How To Invest In Gold

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Investing in gold can add stability and diversification to an investment portfolio – especially in times of economic turbulence.

Here’s what you need to know about one of the world’s oldest forms of investment.

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How much gold is there?

According to the World Gold Council (WGC), the total volume of gold mined to date would fit into a cube measuring 21 metres.

Nearly all the world’s gold – about 90% – has been mined since the California Gold Rush of the 1850s. The WGC says that half of the gold mined over the last decade has been made into jewellery. Just over a quarter was turned into bars and coins, while the remainder was used in technology and gold reserves for investment purposes.

Based in South Wales, the Royal Mint produces all of the UK’s gold currency including bullion bars and coins.

Who owns gold?

Gold is measured according to weight. The US holds the world’s largest reserve of gold weighing in at over 8,000 tonnes. According to the WGC, this represents 4% of the 187,200 tonnes of gold that’s been mined to date. 

After selling off 400 tonnes between 1999 and 2002, when prices were at a 20-year low, the UK accounts for 310 tonnes of gold held in vaults inside the Bank of England.

What affects the price of gold?

Gold is characterised as being a limited commodity with a relatively static supply. In 2022, the three largest gold-producing countries were China, Australia and Russia, according to Statista.

As the supply of gold is relatively limited, the price of gold is highly sensitive to changes in demand. 

The graph below shows how the price of gold (per ounce) has changed over the last 30 years. In 1993, its price was around £220. Currently (July 2024), the gold price stands at around £1,860, close to the commodity’s all-time high of £1,930, achieved earlier this year. 

Gold price performance

The graph below displays the past performance of gold. Past performance is not a reliable indicator of future results.

How is gold priced?

In effect, the gold price is set in the UK. The bullion market, whose accreditation is observed globally, is called the London Bullion Market Association (LBMA). There are two different types of gold prices:

• Fixed: LBMA members meet via conference call twice-daily to agree a price that clears their outstanding client orders. This is typically used for larger orders. 
• Spot: this is a ‘live’ price largely used for buying and selling gold bullion. 

Why invest in gold?

There are several reasons why it can make sense to invest in gold, particularly in times of economic volatility:

1. Wealth preservation

Inflation reduces the ‘real’ value of a currency over time. In other words, £10 today buys you less than it did 30 years ago. Gold can provide one way of protecting the ‘real’ value of your wealth against inflation. 

During a period of high inflation, as is currently the case, investors may revert to gold as a real physical asset that holds its value. The argument is that gold is a good hedge against inflation as, in theory, increased demand for gold in inflationary periods can result in a rise in gold prices.

Over the last 20 years, annual inflation has averaged 3% in the UK, according to the Office for National Statistics. Over the same period, the price of gold has increased by an average of 10% per year (according to WGC). 

Adjusting for the inflation rate of 3%, the ‘real’ value of gold has therefore increased by an average of 7% per year. 

2. Safe haven

The value of a currency is influenced by a country’s policy on interest rates and money supply. In contrast, the value of gold is a function of supply and demand. As a result, gold is often seen as a safe haven in times of economic and geopolitical volatility. 

According to the WGC, global demand for gold jumped 34% in the first quarter of 2022, due to the war in Ukraine. This trend continued through the year, with the WGC commenting: “Colossal central bank purchases, aided by vigorous retail investor buying and slower exchange-traded fund outflows, lifted annual demand to an 11-year high.”

3. Portfolio diversification

Along with cash, shares, bonds and property, gold is another form of asset that can provide investors with an element of diversification.

Diversification is important because it offers a form of protection against one asset class, such as shares, underperforming. 

Gold is often described as having an ‘inverse correlation’ with other asset classes. This means that, if stock markets are falling due to high inflation and economic uncertainty, investing in gold may produce a higher return. 

Tom Stevenson, investment director, personal investing, at Fidelity International, says: “Gold continues to hold a lustre for investors for a number of other reasons. The first is the way it can act as a diversifier in a balanced portfolio. It behaves differently from both bonds and shares and can, therefore, give you a smoother ride over time.

“Another reason to hold gold is its stability over long periods. Prized as a store of value since ancient times, gold has tended to maintain its real inflation-adjusted value over time even if it can be extremely volatile in the short run.

“Gold tends to hold its value at times of stress. It is not coincidental in today’s uncertain times that the world’s central banks are stocking up on gold.”

What are the drawbacks of investing in gold?

Holding gold, or having exposure to it via a pooled investment, is not risk-free. There can be several disadvantages for investors:

• There are no guarantees with gold. Its price, as with any asset class, is subject to fluctuations and can be volatile. An investor buying gold might have to wait some years before being able to sell for a profit.
• Gold does not produce an income or ‘yield’ for investors, unlike savings accounts, bonds and dividend-paying shares.
• Physical gold can be difficult to trade for people with limited amounts to invest. Buying physical gold also requires verification of authenticity and safe storage. 
• Geopolitical factors can influence gold prices, such as the G7 ban on imports of Russian gold in 2022.

How can you invest in gold?

There are several different ways to invest in gold, depending on whether you want to invest directly – in the precious metal itself – or via indirect means. 

1. Buy gold directly 

The value of gold is calculated by reference to its carats – higher carat numbers have a higher proportion of gold and lower proportion of other metals. Pure gold is 24 carats.

