Should I invest in gold?

Gold has traditionally been viewed as one of the safest places for an investor or saver to put their money. Traded long before the birth of the London Stock Exchange, the precious metal is the world's premier hard currency, and so in times of uncertainty people across the globe still scramble to store their wealth in gold.

Hence the financial crisis of 2008 to 2009 marked one of the strongest periods for gold ever seen. As banks fell like dominoes, the value of paper currencies plummeted globally and the eurozone looked set to collapse, the price of the yellow metal soared from $732 (£484) per troy ounce in October 2008 to $1,837 in July 2011 - a rise of more than 150% in less than three years.

However, following the pivotal proclamation in the summer of 2012 by Mario Draghi, president of the European Central Bank (ECB), that the bank would do "whatever it takes" to hold the eurozone together, fears began to abate and gold headed south. By June 2013 it had fallen to $1,286 per troy ounce - a fall of 30% from its peak - and this July it hit a six-year low of $1,091.

Pricey insurance

With a renewed faith in central banks' willingness to hold up the global economy in times of crisis, during the past two to three years investors have turned away from gold and toward other perceived "safe" asset classes such as government bonds, cash and strengthening currencies, notably the US dollar, to store their wealth.

As Tim Cockerill, investment director of wealth manager Rowan Dartington, explains, this is largely because gold can store wealth but will rarely grow it.

"There is nothing equivalent to gold for safety; however, it rarely provides a notable return - excluding 2008/09 - and it doesn't pay any income. For some that won't be an issue, but for others it really could drag on their portfolio," he says.

Research from Bullion Vault, an online precious metal exchange, underlines this.

Analysing the total returns delivered by a portfolio of equities, UK government bonds and gold between 1975 and 2014, the firm found that a portfolio with 10% in gold returned an average of 13.7% per year compared to 14.2% per year for a portfolio with no gold.

However, Bullion Vault also found that a portfolio with 10% in gold lost 7.4% in the worst one-year period (2008), compared to a loss of 13.4% for a portfolio with no gold.

Over the worst five-year period of those 40 years (1999-2004), a portfolio with 10% gold exposure also returned 1.4% per year, compared to 1% from the portfolio with no gold.

"As we saw in the financial crisis, gold as insurance works, but as with any form of insurance there is a premium to pay. The important thing is that gold pays when you need it," says Adrian Ash, head of research at Bullion Vault.

Gleaming opportunity

Although gold has been unpopular recently, there are some indications that a fresh global crisis fuelled by a slowdown in the Chinese economy may be looming, meaning the yellow metal could find itself back in favour.

Continued currency weakness is also a concern for some, with wealth manager Tilney BestInvest recently announcing that it has added gold to its multi-asset portfolios for the first time to protect against further monetary loosening from central banks (which devalues currencies).

According to Ash, gold activity on Bullion Vault has already ticked up, with demand 88% higher in the year to 1 November 2015 compared to the same period a year ago.

He says he expects demand to increase again next year, as the UK heads toward a referendum on whether or not to stay in the European Union, which could prove negative for sterling. If inflation begins to rear its head this could also be positive for gold, as its purchasing power usually outpaces that of paper currencies when prices rise.

The largest headwind for the precious metal is interest rates: as the US Federal Reserve has just begun to hike up interest rates, cash deposit rates and government bond yields will rise, making gold less attractive.

How to access gold

There are a number of ways to access gold, and your preference is likely to hinge on the type of exposure you wish to gain and whether you want to hold it over the long or the short term.

For the general investor looking for a little portfolio insurance, most, including Cockerill, agree that physical gold-backed exchange traded products or ETPs (in other words, those that invest directly in the metal) are the best option, due to the ease with which they can be accessed and their low cost.

Some of the most popular gold ETPs include ETF Securities' ETFS Physical Gold range, which investors can buy denominated in sterling, euros, Japanese yen, US or Australian dollars, while the firm also offers smaller 'daily hedged' versions in sterling or euro.

All move broadly in line with the gold price and have an annual charge of between 0.39 and 0.49%, making them a highly cost-effective way to access the asset class.

If you want to hold gold even more directly, options range from trading physical gold bars on an online exchange such as Bullion Vault to buying from the Royal Mint, where you can also buy gold coins.

Charges for buying and storing vary: Bullion Vault charges a 0.5% dealing fee per trade and 0.12% per year for storage, with a minimum charge of $48 (£31.50).

Storage at the Royal Mint costs a little more, around 1% per year, but it will not charge you to withdraw your gold, whereas Bullion Vault will charge anything from 1% to 7.5% to do so.

Gold funds

Investors looking to generate a capital return from gold might look at gold funds. Rather than buying the physical metal, gold funds seek to capitalise on gold demand through investing largely in global gold-mining companies.

The combination of a falling gold price and a slump in mining stocks more generally means that most gold funds have performed poorly over the past three to five years; however, they can be a good way to access the sector for those interested in generating potential capital growth.

Options include our sister website Money Observer's Rated Fund BlackRock Gold and General, which is well-established, with £610 million of assets under management and a 10-year track record (values correct at time of writing). Others include CF Ruffer Gold, which is the only gold fund to have achieved a positive return over the year to 1 November (12.7%).

Actively managed funds can be an expensive option though, with the two funds mentioned carrying ongoing charges figures of 1.92% and 1.33% respectively.

Sophisticated investors looking to make a strong short-term return on gold could do better to trade. This has proved a particularly profitable strategy this year, as events such as the Greek crisis, China's stockmarket crash and the Fed's interest rate dithering have caused large swings in the price of gold.

"Gold is more of a swing trade now than during the bull market of 2008 to 2011 - it's not for long-term investing. This year alone it hit a high of $1,307 and a low of $1,077, so there were some large price moves for people to take advantage of," says Colin Cieszynski, chief market strategist at CMC markets.

The cost of trading varies widely depending on which broker you use, which type of instrument you choose and how often you trade. Contracts for difference are some of the most popular instruments among British investors; they involve a dealing spread (i.e. a buy and a sell price) and a trading commission, typically around 0.1% per trade.

Whether you choose to invest in a gold ETF as portfolio insurance, hide a gold bar at home just in case, or make a winning trade on the intra-day spot price, gold can be a difficult asset to predict; so lest it lose its shine for you, be sure to understand the risks.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.