Investors are rushing to buy gold in the wake of falling interest rates.
The Royal Mint revealed it has experienced a “surge” in demand for gold in the first week of August – the same week that the Bank of England cut the Base Rate to from 0.5% to 0.25%.
It saw a 25% increase in transactions on its bullion website in that period, as well as a 50% increase in sales of gold bars and coins, compared to the previous week.
Falling returns on cash and bonds as a result of the Bank of England’s decision to cut rates is thought to be making investors turn to gold.
The price of the precious metal has soared this year, up 45% in sterling, thanks partly to the weakening pound. It is up 25% in dollars from $1,060 to $1,330.
“There has been a veritable gold rush this year, as global economic woes and loose monetary policy have attracted investors to the yellow metal in their droves, and it’s no surprise that the Bank of England’s interest rate cut has exacerbated this trend,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.
The news from the Royal Mint comes in the same week that the World Gold Council announced that investment demand for gold hit a record high in the first half of 2016.
“The ongoing clatter of the printing presses in central banks across the UK, Japan and Europe also helps give gold a leg up, as it is a hedge against currency devaluation,” says Khalaf.
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Not the holy grail
However, investors need to remember that gold isn’t the holy grail of investments – it can suffer just like any other asset class. Back in 2011 gold was trading at $1,800 an ounce, it is now 25% below that.
Another reason not to invest too heavily in gold is that it doesn’t generate an income.
Gold can be a useful element of an investment portfolio. It can act as “an insurance policy against things going wrong, and as such it should make up only around 5-10% of a portfolio,” says Khalaf.
How to invest in gold
You have three main options when it comes to investing in gold.
Invest in a gold fund
You could invest in a gold fund such as the Blackrock Gold and General Fund. This will give you some exposure to gold, alongside other industries such as mining that support the gold industry.
The problem with gold funds is they carry more risk as your investment will be affected by how the companies perform rather than just by the fluctuations in the gold price.
Gold funds also tend to carry quite high fees and charges. For example, the Blackrock Gold & General fund has annual charges of 1.17%.
Buy a gold Exchange Traded Fund (ETF)
“Probably the best and cheapest way to get exposure to gold is through an exchange traded fund, like Source Physical Gold,” says Khalaf.
These are similar to tracker funds, except that they track a commodity rather than a stock market index. The fees are much lower than for a fund – 0.25% - 0.5% typically – and your investment will exactly mirror the gold price.
Purchase physical gold
Finally, you could choose to purchase some physical gold in the form of coins or bars. You can buy them from a number of sources including the Royal Mint, Bullion Vault and the Pure Gold Company.
There are tax benefits to owning physical gold. VAT isn’t levied on gold bars or coins and gold coins are exempt from Capital Gains Tax too. So, if you’ve used up your ISA allowance, physical gold is a tax-efficient alternative.
If you buy physical gold you will either need to store it at home – make sure you check it is covered under your home insurance – or you can pay the gold firm to store it for you. BullionVault, The Pure Gold Company and the Royal Mint will all store your gold in fully-insured vaults for a charge of around 0.12% a year.
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