Some gold investment methods are more cost-effective than others, while some provide superior security.
As you move through this guide, I will highlight the pros and cons of each method to help you understand the strengths and weaknesses of different gold investment options available and what you could invest in.
Investing in commodities such as gold carries a high degree of risk due to the volatility of the market price. Perform detailed research and understand your risk tolerance before you make any investments.
Investing in gold using different asset classes
Commodities are usually treated as a single asset class. But I can show you how you to use 4 different asset classes to gain exposure to the gold price:
- Direct ownership of gold
- Indirect exposure via gold mining equities (stocks and shares)
- Collective investment schemes (funds)
- Gold derivatives
Each asset class brings advantages and disadvantages. Even within each asset class, different methods are available with different risks and rewards. This brings us to 7 different investment options.
This guide will group investment opportunities by asset class to help you compare and contrast similar gold investment techniques.
When looking at different investment strategies, I will rate them on the following factors:
The Rating System Explained
1Private Holdings of Gold Bullion
Building a personal collection of gold bullionPersonal ownership offers maximum control and gold you can touch. However, its high costs make it inappropriate for short term investment.
Ideal for: Retirees with a long time horizon.
Not ideal for: Speculators with a modest sum to invest
Is buying gold bullion bars and coins a good way to invest in gold?
Effectiveness: Gold bullion investors enjoy a direct relationship between the value of their assets and the gold price. Therefore this is one of the simplest and most effective ways to profit from a rise in the gold price.
Efficiency: Transaction costs are relatively steep, which makes buying gold expensive as a short term investment. Gold dealers will sell to you at a mark-up above the gold spot price.
Plus, you’ll need to pay for postage, a secure safe, extra home insurance just to take ownership of your gold. You’ll also need to pay selling fees when chose to sell your holding.
Security: Gold is impossible to trace and value dense. Therefore it is highly vulnerable to theft, although this risk can be mitigated through insurance and security precautions. One of the best forms of protection against theft is to keep knowledge of your gold stash secret.
Practicality: Selling physical gold is more difficult than buying.
You will need to bring your gold to a commercial buyer before you can receive a confirmed quote. This can make it time-consuming to ‘shop around’ for the best price available.
Private buyers are unable to verify the authenticity of gold, which can invite uncompetitive offers below its true market value.
Liquidity: Gold bullion has an active and reliable market. Gold is always in demand and many commercial gold buyers will pay cash on the spot.
You may also be interested in: A guide to investing in gold bullion coins
2 Third Party Gold Bullion Storage
Leave security to the professionals
Third party gold bullion storage retains the effectiveness of direct ownership, and outsources the complexities of gold security to a dedicated service provider. Third party storage is efficient but it demands a high level of trust.
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Ideal for: Time-poor investors looking to maximise their return.
Not ideal for: Investors who need access to their gold in a doomsday scenario
Is using third-party storage for gold bars and coins a good way to invest in gold?
Effectiveness: Gold bullion investors enjoy a direct relationship between the value of their assets and the gold price. Therefore this is one of the simplest and most effective ways to profit from a rise in the gold price.
Efficiency: With integrated gold broker and storage solutions, your gold doesn’t even leave the secure facility. Neither during purchase or sale.
Because the gold bullion is held on a large scale, you can benefit from low storage costs. These will be much cheaper than taking the proper precautions in your own home. Suppliers often allow you to sell your gold back to them at a reasonable margin below the gold spot price.
Security: Gold bullion is stored in secure facilities. I have deducted a point because providers don’t often allow you to visit the site and inspect your gold investment.
This creates room for doubt and uncertainty over whether the gold actually exists. This underpins the importance of good governance and regulation of the companies activities. However, gold custodians can furnish the latest certificate from an external audit of their gold stocks. This should provide a level of reassurance.
Practicality: You can buy coins and bars from online gold dealers with a few clicks.
Liquidity: Gold dealers usually offer a simple buy-back scheme which guarantees you a swift sale without a haggle.
This is great for liquidity, but I’ve still deducted a point. The guarantee is actually dependent on the solvency of the vendor. Unlike a normal marketplace, you’ll need to get hold of your gold before you can sell on the open market.
