways lately and currently stands at around the same level as it did a year ago. But some say it could surge again beyond the record of $1,900 per ounce set in September last year.
Dirk Wiedmann, head of investments at Rothschild Wealth Management, believes that current conditions could prove a boon for gold prices. "Crucially, central banks around the world are moving further and further into uncharted territory," he says.
"The Federal Reserve is preparing for another round of monetary stimulus, the Bank of England expanded its bond-buying programme again in July and the ECB has suggested it may step in to reduce the borrowing costs of countries such as Spain and Italy, which could lead to a further surge in the size of its balance sheet. Even previously conservative central banks such as Switzerland's are risking the stability of their monetary system.
He adds: "All of these measures lay the foundation for a surge in inflation, providing a monetary solution to the debt crisis in the west. They are also leading investors to re-focus on protecting their wealth - gold is a natural and unrivalled destination."
Risks of gold
Others are more bearish on the future for gold investors, and stress that its inherently volatile nature driven by sentiment should leave investors wary. Last year, for example, it began at $1,400 per ounce, before rising to a high of $1,900 and slumping to $1,565 by December 2011.
Gavin Haynes, investment director at Whitechurch Securities, warns: "Demand has been primarily driven by investor flows, specifically from western institutional investors looking to diversify their exposure to other assets and protect against market shocks.
"Whether such flows are sustainable is questionable. After an extended period of a rising gold price, since the start of the year it has lost momentum and if we do see an improvement in the economic environment then there could be a further sell-off in the gold price."
Patrick Connolly, certified financial planner at AWD Chase De Vere, adds: "Gold does not produce any income, interest or dividends - essentially, it just sits there. The price of gold therefore depends solely on demand and supply and how much people will pay for it.
"Price fluctuations can be volatile, particularly if large institutional investors pull out. If this happens, there is a risk that retail investors who have bought nearer the top of the market will be the ones who suffer."
There is past form for this. Following its last peak in 1980, the price of gold fell by 65 per cent in less than two-and-a-half years, and it took more than 28 years for that absolute price to be reached again.
Darius McDermott from independent financial adviser (IFA) Chelsea Financial Services warns that gold equities won't provide immunity if there is a big macroeconomic event that produces a stock market shock. They are shares, after all, not gold.
Still, while gold might be an imperfect hedge against a rocky stock market, it does help diversify equity and gilt risk. If you do want to hold a small part of your investment portfolio in gold then there are several routes to go down; investing in gold bullion as a physical asset or gold mining shares, either directly or through a managed fund.
Burying a chunk of your savings in gold has been a perfectly rational response to the collapse of the global credit bubble.”
Physical gold issues
Buying physical gold can present storage and insurance problems. However, coins, such as sovereigns and Krugerrands, are portable and easily stored, and given that they are a physical asset they can provide some comfort during uncertain times. There's often a big spread between dealers' buying and selling prices, though.
"Good delivery" gold bars - the sort that big banks trade in - are beyond the reach of most private investors. At current prices, a standard 400-ounce bar would cost $640,000 (£410,250). But you can own fractions of such a bar through services like BullionVault and GoldMoney.
Adrian Ash, head of research at BullionVault, says: "Unlike stocks, bonds, currency and even real estate, physical gold never goes to zero. It has always retained a deal price throughout human history.
Mr Ash says BullionVault's customers typically buy between £2,000 and £4m of gold, with the average holding around £30,000. They can buy and sell online at spot market prices, while storage charges are 0.12 per cent a year, or a minimum of $4 a month, with insurance included. Trading through BullionVault's automated systems is available 24 hours a day, all year round, with commission charged at between 0.02 per cent to 0.8 per cent.
"Burying a chunk of your savings in gold has been a perfectly rational response to the collapse of the global credit bubble," he adds. "It's been highly profitable, too. Physical gold has dramatically outperformed even the best-managed mining equity funds since 2007. Simply buying and holding has also beaten gold market-timers hands down as well."
Buying gold shares
There are several advantages to buying shares in gold miners, rather than physical gold. One is dividends. "According to BlackRock, gold equities are trading at attractive valuations on a number of metrics. Furthermore, many gold mining companies are rewarding investors with increasing dividend payments which add to the attractiveness of investing in shares in this sector," says Mr Haynes.
If this trend to pay out income continues, then gold shares could prove an interesting investment opportunity as they get re-rated as income payers, adds Adrian Lowcock from IFA Bestinvest. Miners can also add value through increasing profit margins or making new discoveries.
But gold shares are more correlated to stock markets than they are the gold price, and their share prices have languished recently, even at times when the gold price has risen. Also, London's gold mining scene is dominated by smaller - and therefore riskier - companies. There are only two larger miners - Randgold Resources and African Barrick - and even they are not in the global big league. If you want to own shares in the titans of the industry, you have to invest overseas. That may mean a collective investment makes more sense, although again, fund performance may not be correlated with that of the underlying bullion price.
