Is now a good time to invest in gold?

Last updated: Aug 24th, 2011
News by Moneywise team
gold bar

The price of gold has risen above $1,900 an ounce for the first time, as investors flock to safe havens amid ongoing market volatility. So is now the right time to be buying the precious metal? Or is it too risky an investment?

Q: What are advantages and disadvantages of investing in gold? Is it a good thing to invest in or should i stick with shares? Is gold too risky for a long-term investment and, if so, are there any other precious metals that would make a good long-term investment?

A: Philip Pearson is a partner at P&P invest in Southampton

If you wish to gain exposure to gold there are two basic methods. you either hold the physical asset or you track the price through a financial security. Gold has always been seen as a safe haven in times of uncertainty. It is therefore not surprising that the price of gold has risen considerably over the past three years, since the collapse of Lehman Brothers and the financial crisis within the European Union.

If you wish to own the physical asset, you can purchase gold sovereigns or krugerrands, or even gold bars from specialist traders. Thee are however associated costs with these transactions, which are reflected in the purchase price. charges vary tremendously so you need to shop around to ensure you are getting a good deal. Once you have purchased your gold you will then need to store it, and also think about security and insurance costs. When you come to sell the gold there are again charges that vary between different brokers.

Gold certificates

Another possibility is to hold gold certificates, where you purchase a stake in gold held by a bank, this does away with the hassle of storing the physical gold yourself. Gold certificates are liquid and can be easily sold, although again there are brokerage fees for doing so. Each gold bar you purchase is audited and accounted for by the bank and thus it should be a safe way to buy bullion.

The alternative option is to track the price of gold. This can be done effectively through an exchange traded fund, which has the advantage of being very liquid, so you can buy and sell easily without physically holding the asset.

Before you buy, however, it's worth remembering the golden rule of investment is to buy low and sell high. Currently the price of gold is at a 30-year high, and in the past the price has been extremely volatile. If you are a cautious investor then i do not advise purchasing gold at the current price, as there is a greater risk of capital loss in the short term than o any peace of mind you may be seeking at this time for your savings.

Finally, you could make use of collective funds, which in companies that benefit from the rise in the price of gold. These are normally mining stocks or financial instruments that track the price of gold. Collective funds are normally very liquid and enable you to cash in your investment easily if required.

My advice is to avoid over-exposure into any single asset by adopting a diversified approach towards investment. In doing so, gold should only form part of a balanced portfolio. If you adopt this approach then you are significantly reducing your risks should the price of gold fall from its current position in the future.

 

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