You may also be interested in: Our view: is gold overvalued?
3
24 Carat Gold Jewellery
Attractive now, attractive later?
Investing in gold jewellery offers a thrilling yet compromised investing experience.
Ideal for: Novice investors looking for a bit of fun with the added bonus of portfolio diversification.
Not ideal for: Serious investors seeking a large scale gold investment opportunity.
Gold jewellery for investment and personal use
Is buying gold jewellery an effective way to invest in gold?
Effectiveness: Gold jewellery retails at a higher price than the spot price of gold. By how much will depend on whether the design is desirable, and whether it includes any precious stones.
An item of jewellery will hold its underlying gold value, but the value of good design and ‘newness’ will fall. This increases the prospect of an early loss in value.
However, this might be acceptable in exchange for the joy of wearing a beautiful jewellery piece.
Efficiency: The high retailer mark-up on jewellery makes this the most costly way to acquire gold by weight. An item purchased ‘brand new’ will almost certainly lose value when it is sold as ‘used’ piece.
Security: When carried on the person, jewellery is exposed to a higher risk of theft. At home, jewellery is not typically stored as securely as gold bullion coins and bars. These tend to be bought in larger quantities and afforded greater protection.
Practicality: Buyers are presented with an endless choice of different gold jewellery options. Each ring or bracelet will have a different level of appeal as an investment and personal possession. This makes deciding on a purchase quite a lengthy process. Furthermore, sentimentality may also be a barrier to eventually parting with the item!
Liquidity: Jewellery can be sold locally to jewellers, gold dealers and pawnbrokers. It can even be sent by post to national ‘cash for gold‘ dealers. Therefore the only restriction is the working hours of these businesses.
4 Investing in gold through equities
A familiar investment, with looser returnsInvesting in gold mining shares exposes you to company-specific risks, in addition to price changes linked to the gold price. Reducing company risks requires a good deal of diversification – a gold mining fund could be a simple way to achieve this.
Ideal for: Equity investors looking for a more exotic portfolio.
Not ideal for: Anyone looking to accurately replicate changes in the gold spot price
What is an indirect investment in gold?
Investing in gold through equities means buying stocks to gain some indirect exposure to the gold price.
The principle at work is that the fortunes of gold miners are tied to the gold price.
When the gold price is high, miners will achieve great profits from their operations. Therefore we would expect that their share price will also surge alongside the gold spot price.
If the gold price were to fall; mines may be forced shut. It could cost more for them to extract gold than what they could hope to recoup from its sale.
In such a way, a gold equity investment can behave a bit like an investment in gold bullion itself.
As you will read below, however, this indirect relationship reduces the effectiveness of equities as a replacement for gold.
Is investing in mining stocks an effective way to invest in gold?
Effectiveness: The price movement of gold mining stocks will not follow a 1:1 relationship with the gold spot price. In other words, if the gold price jumps by 30%, gold stocks may overshoot or underperform in comparison.
Efficiency: The process of buying stocks is very efficient in isolation. Investing costs for online stock purchases has never been lower.
But the buy and sell price of stocks will not accurately reflect the movement in the gold price itself. If a miner suffers b
ad news, such as their mining license being revoked, you may suffer a loss. This would have no connection with the gold price itself.
Security: If you execute your trades through a UK stockbroker, your holdings will be held in trust under a tight regulatory regime.
However, the underlying security of the gold mining companies themselves is less secure.
Countries rich in natural resources can have a weak rule of law. At the same time, gold mines are very attractive assets to unscrupulous characters.
This leaves mines vulnerable to confiscation, take-over or attack by friendly and unfriendly political forces. The company stock price and therefore, your investment, will be exposed to this underlying political risk.
Practicality: It’s easy to use your existing stockbroker to buy mining stocks just like buying shares in any other company.
Liquidity: Publicly traded shares are extremely liquid, particularly for smaller investment sizes.
Shares can be traded during the stock exchange opening hours, and cash settlement is usually in 3 days or less.
