The Tenant of Wildfell Hall, Anne Bronte
The value of gold
Gold is traditionally viewed as a safe-haven asset – a store of value during uncertain times. These days, it is an investment option – you can buy it directly or through funds. The value of gold increases when stock markets slump, as investors prioritise security. It is described as “uncorrelated” to the stock market, which means its performance does not follow the stock market.
Why is gold so valuable?
It has the right properties to be a store of value and unlike most other metals, gold is not corrosive, which means it can retain value better than, say, a house or car.
Its hardiness is one reason it is used in coins. But because it is also relatively soft, it can be manipulated with basic tools, making it a good material for coins. It can also be cast and recast without losing its properties. And of course, it is beautiful.
A brief history of gold
The value of gold is not a modern phenomenon. Gold has been valued by civilisations across the world for thousands of years. It is thought that mining for gold began around 7,000BC in the Middle East, as the earliest gold artefacts discovered date back to 4,200BC. Aztec and Inca gold is understood to have originated from mines in Colombia. The first “gold rush” began at the turn of the 19th century in America.
How can I invest in gold?
Lately gold has put in a glittering performance, soaring in value during much of 2016 and tempting hard-pressed savers to pile in to make their money work harder. However, like any investment past performance isn’t a guide to the future, and the price of gold can be particularly volatile.
Is my gold valuable?
Despite its high value, gold is quite common – many of us own some bits of gold jewelry. It can be hard to know the value because it is so volatile. The best thing to do is take what you have to a jewelers or post it to a reputable gold website (Moneysavingexpert has a list here).
Why invest in gold?
Investors who want to diversify buy gold because it is uncorrelated, so if the value of their stocks and shares portfolio is falling, the gold they hold will help to mitigate any losses.
For example, equities may fall when there is bad political or economic news, because they are considered to be a riskier asset. Similarly, bond yields typically fall when interest rates are rising. Gold, in contrast, and as a precious metal in limited supply, has often stood firm.
Whether it’s time to invest depends on your attitude to risk, and the current market conditions. Typically, uncertain economic conditions, and a struggling US dollar have presented an opportunity to buy gold. Gold is priced in dollars, meaning investors get more for their money. However, demand for gold during difficult times can send its price sky-high, as this also depends on investor sentiment.
The performance of gold
Gold experienced its strongest rally since the Brexit vote when Trump was elected US president on November 9.
It has proven a terrific choice for investors over recent decades, outshining rivals such as shares, cash and property. According to figures from BullionVault.com, gold has delivered an impressive return of 465% in the 16 years to September 2016. This compares to a 96% return from the FTSE, and 55% on cash. Yet it is far from a one-way bet, like any investment.
Whether it will soar in value again is anybody’s guess, and gold will go through periods where it fails to dazzle. In 2013, the gold price slumped by 25%. Also, gold doesn’t pay an income, making it unsuitable for many investors, and there are other costs to consider such as storage and trading fees.
Like all commodities, the performance of gold is primarily driven by investor demand. It remains a long way off the $1,898 an ounce high reached in September 2011. At the time of writing gold was valued at around $1,228 an ounce.
If the current uncertainty over the future of the economy continues, as the UK begins the process of withdrawing from the European Union, the properties of gold could again prove appealing.
How to buy gold
There are several ways to get exposure to gold as part of a balanced portfolio and to offset the risk of other assets. The option you pick will depend on your preferences and attitude to risk.
The World Gold Council suggests around 2% to 10% of a portfolio consists of gold, as a diversifying tool.
You can buy actual gold bars or coins, and pay to have these stored on your behalf in secure vaults. British investors typically favour twenty-two carat gold sovereigns, but an alternative is the South African Krugerrands. You can also buy gold bars, based on the current gold price, although you will pay a premium for manufacture. The additional cost you pay is greater for smaller bars.
You can buy physical gold through traditional dealers such as the Royal Mint, or one of the online services on offer, but remember to factor in dealing costs, and any storage costs. For example, BullionVault and GoldMadeSimple are among the firms that you can buy physical gold from.
Another option is to invest in a pooled fund, managed by a professional fund manager who picks from the range of gold mining and commodity companies listed on the stock market. Some are more of a pure gold play than others, so check you are happy with the holdings before investing. Examples of popular funds include Investec Global Gold and Blackrock Gold & General.
Instead of paying annual fees for the skill of a fund manager, you could simply buy individual shares in gold mining companies. However, this is a risky approach unless you are an experienced investor, and the value of gold mining shares may not follow the price of gold.
You could invest in an exchange-traded fund (ETF) to track the price of gold, through an investment broker or stockbroker. These can be bought to track various commodities and indices.
This investing this way, you get exposure to gold without physically owning it, with funds such as ETF Securities Physical Gold and Physical Gold ETF for investors.
ETFs are passive investments, designed to follow the movement in the gold price. You may pay a dealing charge of around 0.4% to invest in an ETF per year.
If you are thinking of investing in gold and unsure whether it is suitable for you, consider seeking professional financial advice. Remember that gold could quickly lose its lustre if economic conditions improve.
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Money Means is a news and information series written by independent financial and consumer journalists and experts*. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.
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