How do you buy gold?

With concerns rising that a bear run is long overdue, you may be thinking about investing in the shiny stuff. In stark contrast to cryptocurrencies, gold is not easily created or destroyed and has an intrinsic value and use, thanks to this it is a “safe heaven” where investors put their money in times of global instability. The dot com bubble and the 2009 financial crash produced almost a five fold increase in the precious metal’s price from the turn of the millennium to 2012. On the other side of the coin, good times see gold price erode as people’s faith in stocks, funds and bonds leaves no need for a low growth asset that generates no dividend or interest. This explains the falling price in the economy’s recovery years at the start of the century. In this way, investing in gold has become a hedge against the global economy, it has clear inverse correlation with the US dollar. Following a not too shabby 15% growth in 2017, investing in gold now could still offer good returns for low risk if a bear run materialises. Buying gold bars is obviously very inconvenient, so we’ll cover in this article how you can have gold exposure without having to raid Fort Knox.

First up are Exchange Traded Commodities (ETCs), you can buy and sell these on a stock exchange in the same way as shares. ETCs offer the investor exposure to the commodity and charge a management fee for the service. There are two main types of ETCs, physical and derivative. Physical ETCs have a holding of the precious metal itself, they are among the cheapest and simplest ways to invest in gold. ETFS Physical Gold (PHGP) is the biggest physical gold ETC on the London Stock Exchange with a $6bn market cap, Source Physical Gol d ETC (SGLD) is a smaller but cheaper option. Derivative ETCs use financial derivatives such as futures contracts to the track the asset price, without actually holding any gold. While these are effective at reflecting the commodity’s price in the short term, they can sometimes diverge over the long run. They also carry higher risk and due to their complexity, they are not recommended for a newbie investor.

Another way to invest in gold is buying shares in gold mining companies. Since these company’s revenue is generated from selling gold, their fortunes will be closely linked to its price. Shares in a growing company offering healthy dividends would most likely offer better returns than an ETC. However, your returns are not solely dependent on the price of gold, there are many factors that could affect the share price. Gold’s price could be booming and yet a particular company you have invested in may have unrelated problems that are stifling growth or even losing you money. A gold miners profitability depends on many things such as production quantity, production efficiency and currency movements. This explains why the gold mining sector has underperformed the gold price so far this century. However, this same reason could also mean that well managed miners may still be able to provide growth to investors in times when gold’s price is flat or falling. Randgold Resources (RRS), Centamin (CEY) and Petropavlovsk (POG) are some of the largest gold mining companies listed in London who have outperformed the price of gold in recent years.

Remember, a good portfolio is a well-balanced one. So, if you are concerned about traditional asset prices crashing as hot shot fund manager Paul Woolford is touting, then investing some of your portfolio in gold should offer you some protection. Furthermore, since president Trump frequently reminds us of his big red button, we may all need a “safe heaven” when we’re living in through a nuclear winter.

Disclaimer: When investing in equity markets your capital is at risk. All content posted on stockpickers.co.uk is opinion and not intended to be instructional. The site cannot be held responsible for any losses upon the following of the opinions expressed. 

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