Welcome cheapskates to another beginners guide. Only this time, it won’t be a series, we’ve packed everything you need to know all into this one handy article!
You may have read our recent stock article about the iShares Physical Gold ETC that we have invested in this month and are thinking of getting in on the action. Or maybe you’re concerned about the high stock prices at the moment and want a way to diversify your portfolio. In that case, this could be the article for you.
In this guide, we’re going to explain all of the different ways you can invest in gold (and other precious metals) and will explain our favourite way to do so. If you find this article useful, please feel free to share or leave a comment below!
As always, the following is not financial advice, read our disclaimer
If you want to get to a specific part quickly, use the quick links below:
- History of investing in gold
- Why people invest in gold
- Types of investment – Physical gold
- Types of investment – Gold on the stock market
- Other investments – Mining stocks
- Other investments – Gold backed crypto
- Other investments – Gold derivatives
- Our strategy
Before we get into the different ways of investing, we will briefly cover the history of investing in gold and why you might want to add it to your portfolio.
A Short History of Investing in Gold
In short, gold is given value by everyone around the globe for its scarcity, beauty and usefulness. Because of it’s rarity, it can be used as a relatively stable store of value for a price that is dictated by the market at large, unlike cash which can be manipulated by central banks.
However, it’s story starts back in 500bc when the King of Lydia, now Turkey, minted the very first gold coins. Gold was used as a form of currency and bartering with relatively uncontrolled pricing right up until the 1800’s when the gold standard was introduced in Britain when the gold sovereign was introduced, cementing the price of the gold in currency. Other countries followed suit, but gradually over the next century amid numerous financial crisises, the gold standard was eventually dropped by 1971 to allow currencies to trade freely against each other. During the next 50 years and again, amid a number of financial downturns, investors began putting their money back into gold as a way to store and protect their wealth from the turbulence of the stock market. Gold prices really took off during this period, especially during the 2008 financial crisis.
So why might you want to invest in gold?
There are many reasons investors buy gold, but below are some of the most common:
1. A hedge against inflation
Gold is a classic asset used to combat inflation because it is somewhat inversely correlated to it. The reason for this, is that in a falling economy, the local currency gets weaker and interest rates tend to fall. Because of these factors, investors move their money away from assets affected by these things and into gold, driving up the price. Its also a hedge against inflation because of its scarcity – we can’t just print more of it unlike with fiat currencies.
2. Portfolio diversification
Again, in a market downturn, investors may end up pulling their cash out of stocks. Gold then tends to benefit from this extra investor cash. If you have a portfolio that contains only stocks but y the market is at an all time high (kind of like now), gold could be the perfect hedge to soften the blow should the market crash.
3. It holds it’s value
Gold possibly has a longer track record then any other asset, and through those ages it has managed to hold and increase it’s value to where we are today. Although we have seen relatively dramatic price price swings over short term windows, over the long term its price volatility has been less than that of stocks.
4. Restricted supply
As we mentioned earlier, gold holds its value well due to it’s relative scarcity. It’s not a particularly easy metal to come by, with a. Typical mine taking over 10 years to become fully operational and needing significant capital to get off the ground. Not only that, but in recent times, gold production has been declining to around 2000 metric tons mined a year. A declining production line usually increases prices.
Types of gold investments
OK, so now that we know the basics of gold as an investment, it’s time to find out the different ways of buying the stuff. Below we list the most common ways of investing in gold and lost our preferred method.
The most obvious way of investing in gold……. is to just buy some gold. Duh.
For the purposes of this guide, we’re going to recommend that you stick to buying pure gold (I.e. 24kt or >999 parts gold) for investing. You can buy gold bullion coins and jewellery pieces that differ from this standard but we don’t see these as an ideal investment as they tend to carry a premium well above what their gold value is truly worth (though some people do buy these for their perceived rarity, or potentially as an heirloom, but that’s for another article)
Gold comes in many formats, but the most common way to buy is in bar form or coin form. These ways are great because they are pretty accessible to almost anyone from reputable gold merchants, refiners, resellers and jewellers. Many of the online merchants sell both bars and coins and come in sizes that range from just 1g to 10kg and above. These products usually cost the value of the gold plus a premium for the manufacture. This mark-up varies from manufacturer to manufacturer but not by a great deal.
