How to invest in gold

Gold, throughout human history, has been considered a rare commodity and an integral part of our monetary system. According to the World Gold Council, the precious metal was first used as a form of currency in 550 BC. 

In fact, the gold standard, when a nation’s currency is directly linked to the value of gold, was still used in the UK until 1931. It was only when former USA President Richard Nixon abandoned the gold system in 1971 that countries began using the dollar as the reserve currency.

Still, this did not affect gold’s value. Central banks around the world often store gold to diversify and protect their reserves. Similarly, some invest in gold to protect their investment portfolio from market volatility too.

Those wanting to invest in gold for the first time often start by buying physical gold. Gold can be purchased in the form of coins, ingots, bars and wafers.

Bullion coins can be easily sourced, and their price is based on the spot value of gold plus a small premium. These are legal tender that are of the required investment-grade.

They are available in a range of weights, including in oz such as 1/10oz, 1/4oz, 1/2oz and 1oz. Krugerrands or Britannias are popular 1 ounce gold bullion coins.

Gold bars are available as cast or minted gold bars. Cast gold bars are when molten gold is poured into a mould. It then cools to form a gold brick and is stamped with details of the bar and the maker's mark. A minted gold bar is created by cutting from a rolled strip of gold and embossed lettering from a larger sheet of gold and metal.

Investors can buy gold either with a bank or through a bullion brokerage.

Gold is currently used across the world in a variety of different sectors.

Approximately half of the demand for gold in the world comes from the jewellery sector, but this is reducing according to the World Gold Council.

Central banks and the investment sector also have a large appetite for the precious metal.

Central banks also form a significant part of the demand as emerging market central banks tend to rely on gold to diversify their own reserves.

To a lesser extent, gold is also used in technological innovations. While the volume of gold used in this sector may not be substantial, it still plays an important role in creating computer chips to building methods for delivering drugs into the human body.

Gold is also used in medicine, aerospace, and environmentally-friendly technology. For example, NASA’s Webb Space Telescope is covered with a microscopically-thin gold coating. This is used as an efficient reflector of infrared light, according to the World Gold Council.

The main difference is about the ownership of the gold and who is responsible for the security and insurance of that gold.

When you buy gold on an allocated basis this means you have the title for this gold and are the legal owner. This means you are also responsible for its safe storage. As discussed, this also means you will have to consider security and insurance fees.

However, when investing in gold in an unallocated account from a bank or third party, you do not retain the legal ownership of the gold. Rather than buying the gold and you owning this asset, you will deposit funds to the bank. The bank in return would then repay your investment when requested at the appropriate value at the time.

The upside is that the bank is responsible for the security of the gold and the relevant insurance, but there is the risk that if the bank went bust then these gold reserves could be at risk and would not be protected under the Financial Services Compensation Scheme (FSCS).

You can choose to buy shares in those companies involved in the mining and exploration of gold or invest in financial instruments that base their performance on the future value and changes in gold prices. These include products such as options, futures and spread betting. You can also invest in investment funds that themselves invest in gold to benefit from its value. You do not own any gold in these examples.

Gold exchange-traded funds (ETFs) or exchange traded commodities (ETCs) are listed on the stock market like a traditional equity but they hold only assets centred on gold.

Your ETF performance will be based similarly on the performance of physical gold on the market.

Investors can either use a gold bullion brokerage to buy gold, contact a bank that offers a gold account or speak with a financial adviser or stock broking service for broader gold investments.

An adviser or broker can help to review your investment portfolio and find the best gold investment strategy for your circumstances.