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What is the true value of gold?

October 2017

Categories: Investing strategies

Gold, which has limited industrial applications, tends to be in demand during periods of economic or geopolitical strife when inflation threatens paper currencies or there are significant falls in bond and equity markets.

Its status as a 'safe haven' asset is based on its historic role as a store of value and the fact that, unlike currencies, its value cannot be manipulated through adjustments to interest rates.

Gold prices have been very volatile in the last 15 years ranging from $255 to nearly $2,000 an ounce

In the wake of the 2008 financial crisis, for example, global central banks turned away from dollars and increasingly put their foreign reserves in gold. Investment demand, driven by the emergence of exchange traded products which track the metal, also escalated.

If the economic backdrop is uncertain then gold may stay in demand but it is important to consider that it has not always been such a strong asset. Prices hit a 25-year low at $255 an ounce in 2001, a level at which it was uneconomical to mine the commodity. Demand for gold is, bar its use in jewellery and certain niche elements of medicine and electronics, almost entirely driven by its historical status. Unlike some raw materials such as oil, gold is also not a finite resource as it can be melted down and recycled.

For all that it is considered a safe haven, gold prices have actually been very volatile in the last 15 years ranging from $255 to nearly $2,000 an ounce and currently trades at around $1,300. Like all commodities, but unlike shares, bonds or property, gold offers no income to investors, only a capital return if the price of the metal appreciates.

For those who are interested in gold exposure, there are a number of ways achieving this.


Direct approach

Investors can buy physical gold bullion through a trading platform like BullionVault. The bullion can be bought in small units and it’s stored in a secure vault on your behalf. However, the costs associated with this and the additional storage and insurance considerations can be prohibitive. The emergence of exchange traded products (ETPs) has arguably made it easier for retail investors to invest in gold.

Physical gold ETPs are backed by physical bullion which is often held in a secure vault. Source Physical Gold P-ETC (SGLD) is one example and is among the cheaper options with an ongoing charge of 0.29 per cent. The vault holding the bullion which backs these products is typically in London but sometimes it’s elsewhere. ETFS Physical Swiss Gold (SGBS) uses a vault in Switzerland for example.

Standard physical gold ETPs are based in US dollars so a UK-based investor will be exposed to movements in the USD/GBP exchange rate. An example of a currency-hedged physical gold ETC is db Physical Gold GBP Hedged ETC (XGLS), which has an annual fee of 0.69 per cent.

For investors with a higher tolerance for risk it is possible to gain leveraged exposure to the gold price both through leveraged ETPs and through spread bets and CFDs. Trading through leveraged spread betting and CFDs is inherently risky as you can potentially lose more than just your initial capital. However, this isn’t the case for leveraged ETPs where only your initial investment capital is at risk.



There are several gold funds available, most of which invest in gold mining companies rather than the commodity itself. Among the most popular is BlackRock Gold & General Fund, previously known as Merrill Lynch Gold & General. The fund has been around for nearly 30 years, charges an ongoing charge of 1.92 per cent and has been managed by Evy Hambro since April 2009.

Although by investing in gold through funds you benefit from the expertise of the fund manager and you are invested in a diversified portfolio, the impact of any fall in the price of gold tends to be magnified because of this bias towards investing in gold miners rather than in gold directly.


Gold miners

Another option is to invest directly in the shares of gold miners. There are some advantages to this. Assuming you pick the right company you can benefit not only from the rising gold price but also the operational progress made by said company. However, you are also exposed to the risks of the company encountering operational difficulties and if this is accompanied by a gold price fall then you would take a double hit. Particularly if gold fell below a threshold at which a gold miner’s operations are profitable.

Randgold Resources (RRS) is the largest ‘pure’ gold miner on the London Stock Exchange and is active in the Democratic Republic of Congo and Mali. Its shares have been very volatile, ranging from less than £40 to more than £90 in the two years to the end of August 2017.

Author: Tom Sieber Categories: Investing strategies