Bars come in a cast or minted format (minted meaning that it has been pressed to form the shape and stamped with a design / manufacturer logo etc) and coins come in a minted format (similar to coins in your pocket but made from gold). Coins are usually more accessible and are great for beginner investors but usually carry a slightly higher premium due to their quality and manufacturing process (UK bullion coins are made by he Royal Mint, the same as the coins we spend!). Cast bars tend to carry the lowest premium and are usually of the lowest quality finish.
- Gold is VAT exempt in the UK meaning that you can get pretty close to the actual price of the underlying asset. Not only that, but coins from the Royal Mint are exempt from CGT (capital gains tax) as they are seen as legal tender!
- Physical gold can’t be hacked and isn’t susceptible to cyber attacks because, well it’s real, so it’s safety is fully within your control.
- Although gold stocks aim to emulate the price of gold, there’s always a risk that is varies. However, you can be sure that your physical gold can always be redeemed for the price of gold.
- Unless you hold your physical gold with someone else, there is no ongoing charges or fees with physical gold. Once you’ve bought it, that’s it.
- As mentioned, the biggest drawback with physical gold is that it carries a premium due to the cost of manufacturing it, packing it and shipping it to your door. For example – the cheapest 100g gold bar we can find online at time of writing is £4,419. However, the spot price of gold is currently £4184. That’s a mark-up of £235 or 5.62%, which in the investing world is pretty significant. If gold increases in value by it’s historical value, it’s going to take you over a year to just break even on your investment!
- One of the drawbacks is that you will need to store your gold. You might think that storing your gold under your bed is a good idea, but trust us, it isn’t. As you invest more into gold, you’ll likely want to think about insuring your gold in case your home gets broken into or some other catastrophe takes place. The problem is, your home insurer will be reluctant to insure significant values unless you’re storing it in a serious safe or vault, which can run into the thousands of pounds. You can store your gold in bank vaults, security storage or other safe stores (sometimes the seller can offer a storage solution) but this will also eat into your profit!
- If the worst was to happen and you needed to liquidate your assets quickly, you’re going to be stuck with trying to sell you physical gold. It’s not easy to get the best price for your gold in a pinch and buyers that are willing to take your gold off your hands at short notice will likely offer you significantly less than market price.
What we say
Due to the drawbacks above, we don’t hold any of our portfolio in physical gold. As cheapskates, we want to get the best bang for our buck when it comes to investing and unfortunately, physical gold most often comes with a premium that puts it far down the list of investments we would make. However, if we could get our hands on some physical gold at spot price, we may hold a small portion of our gold in it.
Gold on the stock market
The other most popular way of investing in gold is to invest in it on the stock market. The primary way of doing this is to invest in a gold fund of some kind that tracks the price of gold. There are a few ways of doing this, but the two most popular are ETFs and ETCs. Many people and companies use these terms interchangeably when talking about investing in gold funds, however they are slightly different in how they ensure they track the price of gold and how they are backed.
ETC stands for ‘exchange traded commodity’ and is exactly what is says on the tin – a commodity (in this case gold) that is traded on an exchange. However….. an ETC isn’t exactly gold. It is essentially a stock that emulates the price fluctuations of gold. An ETC isn’t directly backed by physical gold but rather is backed by a bank in the form of a debt note. The bank then provides collateral (usually the underlying commodity like gold), allowing the spot price to be emulated pretty accurately and minimising the chance of the bank defaulting against the debt.
ETF stands for ‘exchange traded fund’ and like the ETC, these stocks try to recreate the price of gold and sell the shares on the stock market. Unlike an ETC, ETFs cut out the middle man and will back the fund with the commodity that it is trying to recreate by either purchasing the commodity itself or by trading in futures of that commodity. Again, this means that the funds have very little tracking errors and minimised the risk of the stock price collapsing.
For everyday investors, the difference between the two is negligible and will perform roughly the same so we have no problem in investing in either, though we tend to favour investing in an ETC die to the slightly cheaper fees.
- ETCs and ETFs don’t really carry a premium like physical gold, aside from the management / ongoing charge fee (likely to be 0.15—0.5%) so are a really cost efficient way of investing in the commodity
- It’s extremely convenient to invest in gold this way and the entire process can be conducted from the comfort of your own home through an app / investing platform.
- There’s no chance of someone stealing your gold
- There’s no need to think about storage or insurance
- Your shares can be liquidated fairly quickly if needed in a pinch.
