How do I invest in gold? ETCs, mining stocks and physical bars options

I’m a keen investor and I keep an eye on markets to build my retirement pot.

But I am worried about the impact of inflation on my investments and I am wondering whether I should invest in gold to diversify my portfolio.

I have heard that gold is a good hedge against inflation but I’m not sure how to invest.

How can small investors gain exposure and is it better to buy physical gold or through a fund?

Time to strike gold? The commodity is often seen as a good investment in times of uncertainty

Angharad Carrick of This is Money said: It is always advisable to create a balanced portfolio and while very few people would choose to invest all their money in gold it provides a potential way to diversify.

Gold is often considered a safe haven investment because its price is usually negatively correlated to stock markets: gold often rises when other markets fall.

This is because unlike fiat currencies, which are those issued by central banks, you can’t just print more gold and devalue it in the process.

During the pandemic, the price of gold climbed and in July 2020 reached its highest point in decades.

Prices have rallied again recently, rising around eight per cent since the start of the Russia/Ukraine crisis.

Jason Hollands, managing director of investment platform Bestinvest said: While gold is often seen as an inflation-hedge – because historically at times of hyper-inflation it has helped investors circumvent collapses in the value of paper currencies, I would describe it first and foremost as a hedge against uncertainty rather than inflation per se.

There are other assets, such as inflation-linked securities, infrastructure and commercial property that have more direct-linkages to inflation than gold.

One environment that has typically not been good for gold is when yields are rising on US Treasuries – bonds issued by the US government.

That’s because bars of gold don’t provide investors with any yield and so there is an opportunity cost to holding them.

When yields on very safe government bonds rise, this usually results in the gold price weakening as investors can switch into a very secure asset – US government debt – that will also generate an income for them.

Unusually, this hasn’t played out recently, despite a surge in Treasury yields.

This may be because of western sanctions against Russia, which have seen reserves in currencies and bonds owned by Russia’s central bank, but held overseas, frozen whereas Russia’s gold reserves are held in its own vaults.

The continued strength in the gold price might therefore be a sign that markets expect other central banks – such as China – to start recycling more of their trade surpluses into gold and less into assets held in the Western financial system, in case they are targeted for sanctions in future.

However, with yields rising on US Treasuries, we may yet see gold prices cool down.

Angharad Carrick adds: There are plenty of ways for everyday investors to gain exposure to gold in their portfolios.

You can buy gold coins from metal dealers like The Royal Mint and UK denomination gold bullion gains can benefit from capital gains tax exemption. This might be of interest if you have a larger portfolio.

Gold bars have previously been another popular way to invest in physical gold but you will have to find a way to store and insure them or ask a dealer to look after them and this comes with fees.

Investors can also buy shares in gold miners like Polymetal or Antofogasta but these are notoriously volatile.

Mining gold is expensive so even the most modest swing in gold prices can result in miners veering between profits and losses.

One of the easiest ways to gain exposure to physical gold is through exchange-traded commodities (ETCs) that are listed on the London Stock Exchange and can be held in Isas and Sipps.

ETCs allow investors to track the price of gold, giving them access to the properties and security of owning gold without the need to store it.

Unlike an exchange-traded fund (ETF) which is generally a basket of stocks or commodities, an ETC allows for exposure to a single commodity.

Hollands added: Bestinvest’s top pick here is the Invesco Physical Gold ETC which holds bullion in the vaults of JP Morgan Chase Bank in London.

It is the largest physical gold fund available in the UK and has a very low ongoing costs of 0.12 per cent.

I should point out that gold is priced in US dollars and therefore it does carry some foreign exchange risk, so for those wishing to neutralise this an alternative is the Xtrackers IE Physical Gold GBP Hedged ETC (0.28 per cent ongoing costs).

The costs of the ETC route are low and these are very liquid investments that can be readily and bought and sold, unlike holding physical bars which will incur either storage costs or – if held at home – insurance.