Few commodities can offer the security and allure of gold
Saturday 29 November 2008
It is just a shiny, yellow substance we dig out of the ground, but we have such a deep-seated romantic relationship with gold that most of us believe it could never be a realistic investment option for us mere mortals. But with fears over the security of everything from cash to commodities, could gold really give you the security you want? Or is even this mystical metal subject to the global economic downturn?
Gold is surprisingly accessible for the average private investor. Most of us know that the stock market is open for investment to anyone who has the means and the will to buy shares, but few people imagine that gold could be a viable investment choice for the person on the street.
Historically, relatively few of us have chosen to put our money into gold, perhaps because the price has been very poor for a very long time. Unlike throwing your money into emerging markets, or even the buy-to-let housing market, it appeared there was no fast buck to be made through the precious metal. However, the banking crisis has set the price of gold fluctuating to a much greater degree, creating a greater potential for growth and, on the flip side, risk.
As with any other investment, gold can go down as well as up in value; having peaked at $1,030.80 an ounce in March, it is now trading close to the $820 mark. However, while even the biggest banks can go bust, not even ambitious City traders can destroy gold.
"Investors have been in pure panic, they think the world is ending," Nicholas Brooks, head of strategy at ETF Securities, told Reuters this week. "When people get into that sort of mentality, one of the first places they go to is gold."
Gold is always worth something. This is why buying some quantities of it is generally considered a good way of diversifying and hedging an investment portfolio. There are many ways to do this, but you should not get any notions of becoming a real-life Auric Goldfinger and heading out to buy a bar of bullion for yourself. Although it is doable, Darius McDermott, managing director of Chelsea Financial Services, advises this is "almost impossible and completely impractical". It is, however, possible to buy gold coins, such as British sovereigns or South African krugerrands. Although the latter is the modern industry standard, Lawrence Chard of the specialist coin and bullion dealership Chard, recommends that paying as much as 2 per cent more for sovereigns can be more profitable in the long run, since they are smaller, arguably more attractive and better known, and they are also exempt from Capital Gains Tax.
The best way to invest in gold as a physical commodity is probably to buy into an exchange traded fund, more commonly known as an ETF. These are listed on the London Stock Exchange and investments are made through a stockbroker as they operate like shares – directly tracking the price of gold rather than the fortunes of a company. They can also be bought through a SIPP, an ISA or a child trust fund, with the potential for tax relief. "By investing in an ETF you are effectively making a direct investment into gold," says McDermott. "You just don't leave it in your safe at night. But ETFs are a very secure method of investment because the company that sells you the ETF has to hold that amount of gold as collateral. And the gold can be reclaimed even if the company and its holdings bank go bust."
Other considerations when investing in physical gold include currency fluctuations. Since gold is priced in dollars it can be affected by how the US economy is faring – and the level of interest rates. "Physical gold doesn't yield anything, so you get no income from it," says Mark Dampier, head of research for independent financial adviser Hargreaves Lansdown. "However, at a time when interest rates are low, gold is more attractive because you will get less yield from anything else, so you're not missing anything."
The alternative way of investing in gold is to buy shares in mining companies. Gold-mining shares are partly driven by the price of gold, but they also exposed to wider fluctuations in the stockmarket, creating additional opportunities and risks. The shares can be bought directly, though this can be very risky as there are so many factors to take into consideration: the 40 per cent fall in BHP Billiton shares earlier this week serves as a warning, specialists suggest.
A more straightforward route for less experienced investors is to buy into a gold fund, such as the BlackRock Gold and General Fund. These funds trade shares in mining companies on behalf of investors and, although their values can still be volatile, the broad range of companies covered by their portfolios offers less risk than going it alone.
As with any serious investment, it is strongly advisable to seek out some good independent financial advice, but it is worth being aware that gold is not reserved only for ancient pharaohs and modern sheikhs.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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