How do I invest in gold? Best and cheapest ways to buy the precious metal

A reader wants to know how to go about investing in gold in these uncertain times. We asked Sarah Coles of Hargreaves Lansdown to help out.

A loveMONEY reader, who asked to remain anonymous, had the following query on buying gold:

I’m increasingly worried about the state of the world, and the level of uncertainty there seems to be about the future of global politics and the world economy.

At the same time, I don’t want to hold too much cash because interest rates are still so low.

I often read that you can protect yourself in a crisis by investing in gold, but I don’t know how to go about it.

How can I invest in gold?

This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.

Help from the loveMONEY Expert Panel 

We asked Sarah Coles (pictured), personal finance analyst at investment firm Hargreaves Lansdown and member of the loveMONEY Expert Panel, to explain the options available to our reader. Sarah Coles, loveMONEY Expert Panel member, explains how to invest in gold (Image: Hargreaves Lansdown)

Here's what she said:

Gold has gained a reputation as a safe haven in difficult times for the world economy, which is one reason why between 2007 and 2011 investors flooded into gold and it almost tripled in value.

However, for a so-called safe haven investment, it does come with a number of risks.

A major component of the price has nothing to do with any real-world uses of gold, and is simply due to demand from investors: this means the price can be very volatile.

Overall it has fallen over 25% since its 2011 highs, and during that time it dipped more than 40% from the peak.

Gold also suffers from the fact it attracts no interest and delivers no dividends.

At a time of rising interest rates, therefore, it looks increasingly unattractive when compared with holding cash.

It is, therefore, a risky strategy to hold a significant part of your portfolio in this commodity.

However, some investors like to keep a small proportion of their diversified portfolio in it, as a hedge against uncertainty in the world economy. There are four ways to do this:

  1. Physical gold

You can buy coins and bullion bars, either to hold yourself or to be held by a dealer. In the UK, sovereign and Britannia coins are among the most common ways to buy physical gold, partly because some coins are not subject to capital gains tax.

If you choose this route, bear in mind that not all coins are equal, so the price may also depend on the demand for the specific date, design and weight of that coin.

Alternatively, you can buy ingots, but the cost makes it prohibitively expensive for most people and but you may have to pay capital gains tax on any gains.

It’s difficult to assess the precise cost of investing this way, but dealers make their money on selling gold to you for a premium and buying it back at a discount, so you could lose 3-5% of the value this way.

You also need to consider the costs of storage. This means either arranging secure storage and insurance yourself (it’s not usually covered by home insurance), or paying a dealer to store it for you.

There is often a minimum charge for storage, starting at around £10 per month.

  1. Trading portions of physical gold

One relatively recent development is the growth of services that hold gold in their vault, and run an investment platform, so you can buy and sell small portions of it.

The Royal Mint is one of the most popular options for people looking to buy gold.

It lets you invest anything from £20, and charges up to 1% to buy, 1% to sell, and 0.5% plus VAT a year.

  1. ETCs

The easiest and cheapest way to invest in gold is through an Exchange Traded Commodity (ETC) – the commodity version of an Exchange Traded Fund (ETF) – which will track the price of gold.

ETCs are structured as shares, so you can buy and sell them on investment platforms, and hold them in an ISA or a SIPP.

There are two versions: gold-backed ETCs will hold gold in a vault and track the price of it, while synthetic gold ETCs are designed to track the price of gold by buying gold-related derivatives.

If you opt for the latter, bear in mind that you are taking on the additional risk associated with the third party selling the derivatives.

ETC’s are low cost compared to the other ways of holding gold.

It will depend on the platform you buy through and the ETC you choose, but as a rough indication Hargreaves Lansdown charges up to £11.95 to buy and sell an ETC online, and the fund may make an annual charge typically of around 0.25-0.5%.

There may also be a platform charge if you hold it in an ISA or SIPP.

  1. Gold shares and funds

You can invest in the shares of companies involved in the gold business – including miners and distributors.

However, before considering this approach, it’s worth bearing in mind that the price of these shares and funds depends on more than the price of gold. There are all the costs involved in the business – especially as mining gold becomes more difficult and expensive – as well as the effect of market movements.

If you were planning to use gold to hedge against possible falls in the stock market, you’re diluting that effect by investing in shares.

If you were to choose this option, the fund on the Wealth 150+ list is BlackRock Gold and General.

If you were to buy it through a firm such as Hargreaves Lansdown, you would pay an annual platform charge of up to 0.45% of your investment, and an annual fund charge of 0.9%.

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If you have a financial question or issue you’d like us to put to the experts, please do get in touch. It needn’t be about investing: whether it’s an energy bill or housing complaint that needs sorting, our team will do their best to help out.

The views expressed by the author do not necessarily reflect those of loveMONEY. This article does not constitute financial advice. You should speak to a professional financial adviser before engaging in any transaction.


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