Going for gold

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.

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.

Notes: Figures to 2 August, based on an initial £100 lump sum based on a offer price-to-bid price basis

Source: Morningstar