How to profit from investing in gold

Friday, 04 February 2011 01:50

By Kate Saines

When you think of 'investing' you might not necessarily think of buying some gold.

Buying a piece of jewellery could be considered an extravagance in these times of financial hardship. And we are constantly being told that any spare cash we have should be poured into sensible investment solutions like pensions, savings accounts or property.

But with savings rates poor, pension pots looking meagre and property prices still steep for many, people are looking at alternative methods for making their fortune.

And gold, it would seem, is one of them.

Just three months ago the price of gold soared to an all-time high of $1,414.60 per ounce. Today it is a little lower, at $1,349 per ounce (at the time of writing), but still looking attractive.

Indeed Paul Duncombe, a fund manager at Schroders, an asset management company, said recently in times of uncertainty and austerity "nothing glitters quite like it".

Mr Duncombe, who is head of multi-asset investment solutions at the firm, explained that it has been outperforming equities, bonds and most other commodities.

And, he added: "In these uncertain times, gold may be one of the few asset classes with the potential to appreciate still further."

So how do we, the men and women on the street, take advantage of the roaring success of gold? There are actually a variety of ways – and, yes, investing in a striking necklace or smart ring from the jewellers is one method.

But have you ever considered buying a lump of gold bullion? Or perhaps investing in a fund which has holdings in gold mines? Or what about betting on its price? Here are some methods to make gold work for you.

Buying Shares in Gold

Many people profit from gold by investing in mining companies. However, this is a risky route. Mining costs are rising all the time and, according to Tom Winnifrith, senior fund manager at t1ps Investment Management, gold mines tended to be politically unstable areas.

"Mining is dangerous," he said, "and so the sensible way to play this is to buy units in a well-managed gold unit trust."

He explained that, in 2010, the gold price soared by 32 per cent. But because of the way unit trusts are managed by expert fund managers, most UK gold unit trusts achieved gains of at least 40 per cent.

What's more, Mr Winnifrith believes the price of gold will go higher, driven mainly by fear that currencies, such as the Euro, will lose value.

But despite this sunny outlook for gold, he warns investors to ensure they don't invest all their cash into this commodity.
He said: "I always warn you should never put all your eggs in one basket. I would suggest no more than 20 per cent of your investment portfolio should be in gold."

When is the best time to buy? Mark Hewlett, managing partner of Anello Asset Management, suggests looking at seasonal weaknesses. "Summer months usually see price declines or weakness as physical demand drops," he said.

Apparently there has been a flurry of selling in the gold market in recent weeks and his top tip to potential gold investors is not to hang around.

"If you think gold's going to go up, stop thinking and buy gold. It's going up because supply can't meet demand."

ETFS

Many people who want to invest in gold choose Exchange Traded Funds (ETFs) as their chosen method.

These are a bit like unit trusts, in that they are a collective investment vehicle holding various assets like equities, bonds or commodities. Unlike unit trusts, they trade as a company.

Clem Chambers of ADVFN, a financial market website, suggests choosing a gold ETF as one of the safest ways to invest in the metal.

The price of the share then tracks the gold price, he said. "It's all of the upside and none of the fun of holding the metal," he explains in his upcoming book 101 Ways to Pick Stock Market Winners.

"If that alone puts you off, you are not buying gold for the right reason."

Gold Bullion

If investing in gold shares or unit trusts sounds a little complex, how about doing something a little more straightforward and buying a lump of gold.

There's nothing like having your own piece of gold bullion to feel wealthy, and it's surprisingly easy to do.

Companies such as BullionVault, a secure gold and silver exchange, allow private investors to buy and sell professional-grade bullion online. The company will then store your physical property in vaults in London, New York and Zurich.

You can buy as little as one gram, which is currently worth £26.50, but the investment becomes more cost-efficient if your holding reaches £1,000 or more as commission fees and storage costs are charged at a percentage of your investment.

Malcolm Clark, a financial markets consultant from Hertfordshire, began investing in gold in 2006, via Exchange Traded Funds (ETFs).

However, he became nervous about this method of investing three years ago and switched to investing in BullionVault because he liked the structure, the fact that your money could be held in various different banks, and that it could be run online.

He also liked the liquidity of this method, in other words the way gold could be bought and sold easily.

Gold bullion accounts for between 15 to 20 per cent of his investments. He also has mining shares, which are more volatile, and has investments in stock market.

Gold, he said, was a way of diversifying his portfolio and using a company such as BullionVault appealed to him because it was very easy and very clear.

"I receive monthly statements," he said, "which means you can park your money there and forget it about it but you get reminded about it on a monthly basis. It's a super arrangement. "

Pawnbroker

So what if you want to enjoy the gold you are investing in? The obvious way is to buy a piece of gold jewellery.

There is likely to be an array of choice at your local jewellers, but buying pieces from a pawnbroker will mean you do not have to pay VAT.

Manchester-based pawnbroker, Mays, is alerting people to the fact that absolutely no VAT is applicable to pre-owned jewellery.

You can pick up some real vintage gems from these kinds of stores. However, it's important not to get too attached as you will only profit if you sell the item on when the price of gold rises.

Spread betting

Spread betting involves betting on the financial markets, and gold is one of the commodities on which people can gamble. Put simply, you bet on on whether the price of gold will go up or down.

Andy MacKenzie of Spreadex, a spread betting firm, explained how it works. He said Spreadex provided a prediction or "spread" on where the price of gold will be on a future date.

If you think the price will be higher than Spreadex's quote, you place a 'buy' spread bet, if you think it will be lower you place a 'sell' spread bet.

If you get the trade right you win the difference in your winning trade, multiplied by your stake size.

And there are added bonuses. Mr MacKenzie said: "In recent years spread betting has grown in popularity as an alternative investment tool due to all profits currently being free from stamp duty or capital gains tax."

And he said the fact people could bet on gold going either up or down in price provided an additional appeal.

A spokeswoman for the Cantor Index, another provider of spread betting, told us that a lot of its clients have been buying into the idea that the gold bubble is set to burst, and many had begun to change their position.

And this is the risk with gold, despite the positive outlook many commentators have given us, we don't really know if our seemingly shrewd investment will be fruitful.

For every fund manager and expert who thinks the price will go up there will be as many who disagree.

Gary Reynolds of Courtiers Investment Services said demand for the use of gold was dropping fast, he said it was not the safe-haven people claimed it to be as there have been periods in history – the onset of the credit crunch for example – when it did not do particularly well.

What's more, he argues it has no practical use that could not be met more efficiently or more cost effectively with substitutes.

Like with all investments, there is a risk, and different experts will tell you different things. But if your bet pays off, you could really be quids in.

Find out about the pitfalls of selling gold for cash here.

Buy and sell gold from a reputable source, Hatton Garden Metals, here.

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