Alternative Investment  

How can gold fit into a portfolio?

This article is part of
Guide to investing in alternatives

Mining for gold

It is crucial investors get the type of exposure most suited to their investment goals.

One of the mistakes often made by investors is to invest in mining companies as a proxy for investing in actual gold, which Mr Hammond cautions against.

“For a start, gold miners are not closely correlated to gold as they use hedging to lock in prices. They also tend to fall with the rest of the market at times of corrections so you’re not getting your ‘insurance policy’.

"And there is always a risk of misstatement of reserves which can crater a miner’s share price,” he warns.

Instead, he believes an allocation to physical gold is the best approach.

“For your core allocation, physical gold will always be less risky and cheaper – it has no credit risk as it is yours and you hold it, it has very little liquidity risk because most bullion traders will always be happy to buy it back, and it has fully transparent pricing,” he reasons. 

“Importantly, it also has significant tax advantages. For example, there is no capital gains tax on UK bullion coins such as Sovereigns and Britannias.”

Mr Hammond continues: “You can also invest in relevant unit trusts, Oeics and pooled vehicles, but they can be costly with management fees of between 1.5 to 2.5 per cent.

"More importantly they are not pure plays as they often have little exposure to pure gold and more exposure to gold miners and other commodities such as diamonds.”

eleanor.duncan@ft.com