60 second guide to gold as an investmentPrecious metal price hits record high

05 August 2011

Investing in gold

The price of gold has reached a record high but has it hit its peak?

As the debt crisis in the Eurozone and weak economic growth in North America has caused jitters across global stock markets, the price of gold has hit a record high, reaching $1,664 per ounce.

In terms of sterling, gold broke the £1,000 barrier for the first time in June 2011 and is now priced at £1,016 per ounce. The soaring price has been fuelled by global economic uncertainty, with some predicting the price could rise even higher in the next few months.

With this in mind, Which? Money provides you with a quick guide to all you need to know about buying and selling gold.

Why is the price of gold rising?

The price of gold tends to rise when global economies are suffering because it is seen as a save-haven or hedge in times of instability. Gold is considered to be an alternative form of money, and therefore a way to preserve wealth.

When there’s a global crisis, the central banks of governments often devalue their currencies to stave off recession. So, as a store of wealth, demand for gold increases, consequently pushing up its price.

With the threat of sovereign debt default in Greece, problems brewing elsewhere in Italy and Spain, and the near-default in the US, coupled with weak economic data, gold has surged again over the past few months.

How much higher can the gold price go?

In 1980, gold hit a high of $850 per ounce, which in today’s prices would be around $2,300 per ounce. Some believe that the price of gold could continue to rise in the next few months, with predictions of $1,800 per ounce in the next few weeks.

However, some large investors think that the gold bubble will burst soon. Legendary hedge fund manager George Soros sold off 99% of his gold holding in May 2011, while some investment funds, like the Aberdeen Asia fund, are reducing their exposure to the precious metal, fearing that the peak in price is imminent.

And when the price falls, it could fall hard. In the early 1980s, the price plummeted from around £850 per ounce to $290 per ounce and remained that way for almost 20 years.

How can you invest in gold?

There are three principle ways of investing in gold:

Physical gold

You can buy physical gold coins and bars from a trader recognised by the World Gold Council, although remember that buying physical gold is an unregulated investment activity. You also face commissions, usually 5% and above, when buying physical gold, so you may pay more than its current price (known as the 'spot' price).

Gold mining shares

Secondly, you can buy shares in gold mining companies, usually through a unit trust or investment trust. However, shares are traded on the stock market and don’t always follow the price of gold. Over the past decade, a £10,000 investment in the average gold fund would have grown to just over £90,000, but while gold has risen by 25% in the past half year, the average investment fund has in fact lost 0.5%.

Exchange traded commodities

Finally, you could invest in an exchange traded commodity (ETC) that tracks the price of gold. You buy shares in the ETC, which is backed by physical gold it has bought, and the price of the shares you own tracks the price of the metal.

How can I sell my gold?

If you have gold that you want to sell, the past few years has seen a rise in specialist companies willing to buy it, so that it can be melted down and sold on. Whether the gold items are old or broken doesn't matter as it's the value of the metal itself they are interested in.

As such, cash for gold companies' advertisements target consumers who may have gold items they've forgotten about or no longer want - and selling these though a cash for gold buyer is presented as a quick and convenient way to make some extra cash.

However, a Which? investigation into these companies showed that you might not necessarily get the best price for it. You can read more about this in our guide to cash for gold and gold selling.

Learn more about investing

To learn more about investments, read our beginner’s guide to investment.

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