Gold is a commodity or 'raw material' that trades based on supply and demand. The interplay between supply and demand ultimately determines what the price of gold is at any given time.
There are different ways to invest in gold, so if you wish to do so, you should ensure you take time to find out which method best suits your investment appetite.
Here, we explain the pros and cons of buying gold, and how you can invest.
Why do investors buy gold?
Gold has long been one of the most prized metals on Earth. It has played a major role in the economies of many countries, and used to be used as a form of currency.
Although this is no longer the case, gold can still be a reliable, long-term investment and may be a valuable portfolio addition, particularly in times of economic downturn.
We've outlined the main advantages below:
- Find out more: building an investment portfolio
How to buy physical gold
You can buy physical gold either as
- Bullion bars
While a bar’s value is always the same as the price of gold, some coins also have numismatic value – they could be worth more than their gold content alone.
When buying gold, make sure you opt for a seller with a good track record.
Sovereign mints, such as the Royal Mint in the UK or the Perth Mint of Australia, have the advantage of being government regulated as the bullion they produce is legal tender, albeit with higher mark-ups than private mints.
You could also buy gold jewellery, although items will likely cost far more than the value of the gold they contain, making them less effective as an investment strategy.
Some investors see gold as a way to pass on wealth rather than generate earnings, although gold is not exempt from inheritance tax.
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What are the risks of buying gold?
Like with any investment, investing in gold involves some risk.
We've outlined some of the key risks below.
- Find out more: what is investment risk?
What are gold investment funds?
Gold investment funds can be a good alternative to buying physical gold if you think the latter may be too much hassle, or you're only investing in gold in the short term.
This method can be cheaper, as you don't have to buy whole bars or coins, or pay for storage.
You can invest in gold using exchange-traded funds (ETFs) or exchange traded commodities (ETCs).
- ETFs buy and sell gold, or its futures, meaning investors effectively own the gold.
- ETCs are debt notes, which are backed up by gold.
Both ETFs and ETCs aim to track the price of gold, and you can buy and sell them easily through investment platforms.
However, watch out for fund fees which will be imposed to cover management expenses and administrative costs.
If you want to learn more about how to invest via a platform, we've put together a series of guides which can help you.
- Find out more: best and worst investment platforms
How else can you invest in gold?
You can also buy shares in gold-related firms like mining companies, although this is a much more adventurous option.
The companies' prices don't always track the gold price. If a mining company is badly managed, owns unproductive mines or operates in unstable countries, its price may shrink.
You should diversify across multiple mines and regions, as buying individual stocks makes you vulnerable to instability.
- Find out more: investing directly in shares