ACTIVELY MANAGED GOLD FUNDS
BlackRock Gold & General is the fund that is most widely recommended by independent financial advisers (IFAs). It invests in companies involved in mining and production, rather than the commodity itself. It has risen by 51 per cent in the past five years, although it has lost 24 per cent in the past 12 months.
"Unlike many competitor funds, this fund is a relatively pure play on gold. It does not invest in base metals and total non-gold-related exposure will never exceed 25 per cent of the portfolio," comments Mr Haynes.
Alternatively, Mr Connolly favours JPM Natural Resources as a means of investing in mining companies.
There are no investment trusts specialising in gold, although City Natural Resources High Yield Trust and BlackRock World Mining Trust both have exposure to gold mining shares.
See our Top 100 Funds for more ideas on investing in gold.
| Fund | One year | Rank | Three years | Rank | Five years | Rank |
|---|---|---|---|---|---|---|
| BGF World Gold A2 | -22.13 | 2 | 23.86 | 5 | 57.37 | 2 |
| BlackRock Gold and General A Inc | -24.15 | 4 | 22.77 | 6 | 51.15 | 4 |
| CF Ruffer Baker Steel Gold O | -34.56 | 9 | na | na | 15.92 | 7 |
| Craton Capital Precious Metal A | -48 | 11 | 18.36 | 7 | 13.67 | 8 |
| Franklin Gold and Prec Mtls A Acc $ | -31.77 | 7 | na | na | na | na |
| Invesco Gold & Precious Mtls A | -24.11 | 3 | na | na | na | na |
| Investec Global Gold A Acc Net GBP | -24.42 | 5 | 28.39 | 3 | 45.51 | 5 |
| Investec GSF Glbl Gold A Inc Grs USD | -21.38 | 1 | 28.16 | 4 | 54.16 | 3 |
| Junior Gold C | -41.65 | 10 | na | na | na | na |
| LO Funds World Gold Expertise USD P A | -27.95 | 6 | 42.51 | 2 | 59.11 | 1 |
| SF t1ps Smaller Companies Gold A | -53.2 | 12 | na | na | na | na |
| Smith & Williamson Glbl Gold & Resources | -32.91 | 8 | 43.73 | 1 | 32.43 | 6 |
| Sector average | -32.19 | 12 | 29.68 | 7 | 41.16 | 8 |
Notes: Figures to 2 August, based on an initial £100 lump sum based on a offer price-to-bid price basis
Source: Morningstar
Gold ETFs
For direct gold exposure to gold, the most popular route for investors is to invest in a gold exchange traded fund (ETF) or exchange traded commodity (ETC), and these can form an ideal building block for a diversified portfolio.
Both types of investment vehicles are listed on the stock market, and enable investors to track the performance of the price of gold, while also offering a liquid market to buy and sell the value of the asset easily without having to store physical bullion.
They are similar to tracker funds replicating the performance of the FTSE, for example. However, unlike tracker funds they can be traded at any time when markets are open.
The charging structure for ETFs and ETCs is basic, as they do not levy front-end charges, early redemption penalties or exit charges, and service charges are often below 0.5 per cent a year. Neither do they attract stamp duty. However, investors will have to pay broker dealing charges.
They fall into two categories. If they are 'physically backed', then there is an equivalent amount of real gold sitting in a vault somewhere to back up the paper. 'Synthetic' ETCs use derivatives or futures to generate the same returns as the gold price, which introduces an element of counterparty risk.
An example of a 'physically backed' fund is iShares Physical Gold ETC, with a total expense ratio of 0.25 per cent. At Investors Chronicle's Fund Awards 2012, ETFS Physical Gold ETC (PHAU) won Best exchange traded product for gold exposure.
Danny Cox, head of advice at Hargreaves Lansdown, says: "There is no yield from gold ETCs, although the gains are free from capital gains tax if held within an individual savings account (Isa) or self-invested personal pension (Sipp).
"Investors holding gold should benefit if currencies depreciate as a result of continued quantitative easing," says Mr Cox. But he cautions that gold ETCs are typically priced in US dollars which introduces currency risk - a gain from the rising gold price may be partially offset by a weaker dollar, even if there is a sterling share class available. There are some products available which hedge the exchange-rate risk, but they generally have higher charges. ETFS GBP Daily Hedged Gold (PBUL) is designed to enable sterling investors to gain an exposure to a total return investment in gold futures with a daily hedge against movements in the exchange rate between the US dollar and sterling.
ETFs and ETCs can be bought through stock brokers. They are typically marketed as offering a cheap way of gaining exposure to various stock markets, and because they are open-ended, investors do not have the problem of shares trading at discounts or premiums.
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