How to invest in gold
The yellow metal, the barbarous relic, call it what you like. Gold continues to attract attention, but how can investors get access to it cheaply?
Investing in gold has long been popular and is a subject that is close to IG Group’s heart, given we were established in 1974 specifically to allow retail investors to get exposure to the gold price at a time when retail ownership was restricted.
Nowadays investors have fewer restrictions and can get exposure in a variety of different ways, either through physical ownership or by owning simple financial instruments.
Buy physical gold
This is the traditional approach. Find an online gold bullion dealer and they will be able to sell you coins and gold bars ranging in size from a gram to several kilos. Owning bullion will usually have the lowest mark-up over spot price as there is no interest from coin collectors, who may pay a premium for rare issues. However, the bullion dealer needs to make a return and you will typically pay a mark-up of at least 2.5%, making a round-trip investment loss of 5% assuming no price move in the underlying asset.
Owning gold bars has an aesthetic value, but if you want to store them securely there will be further charges to pay and they are not usually covered under the contents of standard home insurance.
Buy gold ETFs
Gold Bullion Securities (GBSS), Invesco Physical Gold (SGLP) and iShares Physical Gold (SGLN) alone hold several billion pounds of exposure to gold, and all have the value of their products backed by physical gold held at their custodian or in secure vaults. You’ll note that the tickers used above are all for the GBP lines of these products; it being cheaper for most UK investors to purchase the sterling line of a product, rather than pay an FX fee. The underlying asset is still the same, no matter whether the product is denominated in GBP, EUR or USD – you have exposure to physical gold.
These products charge a small annual management fee of 0.25% to 0.4%, on top of which you’ll need to pay a transaction fee to your broker, which at IG can be as little as £5.
We mentioned the round-trip cost for gold bullion; for ETCs it is significantly less. Bloomberg reports bid-ask spreads of 0.05% to 0.1%, meaning that a £1000 investment could effectively cost as little as £10.50 to buy and sell (£10.00 IG commission and 50p of bid-ask spread cost).
Does owning an ETC enable the owner to exchange their shares for physical gold? Reading the prospectus will reveal all, but unless you own a very large amount that can be conclusively ruled out.
Buy gold funds
A gold fund, or a gold miners exchange traded fund (ETF), will invest in a number of gold mining companies. These businesses are operationally leveraged to the price of gold, which is simply to say that once the gold price rises above the cost of production, these businesses can become very profitable. The opposite is also true: a decline in the gold price can see many ‘junior gold miners’ get into financial difficulty very quickly.
Investing in gold miners offers exposure to the underlying asset, but their share prices can also be impacted by other events, with rising interest rates, inflation and correlation to the rest of the equity market also driving returns. If you want pure exposure to gold, there are better ways of doing so.
Buy gold in a spread bet or CFD
Finally, investors who want to get short-term exposure to gold, either long or short, can do so in a spread bet. This approach can also use leverage, up to 20:1 for a retail client, which magnifies gains and losses. This means that a 5% move in the underlying asset price could either double your money or see your position closed out for a total loss.
How to invest in silver
Investors in gold are often interested in the other precious metals, particularly silver, given the significant relative underperformance of this commodity.
Silver is also a bit of an outlier, as silver bullion and coins attract 20% VAT in the UK. This means transactional costs are very high and listed silver ETCs, such as Invesco Physical Silver (SLVP) and iShares Physical Silver (SSLN), have even more of a cost advantage over holding the physical metal.
To look for other commodity ETFs, use our ETF screener for more inspiration.