Golden opportunities – but not without risk

Published by Rob Griffin on 30 January 2018.
Last updated on 30 January 2018

Golden opportunities – but not without risk

To buy into this precious commodity, you can purchase gold bars, invest via ETCs or buy shares in gold mining firms through a fund. We look at the pros and cons.

Few asset classes divide opinion as sharply as gold. Some argue it’s a safe haven against rising geopolitical tensions because it’s uncorrelated to other asset classes, so all investors should hold a small amount. Others, however, insist exposure is pointless as it doesn’t produce income, interest or dividends.

Matthew Walne, director of Santorini Financial Planning says: “You buy it, tuck it away, and hope someone will pay more for it in the future. It’s also not something you can store in your loft and hope a burglar won’t notice.”

Patrick Connolly, a certified financial planner with Chase de Vere, points out the gold price depends solely on demand, supply and how much people are prepared to pay. He also questions its reputation as a safe haven investment, highlighting how violently the gold price has fluctuated over the decades.

“The price reached over $1,800 in 2011 yet fell to around $1,100 at the beginning of 2016 and is currently around $1,243,” says Mr Connolly. “This is very volatile for a supposedly safe asset class.”

He adds: “From its peak in 1980 the price of gold fell by 65% in less than two and a half years. It took more than 28 years for this peak to be reached again.”

All those concerns are valid but gold can still play a diversification role in reasonably large portfolios, according to Juliet Schooling Latter, research director at Chelsea Financial Services.

“I don’t agree it’s safe as the price of gold and its shares can be very volatile, but it’s one of the few asset classes to maintain its negative correlation at times of severe market stress,” she says.

She cites the effect of recent sabre-rattling between the United States and North Korea. “As tensions have increased, gold prices have risen,” she says.

There are three main ways to invest in gold: buy and store physical gold; get exposure via Exchange Traded Commodities (ETCs); and buy shares in gold mining companies, which is best done via a specialist fund.

There are pros and cons with each approach. To buy physical gold, you can go through online sources such as BullionVault. These services enable you to buy from as little as one gram of gold – currently this costs around £30 – and have it stored in professional vaults.

As well as buying the actual gold, you will also have to pay commission, storage and insurance costs. Before making any commitment, you need to do your sums.

Your next option is buying ETCs, which have been very popular with devotees of gold over the past decade. These track movements in the gold price through either holding the physical bullion or using derivatives, which are financial instruments deriving their value from the underlying entities.

The benefits include their low price and the fact that they diversify an investor’s money across a range of underlying holdings, which helps spread the risk.

The third option is to buy shares in gold mining companies – although you will be embracing equity-related risk, which means it’s far less effective in diversification.

There is also the possibility of such companies hitting operational issues, according to Mark Dampier, research director at financial provider Hargreaves Lansdown.

“Many gold mining companies have failed to take advantage of the rising gold price over the past decade, letting costs spiral out of control,” he says. “This has been refl ected in the share prices of mining companies and the poor performance of gold funds,” he says.

While accepting there is some evidence to suggest companies are trying to turn things around by cutting costs and initiating management change, he feels it’s still early days.

For investors who want exposure to gold mining companies, the most cost-effective route will be to buy a fund that invests in a variety of such stocks. The good news is that there’s only a handful to choose from within the IMA Specialist sector so it’s not a task that will take ages.

One relatively recent arrival is the Old Mutual Gold and Silver fund, which was launched just under two years ago with the aim of achieving a total return.

Its manager, Ned Naylor-Leyland, believes the low correlation of gold and silver with stocks and bonds acts as a good diversifier and reduces risk over the medium to long term.

He also invests in the increasingly popular bitcoins, which took the investing world by storm in 2017. “Bitcoin and gold are complementary assets,” he says. “After all, Bitcoin was explicitly designed to be digital gold.”

He claims Bitcoin’s frictionless and immediate blockchain payment system resolves the criticism of gold as lacking divisibility and having problems with ease of transmission.

“I believe this recognition of a differentiated form of payment will bring the ownership of disciplined money into the modern world, paving the way for the return of gold as a global currency,” he adds.

ONE TO WATCH: BlackRock Gold & General

This fund, which was launched in 1988 and is managed by Evy Hambro (left), 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 portfolio is 87% invested in gold, with 11% in silver, and exposure of less than 1% each in diamonds, copper, and cash/derivatives, according to the most recent fact sheet.

Within stocks, Newcrest Mining and Randgold Resources are the largest positions, each of which accounts for more than 9% of assets under management. Other prominent names in the top 10 holdings are Agnico Eagle mines, Newmont Mining Corporation, and Northern Star Resources.

As far as country exposure is concerned, Canada has the lion’s share at 51%, followed by the US with 17%, Australia on 15% and the United Kingdom on 12%.

Mark Dampier, research director at Hargreaves Lansdown, says the fund is managed by an experienced team but warns this area is likely to remain volatile.

“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,” he says.

ABOUT THE FUND

Fund: BlackRock Gold and General fund
Manager:  Evy Hambro  and Thomas Holl
Launch date:  7 April 1988
Fund AUM:  £1.05 billion
Max initial charge: 0%
Ongoing charge: 1.17%  for the D share class
Further information: Blackrock.com

QUICK GUIDE: Consider investing in this area if…

• You want to diversify your existing portfolio

• You are looking for insurance against geopolitical risks

• You want exposure to gold

Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express 

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