- You have no control over your investment, where the gold is stored and how it is backed with this type of investment, it is completely in the hands of the share issuer.
- There is a very small chance that the share issuer / bank backing the ETC goes bust, though the fact that the funds are backed by physical commodities negates the need to worry about this a little.
What we say
We have no problem in – and already do – investing in gold on the stock market. As cheapskates, we think it is the most convenient and cost effective way of gaining exposure to the commodity. We currently invest in the iShares Physical Gold ETC which we shared an article on recently, because it is the best value Stock we can find right now at 0.15% and trades in GBP, meaning that we don’t need to suffer exchange rates.
Below are some of the other ways you can gain exposure to gold in your portfolio. We don’t currently use any of these methods of investing in gold, but we will continue to monitor these methods with a view to moving our investments if the financial motivation is there.
Gold Mining Stocks
Investing in gold mining companies can be an indirect way of gaining exposure to the potential rise in value of the gold market.
The thought process here is that when the gold price is high, there will be more demand for mining gold and gold miners will make more profit from their operations.
Thr problem here is, there isn’t a perfect correlation between the performance of the companies stock and the price of gold. Its true that the company could do better than the price of gold but it could also do worse. For us, the downside of investing in a gold mining company outweighs the upside, because the company will only do well when gold is in high demand but a company can be affected by external factors like bad press, internal issues, regulations etc.
Gold Backed Crypto
A method in it’s infancy, gold backed crypto is a way of giving yourself exposure to gold. There are now a number of crypto currencies backed by gold such as the Perth Mint’s Gold Token (PMGT) and Tether’s Gold token (XAUT).
Much like crypto stable coins (if you’re not sure what a stable coin is, you can read our introduction to crypto here) these currencies try to emulate the price of the underlying asset by backing the token 1:1. For example, in the case of Tether Gold, the tokens are backed by Tethers gold reserves that are held in Swiss vaults (each token matches a serial number of a troy ounce bar in the vault).
Although we are big proponents of Crypto and believe that the technology behind them will likely become commonplace in most investors portfolios, we’re not quite ready to jump in head first and convert our gold assets to Gold crypto. There are still a number of risks in the crypto space and the market is still extremely volatile, even for stable coins (like when USD Tether collapsed in 2020 to $0.70 after becoming entangled in a scandal around how their currency is backed, which FYI is still ongoing, yikes!). We don’t shy away from volatility and uncertainty, but gold is usually viewed as the opposite of that and that’s how we want to treat it.
For now we’re happy to continue to hold our gold in an ETC, though we will be keeping an eye on the crypto space and expect this type of investment to become more mainstream soon.
The final way of investing in gold is to buy derivatives. A derivative is essentially a financial instrument that derives it’s price from the price of gold but doesn’t directly invest in gold. The most popular way of doing this which may be familiar to most is through a CFD or spread betting.
These methods use leverage, meaning that investors only need to contribute part of the total investment and gain up to 100 times what they would if they invested in the actual underlying stock. You never own the underlying asset when investing in derivatives, but rather make a ‘deal’ with the issuer on whether the price will go up or down.
BE WARNED, although using leverage can lead to higher returns, it can also lead to much bigger losses and even lead to losing more than your initial investment. We cover CFDs in our investing for beginners guide and our recommendation is to stay clear, especially if you are an amateur or new investor.
Final thoughts + Our strategy
We think investing in gold can be a great way of adding some diversification to your portfolio due to its low barrier to entry and its tendency to do well when stocks do badly. We think that investing in an ETC (the one that we invest in is the iShares Physical Gold ETC, check out our article on this stock) is the best way to achieve it due to the low fees but physical gold does have its place if you can get it cheap enough. We don’t hold a huge amount of our portfolio in Gold (8% at time of writing, which is actually a little higher than usual) as we think we can get better returns elsewhere, but won’t shy away from it if the market continues it’s upward trend into the atmosphere!
Over the next 12 months, we plan to continue this high-ish level of gold in our portfolio whilst we wait to see if the high prices of the stock market can be sustained. We’re going to be keeping an eye though on Gold backed cryptocurrencies as a way of investing in gold over the coming years with potentially lower fees than our current favoured method.
Thanks for reading! Why not check out our article on the stock we use to invest in gold!
Let us know your thoughts by leaving a comment below!