You can buy physical gold in the form of bullion, coins or jewellery from precious metal dealers and banks:

• Bullion bars: When people think about investing in gold, they typically think of bullion bars locked in bank vaults. Bars can range in weight from one gram to over 10 kilograms. Bullion bars are stamped with the purity level and weight of gold.
• Gold coins: The two most common types of gold coin produced by the Royal Mint are the Britannia and Sovereign. The smallest coins currently sold are the 1/10 ounce Britannia coin and the quarter Sovereign coin, which cost around £195 and £135 respectively (prices at November 2023). Both coins are legal tender in the UK, and, as such, are free of tax considerations (such as capital gains tax and VAT) for UK residents.
• Gold jewellery: this carries additional risks to buying gold bullion. There is typically a mark-up relative to the content of gold, to cover the labour involved in the design and manufacture and the retail margin. This mark-up can be as much as three times the value of the underlying value of the gold. You should also check the carat of the gold as a lower purity will reduce the base value.

Whatever type of gold you’re looking to buy, it’s important to use a reputable dealer – for example, members of the British Numismatic Trade Association adhere to a code of ethics. Another option is to buy bullion bars or coins directly from the Royal Mint.

You should also factor in the cost of insurance and storage fees. Secure storage options include vaults and bank safety deposit boxes. 

The Royal Mint charges 1% (plus VAT) annually of the value of your gold stored in its vault. If you are looking to store gold at home, it’s advisable to invest in a high-security safe and ensure that you have adequate insurance cover.

2. Buy gold and commodity funds

Retail, pooled or collective investments aggregate sums of money from lots of different people into one large fund managed on their behalf by a professional investment firm.

Funds are either ‘actively’ managed – where a manager chooses holdings to perform to a specific investment mandate – or take a ‘passive’ approach with portfolios designed to copy a particular stock market or commodity index.

Specialist commodities, mining and exchange-traded funds (ETFs) can provide you with exposure to gold, without the difficulties of trading and storing gold in its physical form:

• Funds investing in gold mining companies: these include BlackRock Gold and General, Ninety One Global Gold and LF Ruffer Gold although they invest principally in mining companies, rather than gold itself. These funds have delivered 5-year returns of 49%, 65% and 89% respectively (to 7 November 2023), according to data from Trustnet. These funds charge a higher fee as they are actively-managed by a fund manager.
• ETFs: if you want an investment that tracks the price of gold rather than the value of mining companies, there are a number of ETFs to choose from. For example, the iShares S&P/TSX Global Gold Index and the ProShares Ultra Gold ETF have achieved 5-year returns of 88% and 84% respectively (to 7 November 2023). ETFs tend to have lower fees compared with active funds. 

3. Buying shares in gold mining companies

Another way to invest indirectly in gold is to buy shares in companies that mine, refine and trade gold. However, while the prices of mining company shares correlate to gold prices, their share prices are also impacted by other fundamentals such as profitability, geopolitical risks and environmental issues. 

Some of the largest global gold mining companies include:

• Barrick Gold Corporation – headquartered in Toronto, Barrick is a major gold and copper producer, operating mines in 13 countries.
• Newmont Corporation – Newmont mines gold in addition to copper, silver, zinc and lead. It’s headquartered in the US, with mines in Africa, Australia and North and South America.
• AngloGold Ashanti – a South African company producing gold, silver and copper through mines in nine countries.

Some of the larger mining companies listed on the London Stock Exchange also mine gold, among other precious metals. These include BHP Group, Rio Tinto and Glencore. 

Investing in a mining company provides the opportunity for capital growth if the share price rises, along with income in the form of dividends. A dividend is a cash payment to shareholders, usually made once or twice a year. 

According to fund manager Janus Henderson, BHP topped the table as the world’s largest dividend payer in 2021 and 2022, with the mining company reporting bumper profits on the back of soaring commodity prices.

As with other assets, any profit or capital gain made from investing in gold, whether directly or indirectly, will be potentially subject to capital gains tax (CGT). The current CGT allowance is £3,000 for the current (2024-25 tax year).

However, as mentioned above, CGT is not payable on Britannia and Sovereign coins as they are legal tender, or on gold-based investments (such as funds) held within an Individual Savings Account.

There has been similar appreciation in the price of other precious metals over the last 30 years, including silver, platinum and palladium. 

Metals will play a key role in the transition to green energy to meet the ambitious net zero emissions targets set at the last COP 26 summit. Clean energy technology is heavily reliant on metals such as lithium, nickel and cobalt to allow storage of energy in batteries.

As with gold, there are a number of metal-specific ETFs, in addition to general precious metal ETFs.

Should you invest in gold?

Gold may offer investors a safe haven and a way of preserving wealth in a high inflation environment. As with shares, the price of gold is volatile, however it has delivered an increase in value over the last 30 years.

Depending on your preference and appetite for risk, you may choose to invest in physical gold, mining shares or gold-based funds and ETFs. However, it is important that any investment in gold forms part of a diversified portfolio. 

Your investment can go down as well as up, and you may not get your money back. If you are unsure as to the best option for your individual circumstances, you should seek financial advice.

Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

Is gold a good investment during a recession?

Historically, gold has been seen as a hedge against a recession as it has a low correlation with other assets, such as equities. According to the World Gold Council, gold prices have delivered positive returns in five of the last seven recessions.

This is shown in the chart below, which looks at the performance of gold before, during and after recessions.

However, gold prices do not always rise in a recession and investors should take into account other factors such as geopolitical uncertainty.