How to invest in gold

See MoneyWeek’s Gold section for the latest news and analysis on investing in gold.

Why buy gold? The gold story is far from over. Gold hit 16-year highs at $450 an ounce last December and is currently trading at around $426, but investors shouldn’t be tempted to take profits. During the last bull market, the price hit $850 an ounce in 1980 against a backdrop of surging oil prices, a weakening dollar and escalating tension in the Middle East. Things aren’t so very different today. Global instability is good for gold – the world’s ultimate safe haven – and the metal has stood the test of time in a way that no paper currencies ever have. Rising demand, coupled with shrinking production, means that prices over the long term have to rise as well. Veteran gold investor Doug Casey says that he believes gold prices could exceed $3,000 before the decade is over. That would represent a rise of 600%.

How much of my portfolio should I hold in gold?

Even a small weighting of gold in an investment portfolio can help to reduce overall risk. Frank Holmes, chief investment officer of US Global Investors, recommends a 10% gold allocation. “It’s a natural hedge, uncorrelated with other asset classes. If you had stuck to it during the dotcom boom (when gold was falling) and kept re-topping it up by 10% each year, you would have had fewer tech stocks and lost less on them.”

So how can I invest?

Central banks have held gold stocks for over 200 years and still account for a fifth of above-ground holdings, but gold comes in plenty of shapes apart from gold bars, including jewellery and coins. Gold coins fall into two general classifications: numismatic coins and bullion coins. The price of a numismatic coin is determined by its rarity and desirability for collectors, rather than its bullion value. A bullion coin, on the other hand, fairly accurately shadows the bullion price. You can also buy gold bullion or gold bars of varying sizes. There are plenty of other, less tangible ways of gaining exposure to gold, from buying gold futures to investing in gold-mining companies.

Do jewellery and coins make sensible investments?

Jewellery is probably the worst way to invest in gold. Retail prices are often marked up by as much as 300% and the real value is subjective and often lies in design and craftsmanship as well as the gemstones. It is easily lost or stolen. If you want gold in a readily accessible form, coins or small bars are better options. They are also exempt from VAT. Although the Krugerrand was the first bullion coin to be marketed as an investment product, investors today can choose from a wide range of bullion coins whose market value is determined by their fine gold content. Krugerrands remains popular, as do the Canadian maple leaf, Britannia and US eagle coins, all of which can currently be bought for around £243 and sold for £226 (for a list of coin and bullion dealers, see the World Gold Council)

And numismatic coins?

These coins also have their fans. According to this month’s edition of US newsletter Sjuggerud Confidential, now couldn’t be a better time to buy as they are currently “near their smallest recorded premiums over melt value”. The last bull markets in rare coins saw prices rise by 1,195% and 665% and now could be the start of a new one. Go for high-quality pre-1933 gold coins graded MS-65 or better by either the Professional Coin Grading Service or the Numismatic Guaranty Corp, says the newsletter.

What about gold bars?

The world’s professional gold market, which is centred in London and operated by the London Bullion Market Association (LBMA), trades in 400oz (approximately 12kg) bars, currently costing around $160,000 each. The bars are serial numbered and usually do not leave the security of industrial strength vaults. The market is competitively priced, but unfortunately inaccessible to the retail investor. However, individuals can still buy gold bars. If you are in London, you can simply walk into the offices of a bullion merchant, such as ATS Bullion International Ltd or Baird & Co, and buy a small bar of gold for as little as £25 over the counter. You can sell it the same way. The price of gold is fixed twice a day at 10.30am and 3.00pm at the premises of NM Rothschild by the five main Bullion Houses – Deutsche Bank, HSBC, NM Rothschild, ScotiaMocatta and Societe Generale. Merchants make their profits from the margin between the buying and selling price. Investors also have to pay for storage and insurance. Baird & Co charge £25/kg a year, but levy a minimum annual fee of £100.

Are there more convenient ways to invest?

Yes. Gold-backed securities are a relatively new phenomenon. To create a gold-backed security, a company is set up that has the right to issue a paper instrument, which can only be issued in direct proportion to gold deposited in a vault. The securities are then traded on a normal stock exchange. The dealing spreads are considerably lower than coins and small bars – typically they are 0.5% – and you don’t have to worry about storage. The World Gold Council launched a gold exchange traded fund, Gold Bullion Securities, which is traded on the London Stock Exchange. This ETF charges a managementfee of 0.4% a year, while the buy-sell spread quoted on its website is about 0.33% of the price. You can also buy gold futures, or invest in gold funds such as the Merrill Lynch Gold & General Fund, which invests in the physical asset,as well as mining companies. This particular fund has tripled in value over the past five years. If you’re after a single stock, the hot tip from Charles Allmon, editor of Growth Stock Outlook, and an old MoneyWeek favourite, is Newmont Mining (NEM), the “best-managed of all the gold players and the only gold stock with a highly liquid market”.