The price of gold is embarking on a pretty remarkable upward trajectory at the moment. This month it hit another new high, at $1,387 an ounce, having frequently hit new record highs across the year already.
So why is the price jumping? And how do you go about making money from gold?
Hedging your bets
There are a number of different theories on just why the price of gold is rising so consistently. Some experts reckon that rising prices are here to stay, driven by the emerging middle classes in nations like China, India and Brazil.
However, in the short term, much of the price rise is down to investors looking to hedge their bets against the risks of both inflation and deflation, or looking for a form of back-up currency against the increasing difficulties in the foreign exchange markets.
And that demand from investors is only likely to increase if various central banks continue with stimulus programmes which weaken the value of paper currency and increase inflation.
So how do you go about getting involved with gold?
Buying bullion
One way of investing in gold is to buy the actual gold bullion in the form of coins or gold bars.
There is a wide range of coins to choose from, printed by governments across the world. However, UK investors tend to stick to two main types, sovereign and kruggerrand. So what’s the difference?
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Kruggerrands are one ounce gold bullion coins from South Africa. On the plus side, you know exactly how much gold is contained within the coin (making it easy to compare prices), and Kruggerands tend to be available at slightly lower prices than other one ounce bullion coins. On the downside, it’s a pretty ugly thing, and has little historical value.
Sovereign coins on the other hand are produced by the Royal Mint. There are a number of upsides to going for Sovereign coins – they are smaller and prettier, they carry some historical significance, and are exempt from Capital Gains Tax. However, you will tend to pay a premium for them.
As for bars, these may appear a cheap way of getting into gold, however experts suggest they are not as easy to sell, as only specialist gold dealers are likely to give you a decent price.
Tips for buying bullion
- Only deal with reputable dealers. Check out the where to buy directory on the World Gold Council website and the London Bullion Market Association site for the names of decent dealers.
- When deciding which type of coin to buy, do not rely on comparing the price of the gold itself, but instead look at the premium – the amount over and above the value of the intrinsic gold content. This makes it far easier to compare what may be the best purchase for you.
- Remember you will have to pay a fee to store your gold with your bank or broker.
Exchange-traded commodities
In numerous stock exchanges across the world, from the UK and US to Mexico and Singapore, gold is traded in the form of securities, regulated financial products known as exchange-traded commodities or exchange-traded funds.
These move directly in line with changes in gold prices, and have made a big difference to the gold markets according to the World Gold Council, representing just shy of a third of identifiable investment in gold over the five years to 2008.
Funds
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If you don’t want to invest in the gold itself, but fancy trying to make some money out of it, you can put your money into a collective investment (such as an OEIC, mutual fund or unit trust) which invests in the shares of gold-mining companies.
There are all sorts of different funds to consider, but it’s worth remembering that investing in this way can be a tad uncertain. After all, your investment is open to other influences such as expectations of the future gold price, the cost of mining, and even what other mining the firms are involved in.
Flogging your gold
Of course, investing in such a formal way is not the only method for making money from gold – you can sell what gold goods you already have.
I constantly see ads online and on the TV from firms offering to buy your gold, whether it’s old earrings, watches or bracelets. But is it too good to be true?
Sadly, in many cases the answer is yes. Many of these cash-for-gold firms are less than transparent in their pricing policy, with many horror stories of customers being offered just 20% of the market price of their goods. There may also be hidden charges. It’s worth bearing in mind that this area is completely unregulated, so while some firms will no doubt be completely above board, there will be more than a few shady outfits to avoid.
It’s definitely worth having a read of Don't get ripped off in the gold rush! before you send off your gold goods in the hope of making a few quid!