How to Invest in Gold in the UK in 2024

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 it 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. It also overcomes the problems surrounding storage and 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.

4. Digital Gold

Instead of investing in physical gold, investors can opt to buy digital gold. This allows investors to buy, sell, and hold gold electronically, providing a lot of convenience.

While a digital gold investment is backed by physical gold, the storage and insurance are handled by the broker. It also opens the door to buying fractional gold. This eliminates the minimum investment requirements of gold bars and coins and allows tiny investments, reducing the barrier to entry for smaller investors.

In the UK, The Royal Mint offers its own digital gold trading platform called DigiGold (beware of other platforms using the same name).

Of course, this investment option isn’t entirely without downsides. Investors sometimes prefer to have a tangible physical asset in hand. And even with digital gold, there are still fees to pay both for storage and transactions.

What’s the best way to invest in gold?

As highlighted, each method of investing in gold comes with its own advantages and disadvantages. However, for investors who aren’t experts in handling the shiny yellow metal and wish to gain exposure quickly, opting for digital gold may be the most suitable option.

This method does come with trading and storage fees, but it’s also one of the simplest methods to become a gold investor.

However, for investors who are concerned with buying and selling at the right price, opting for a Gold ETF may be wiser. While this comes with its own set of management fees, having a professional manage a gold portfolio can be advantageous even at the cost of higher volatility.

Overall, there is no single best way to invest in gold as it entirely depends on the individual and their personal circumstances.

What affects the price of gold?

Just like every other commodity, the price of gold is driven almost entirely by supply and demand. However, unlike other commodities, gold doesn’t have that many use cases in terms of manufacturing and production. At least not compared to other metals like steel, copper, and aluminium.

Instead, since it’s predominantly used as a store of value, gold prices tend to be driven by macroeconomic factors. This includes:

• Central Bank Investments – Central banks like the Federal Reserve in the US or the Bank of England in the UK are large buyers of gold bullion. The metal is often used as a means of diversifying monetary reserves to reduce the impact of inflation on a nation’s wealth.
• Interest Rates – History has shown that gold prices can be sensitive to monetary policy. Typically, when interest rates rise, the price of gold falls as a higher rate of return can be earned with near-risk-free interest-bearing bank accounts. Similarly, when interest rates fall, money moves back into commodities like gold, pushing up the price. However, there have been periods in history where this hasn’t occurred, making the relationship a bit unclear.
• Inflation – Due to its limited supply, gold has long been a refuge for economic instability. So, when inflation and economic uncertainty rise, so does the price of gold as demand from investors increases.
• Currency – Since gold is a US-dollar-denominated metal, the price is inversely correlated with the value of the US dollar. In other words, when the value of the US dollar rises, gold prices tend to fall. Similarly, when the US dollar weakens, the price of gold rises.

Where to sell gold in the UK?

When investing in gold mining stocks or gold ETFs, the process of selling gold is pretty straightforward. These assets can be bought and sold on the stock market like any other form of equity investment.

However, when investing directly in gold bullion, selling becomes more of a challenge as it requires contacting a gold merchant. Finding a reputable gold merchant in major cities like London isn’t too challenging, and most of the gold can be found online. However, for those living in more rural areas, gold merchants can be harder to find.

Investors must properly vet a gold merchant before doing any business, ensuring the rates offered are close to the market price of gold.

There will always be a slight discrepancy between the buy and sell price of gold since merchants take a commission on each transaction. Nevertheless, it’s essential to enquire about fees, verify their credentials, and research customer reviews before agreeing to do business with a gold merchant.

Why invest 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 many consider it a “safe” investment. 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.