How to invest in gold using funds
For many years investing in gold has made a lot of sense. When stock markets have gone through difficult periods the price of gold has generally risen. As a result, it’s widely regarded as a safe haven asset and a great way to spread your risk.
However, gold divides opinion. While some wax lyrical about its diversification qualities, critics question how useful exposure can be.
David Coombs, head of multi-asset investments at Rathbones, is not a fan. “It is a catastrophe insurance policy for those once-in-a-century events that you can’t predict,” he says.
“It has only ever made investors money three times in the past 35 years and there have been numerous periods when uncertainty abounded and it didn’t budge.”
However, Justin Modray, founder of Candid Financial Advice, can see some positives. He argues that having modest exposure in a portfolio can be a good way to help spread your investment risk, although he warns against going overboard.
“Up to 5% for most portfolios is a sensible long-term level,” he says. “If you think stock markets will continue to fall over the shorter term, then a larger bet may pay off, but there’s always the risk that you’re wrong.”
One of the main problems with gold is there’s no way to accurately measure its value, unlike owning a piece of land, some property or even an equity, argues Dennis Hall, founder of Yellowtail Financial Planning.
“It just sits there,” he says. “You pay a price for it and hope someone pays you more for it in the future, even though you have no idea why they would. It’s speculative and we try to remove speculation from what we’re doing.”
Brian Dennehy, managing director of FundExpert.co.uk, agrees that sentiment is the best signal for peaks and troughs in gold. He points out that there have been some very dark periods for the metal over the past couple of decades.
“Gold was widely loathed by investors from 1999 to 2001,” he recalls. “Anyone who’d spoken of it being a safe haven or protection against inflation would have been pilloried, yet from that dark time it rose more than seven times until its peak in 2011.”
But he’s expecting any further increases to be more modest. “I’m not suggesting gains of seven times now, but a double-digit gain would be neat in a world of tumbling prices and income,” he says. “We reckon gains could be in the region of 20% to 40%.”
Gold has already enjoyed a pretty good start. On the back of widespread fears about the global economy, its price rocketed 20% from $1,054-an-ounce on 1 December 2015 to $1,268 on 6 March 2016, according to BullionVault.
Assad Abdulla, senior portfolio manager at Signia Wealth, says: “Investors across the risk spectrum now see gold as an asset they need to own,” he says.
“Institutional investors see it as a negatively correlated asset with the other more risky assets in their portfolio and retail investors see it as a store of value.”
There are a number of ways to get exposure. You could buy gold coins, bars or jewellery. But Mr Modray says: “One of the simplest is to buy an exchange traded product that tracks the gold price, such as the ETFS Physical Gold fund that costs 0.39% a year.
This is designed to give investors a return equivalent to the movements in the gold spot price. It is backed by gold held by HSBC bank.
“You’ll need to buy via a stockbroker or investment platform which will charge dealing fees, but this is still likely to be cost effective.”
Moneywise recommends the Source Physical Gold P-ETC (SGLD), which costs 0.29% a year, and is a member of our First 50 Funds for beginners. It's traded on the London Stock Exchange and you can buy it through most investment platforms.
You could also buy shares in gold mining companies, although this comes with added risk as firms may have operational issues and their share price swings may be bigger than movements in the gold price. Gold mining companies listed on the London Stock Exchange include Randgold Resources, Fresnillo, and Pan African Resources.
A better option is actively managed investment funds that specialise in gold and gold miners as they spread the risk by putting their money into a number of companies.
“You can also buy gold coins or bars, but unless you buy very large bars this tends to be quite inefficient as manufacturing costs and gold dealer mark-ups could easily erode profit, plus you’ll need somewhere safe to keep them,’ adds Mr Modray.
It’s difficult to know whether now is the right time to buy gold because a lot depends on external factors such as the strength of the US dollar, the economic outlook and geopolitical risks.
Patrick Connolly, a certified financial planner at Chase de Vere, says: “We have a mixed picture, with some characteristics positive for gold and others negative. Gold shares have also performed strongly in recent weeks, although these companies still have some serious challenges.”
Fund to watch: BlackRock Gold and General fund:
BlackRock Gold and General fund has been one of the most popular funds in the sector since it launched at the back end of the 1980s.
It aims to achieve long- term capital growth by investing in companies that derive a significant proportion of their income from gold mining or commodities.
The fund has just over 80% of its assets in gold, with a further 12% in silver and 3% in diamonds, according to the latest fund fact sheet, while the largest country exposures are Canada, the US, the UK and Australia.
Its manager, Evy Hambro, insists the fact gold has performed strongly so far in 2016 emphasises its role as a hedge against financial market instability, currency weakness and inflation fears.
“Over the medium term, we believe there is the potential for the gold price to trend higher, with Asian retail demand and the possibility of inflation driven by global monetary easing being potential sources of support,” he says.
Although an experienced and well- resourced team manages the fund, its performance is likely to remain volatile as it focuses on a single specialist area.
Mark Dampier, head of research at Hargreaves Lansdown, says: “The fund could appeal to more adventurous investors who share the manager’s belief that gold mining companies could capitalise on a higher gold price as the metal is increasingly viewed as a store of wealth.”
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.