Five things you need to know about gold

What you’ll learn:

• Why gold can help you diversify.
• Which factors drive the gold price to move.
• How to gain exposure to gold.

Investors often flock towards gold during periods of economic or political instability as a hedge against uncertainty. However, gold itself can be extremely volatile, so it’s important to understand what moves the gold price, and the risks involved, before investing.

Here, we explain five key things every investor should know about gold.

1. Gold often behaves differently to other assets

The value of gold doesn’t tend to move in line with other assets such as shares or property, and often rallies when stock markets fall. This lack of correlation with other assets can make it a useful diversifier when held as a small proportion of a balanced portfolio.

2. Gold is not risk-free

Investors often see gold as a ‘safe haven’ during periods of uncertainty, but all sorts of factors can have an impact on its price. These include supply and demand, the state of the global economy, and political uncertainty, all of which mean gold can be a highly volatile investment. You should therefore seek professional financial advice if you’re uncertain whether this is the right kind of investment for you.

3. It won’t provide you with an income

If you’re seeking an income from your investments, gold won’t pay you any interest, nor will it provide you with any dividends. Instead the hope is that gold will provide you with long-term capital returns, although as with other forms of investment, there are no guarantees and you could get back less than you put in.

4. Holding physical gold can be an expensive way to gain exposure

Taking a direct approach to owning gold, for example by buying bullion bars or coins is one way to gain exposure to the precious metal, but you’d need to consider storage and insurance costs which can be expensive.

5. You can invest in gold without physically owning it

One way to invest in gold without physically owning it is to opt for a specialist fund, investment trust or exchange traded commodity (ETC). Like other Exchange Traded Funds, ETCs are stock market listed passive investments. They either track the price of a resource, such as coffee, or a particular sector, like precious or industrial metals.

You can, for example, invest in a physical gold ETC, which will provide you with exposure to the precious metal by tracking its spot price. The spot price is the current price in the marketplace at which you could buy or sell gold for immediate delivery. Alternatively, you can buy an actively managed investment fund that helps spread risks by investing in a wide range of gold and gold mining companies. These will be less closely tied to the price movement of gold itself, and influenced by the wider factors which affect the value of the companies the fund invests in.

Find out more about investing in gold and other commodities

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The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.