How to Invest in Gold in the UK

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

During times of economic instability, investing in gold can offer a safe haven against market volatility and is a proven hedge against inflation. Its history as a store of value dates back to 550 BCE, and even today, it remains a top choice among defensive investors.

With that said, let’s explore the advantages and disadvantages of the various methods available to invest in gold in the UK.

How to invest in gold in the UK

British investors have several methods available to them to invest directly or indirectly in gold.

1. Gold bullion, coins, and jewellery

Physical gold can be purchased from various dealers and banks online or in person. It comes in all sorts of shapes and sizes.

However, the three most common types are:

  • Gold bullion coins – The most common type of coins among British investors are the Britannia and the Sovereign. Both are considered a form of legal tender and, therefore, immune to capital gains tax and VAT when bought or sold. The American Eagle and Canadian Maple Leaf are more prevalent in the US.
  • Gold bullion bars – Bars are likely what most people think of when someone says ‘gold’. A gold bar can come in various weights, sizes, and purity, which are marked with a seal on the top.
  • Gold jewellery – Buying gold in the form of jewellery brings the added advantage of wearing them at fancy events. It is also often combined with other precious metals and jewels, which can serve as a tangible store of value and be an heirloom to be passed down through family generations.

Buying gold directly comes with a few caveats. Given their value, gold coins and bars need a suitable place for storage. The Royal Mint in the UK offers a storage service to gold owners in exchange for a 1% annual fee of the total value of gold stored.

Alternatively, safe deposit boxes in a bank or high-quality home safes are popular methods of storage.

Jewellery has a slight advantage in this regard. Suppose a piece of valuable jewellery is stolen. In that case, its value is covered by home insurance policies, whereas gold coins and bars typically are not.

However, jewellery may not be appropriate for individuals simply seeking an investment. Why? Because these luxury items always come with a markup price to reflect the workmanship that went into crafting them. As such, the melt-down value of jewellery will almost always be less than the retail price paid.

2. Gold mining companies

As an alternative to buying physical gold, investors can own the yellow metal indirectly through shares in a gold mining company. These companies search, identify, and extract the precious metal from the ground before processing the ore for sale on the global market.

Mining is largely a fixed-cost operation. Therefore, when gold prices rise, the profitability of mining firms rises with it, rewarding investors with either a higher share price or a larger dividend.

However, it’s worth remembering that share prices of gold mining stocks aren’t perfectly correlated with the price of bullion. Being a business, there are lots of factors that can disrupt operations.

Many mining companies operating in Russia in 2022 are a perfect example of the geopolitical risks these stocks face. Furthermore, as mining is an expensive endeavour, it’s not uncommon to see large debt balances. When interest rates rise, this can lead to a higher cost of servicing this debt, leading to fewer earnings attributable to shareholders.

3. Gold exchange-traded funds

Instead of investing in gold-related businesses or the physical metal itself, an investor can buy shares in a gold exchange-traded fund (ETF). These investment vehicles grant investors the ability to indirectly buy coins, bars, and stocks through a single position.

Taking this approach leaves the majority of the investment decision-making to a professional. And it also overcomes the problems surrounding storage as well as insurance.

However, investing in an ETF comes with recurring annual fees that can harm investment returns. Furthermore, if the fund focuses primarily on gold stocks rather than buying the physical metal, it can open the door to higher levels of volatility.

Benefits of investing in gold

Owning gold directly or indirectly can come with a lot of benefits for investors:

  • Inflation hedge – During times of high inflation, the devaluation of money encourages investors to place capital into assets not subject to inflationary pressure. This reallocation of capital into assets like gold is the primary reason why the price of the precious metal has outpaced inflation over decades.
  • High liquidity – Demand for gold has historically remained strong even during periods of economic stability. Therefore, the process of buying and selling gold has become increasingly streamlined, making it easy to move wealth in and out of the asset.
  • Immunity to currency volatility – As a global commodity, the price of gold remains fixed relative to other currencies. Therefore, if a currency suddenly devalues, the price of gold in that currency would increase proportionately, providing shelter from the economic impacts of government policy.
  • Collateral – Unlike other financial instruments, gold is readily accepted as a form of collateral for debt due to its price stability. For wealthier investors, this can open the door to accessing more capital for a large mortgage or business loan.
  • Diversification – Gold is an additional asset class that can be added to an investment portfolio. This additional diversification can help mitigate the impact of other asset classes like stocks, bonds, and real estate should they underperform.

Drawbacks of investing in gold

Despite offering many advantages, investing in gold has several drawbacks.

  • No price guarantee – While the price of gold is, for the most part, stable, it can and does experience various demand cycles. Suppose an investor moves their capital into gold during a time of economic crisis. In that case, the gold price may fall below the price they paid once the crisis is resolved.
  • A poor wealth builder – Gold has been proven to be a successful store of value. And that makes it a popular choice amongst investors seeking to protect their wealth. However, the asset does not generate any income or cash flow. As such, gold has significantly underperformed over long periods of time compared to the stock market.
  • Requires storage – As previously mentioned, buying physical gold requires appropriate storage facilities, which can be expensive and difficult to access depending on an investor’s location.

Is it safe to invest in gold?

The price of gold has a reputation for being relatively stable, at least over longer time periods. That’s why it’s often considered to be a “safe” investment by many. However, contrary to popular belief, gold is not a risk-free investment.

Gold prices can be highly susceptible to economic activity. When the economy is struggling due to inflation, low output, or high unemployment, the price of gold typically increases as investors seek shelter from uncertainty.

But when the economy is thriving, money is typically taken out of gold and invested into higher-performing investment vehicles such as stocks or real estate.

This cycle creates noticeable peaks and troughs in the historical gold price. And an investor buying gold near the peak or selling near the trough could end up destroying wealth rather than protecting it.

How much should you invest in gold?

The proportion of gold inside an investment portfolio is highly dependent on individual circumstances. However, most financial advisors generally recommend keeping no more than 10% of a portfolio in precious metals like gold.

Why? The primary purpose of gold as an investment instrument is to protect wealth. However, with most investors seeking to build wealth, allocating large portions of a portfolio to this metal will likely yield poor results.

Should you invest in gold in the UK?

Gold is a popular safe haven for investors concerned about inflation, economic calamities, or government policy. While its price can be volatile in the short term, over longer periods of time, the metal has generally retained its price ahead of inflation.

Numerous methods are available to investors seeking to tap into the opportunities the metal provides. And each caters to different degrees of risk tolerances as well as growth expectations.

So, is gold a good investment? The answer ultimately depends on an individual’s investment goals. Gold is likely an unsuitable instrument if an investor is seeking to grow their wealth. Alternatively, if an investor is trying to protect the wealth they already have, then investing in gold may be a suitable and prudent decision.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.