InvestmentsSep 24 2020

Investing after the gold rush

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Investing after the gold rush

As investors root around for financial products or investment opportunities that are less risky than stocks and shares, but deliver better returns than a traditional tax-free savings account, some are turning to gold as a means of diversifying their portfolios. 

But investing in gold is not always easy for first-time investors, so how should they go about it and what is the role of the adviser as part of this process?

At the start of the pandemic, demand for gold increased sharply as retail investors flocked to so-called ‘safe haven’ asset classes.

When the production of gold coins was paused temporarily due to the virus, the supply shortage added to the sense of urgency and the gold price surged in response, reaching a new record of $2,000 (£1,547) per ounce.

It was not just institutional or experienced retail investors leading the charge for gold, but also first-time gold investors – lots of them.

Once reserved for the use of wealth managers and financial advisers, the proliferation of fintech apps and other platforms has laid the gold-buying marketplace open to all.

However, with so many options available in terms of the way gold is bought, owned, stored and sold, it can be difficult for individual investors to understand the risks attached and decide which option best fits their personal aims and objectives.

Gamification

One of the most concerning areas for gold-buying platforms in the current climate is the sheer volume of investors who are turning to the precious metal for the first time.

There are signs that investing in equity markets, as well as some of the more unconventional asset classes such as cryptocurrencies, precious metals and other commodities, has become ‘gamified’, probably due to the fact that people have had more time on their hands during the lockdown restrictions.

The desire to experiment may also be due to the fact that other go-to safe haven investments, such as government bonds, could underperform in the future, due to the mounting level of debt during the pandemic.

Key Points

  • There are various ways to invest in gold
  • Many investors are turning to gold in the current climate
  • Investors should be aware of hidden costs

While growing investor interest is positive in one sense, particularly in terms of demonstrating that younger people are engaged in managing their own finances, there is obviously a danger that the risks attached to such investments are not fully understood or are being ignored.

Regulation also has a role to play in safeguarding the interests of retail investors, but it is important that new platforms and product innovators take responsibility too.

This can be achieved by running ‘readiness tests’ for first-time investors to check they have a basic understanding of the risk profile of specific investments.

These can be run alongside checks carried out to prevent fraud and money laundering. Monitoring accounts can also help to identify any unusual activity, so interventions can be made where necessary.

Financial advisers can also help to support retail investors as they navigate the shifting investment marketplace.

Naturally, this involves having a broad and up-to-date knowledge of the market and its various offerings.

Wealth of choice

For individuals interested in investing in gold, a diverse range of options is available.

For example, investors can buy physical gold bars and while this may incur some significant security risk and costs, they own a physical asset, which has intrinsic value that they can sell at the appropriate time.

Owning physical gold has become much easier to do recently, as it is now possible to buy it incrementally, for as little as £30 per month, and spread the cost of fees with other investors.

Once enough gold has been saved to make a full bar, investors can choose to withdraw it if they wish, or simply carry on accumulating more.

Alternatively, investors can purchase gold mining stocks, or shares in gold mining companies, but these may not track the price of gold and the investor does not own any physical metal.

Another option is to buy exchange-traded commodities or exchange-traded funds, which are backed by physical gold, but may still come with some element of counterparty risk.

It is often said that one of the main benefits of investing in physical gold is the removal of ‘counterparty risk’. However, this is not always the case and investors should consider their investments carefully.

With bullion ETCs and ETFs for example, the investor should understand that a financial institution is underwriting these, so there is a significant risk that if the economy takes a turn for the worse, their investments could suffer too.

Investors should also be aware that there could be hidden costs such as annual fees, threshold-linked delivery expenses, exit fees and other payments.

The main way that advisers can support first-time investors is by explaining the different types of investment available and helping them to weigh up the costs and risks attached to each.

In the case of physical gold, this is likely to mean explaining how the purity of the precious metal they are buying might impact the value of their investment over a period of time. 

With the gold price having risen recently, it is also important to ensure investors are aware of the implications of the high entry price and select products that fractionalise their investment in order to minimise risk and optimise affordability.

There is an opportunity for retail investors to diversify their portfolios by investing in gold without incurring excessive fees or taking on too much risk.

Before joining the gold rush, however, they should take steps to understand the whole marketplace and select the right platform and product to meet their needs.

Shahid Munir is co-founder of Minted, a gold-buying app for retail investors