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How can investors access gold?

Kit Klarenberg
Written By:
Kit Klarenberg

Investment firm Tilney Bestinvest recently added physical gold exposure to its Multi-Asset Portfolio (MAP) fund range. Should investors do the same?

In investment terms, gold is commonly regarded as an insurance policy, of sorts; a defensive holding that can mitigate against inflation, market volatility, and falls in other asset classes.

The decision for investment managers Tilney Bestinvest to add physical gold to its multi-asset portfolio range may then seem odd to some given the current environment, with inflation hovering around zero, an apparently improving global economy and imminent interest rate rises.

But the firm says it has become increasingly cautious on the prospects for risk assets, and as such has reduced its equity exposure and instead introduced a position in gold for the first time.

“Gold has a low correlation with other risk assets and serves as a form of insurance. The move to include gold completes our phased move to de-risk our portfolios,” says Gareth Lewis, Tilney Bestinvest chief investment officer.

For investors looking to emulate Tilney’s move, there are a number of ways to gain exposure to the precious metal.

Physical gold

The most obvious way is to invest in physical gold directly by purchasing bars.

There are a number of established gold bullion and coin dealers in the UK (such as ATS Bullion, Baird & Co and The Royal Mint), and the World Gold Council publishes a directory of trusted distributors.

Whatever gold you buy, it will be expensive. Prices have overall declined since 2011 despite short-term fluctuations, but presently a 100 gram bar still costs around £2,500.

Robert Love, head of research at Asset Intelligence, notes holding physical gold yourself comes with a number of supplementary costs. It’s unwise to keep the gold at home owing to its extremely high value, and it is sensible to insure it.

Professional, high security storage and a specialist insurance policy will mean sizeable annual fees, although some sellers offer options for storage on top of sale.

“I consider physical gold an anti-investment,” says Peter Sleep, senior portfolio manager at Seven Investment Management.

“You pay to invest, you pay for insurance, you pay for storage, and it pays you nothing in return. If you’re truly concerned about a coming financial apocalypse, don’t buy gold – buy a bunker in Wales, and learn how to grow your own food.”

For a blended, low-cost approach, investors may wish to consider BullionVault, an online service allowing for the sale and purchase shares in physical gold.

While investors buy a stake in physical gold, the gold itself generally doesn’t enter their possession – it remains stored in vaults in Switzerland, London and New York until resale.

BullionVault conducts a daily independent audit of their holdings, and will also allow you to take physical delivery of your gold if you wish.

Exchange traded commodities (ETCs)

ETCs, the commodity equivalents of exchange traded funds, are securities designed to accurately track the price of physical gold. They are passive investment vehicles, some are backed by physical gold, others just replicate the price using synthetic instruments.

Either way, ETFs will mirror gold’s market movements and offer a practical way to hold gold in a portfolio. They have become increasingly popular vehicles in recent years, but Love warns prospective buyers to approach with caution.

“Make sure you know what you’re buying, does the ETC track miners, a gold index or spot price?” he says.

“Some ETCs will offer leveraged returns or short the price, so ensure you’re comfortable with these approaches before purchase. I recommend the popular iShares Physical Gold ETC.”

Tilney Bestinvest has secured exposure to the commodity via a physical gold ETC, the ETF Securities Physical Gold GBP ETC. Tilney’s Gareth Lewis, says the ETC is a “low-cost and liquid” investment option.

Frank Spiteri, head of retail distribution strategy at ETF Securities, says while management fees have to be taken into consideration, ETCs represent a low-cost and accessible means of investing in physical gold.

“Investors are able to trade in and out of positions intraday, and gain simple exposure to the spot price movements of gold,” he says.

“Planners looking for opportunities to add gold exposure to client portfolios can take advantage of gold ETCs and subsequently easily trade in and out of positions thereafter.”

Gold stocks

Investors may alternatively choose to access gold via gold mining stocks. There are currently 187 goldmining stocks to choose from, including explorers and producers.

Experts advise investors to approach these companies with extreme caution. Helal Miah, investment research analyst at The Share Centre, notes “all gold mining stocks are high risk”, and his view is supported by most.

Sleep says: “Goldmining shares are a horror show, they’ve fared far worse than the gold price in recent times, with shares trailing gold prices on the way up and falling far further on the way down.

“Goldcorp, the largest goldmining stock, has dropped 68.8 per cent in the past five years – the price of gold 17 per cent. The iShares Goldminers ETF, launched in September 2011, has fallen 71 per cent since inception. Meanwhile, the FTSE is up around 40 per cent in the same period.”

The plight of goldmining stocks is largely attributable to the rising cost of extraction, and current market volatility – investors have sought exposure to gold via ETCs instead.

Nevertheless, their widespread rejection means prices have fallen significantly, meaning they could be considered a cheap contrarian play by some.

Gold funds

Love believes investing in such a risky and volatile sector is best left to professional fund managers. He tips Ruffer Gold, and the BlackRock Gold & General fund, which has been in operation for over two decades under different guises.

“[Gold & General] manager Evy Hambro is experienced in this sector – he believes the declining earnings of gold mining companies are near to the bottom. The fund also has exposure to other areas, for example diamonds, silver copper,” Love says.

Sleep notes, however, that performance of the fund has been severely lacklustre of late and its failings are symptomatic of problems with all funds in the sphere.

“It’s the big beast of the sector but it has fallen 65 per cent in the past five years, although the FTSE goldminer index has fallen 73 per cent in that time, so the fund’s beat its benchmark at least,” he says.

“It’s also reduced in size from £3.5bn to under £700m in the past five years. Some of that will be the fall in the gold price, but most will be investors pulling their money out.”

The BlackRock Commodities Income trust has performed better than many of its peers in recent years, losing only 52.36 per cent of its value in the past five years, however it has steadily reduced its gold holdings in that timeframe. At present, gold stocks account for 5 per cent of its portfolio.