How To Invest In Gold With ETPs

The advent of Exchange Traded Products offering exposure to the gold price has brought investing in this ancient store of value up-to-date…

How To Invest In Gold With ETPs The discovery of gold nuggets at prehistoric burial sites is testament to mankind's long love affair with the precious metal.
And no wonder! Unlike most metals, gold occurs naturally in nugget form – which initially made it easy to discover – yet it's also rare and impervious to corrosion.
So while we've been mining gold for millennia to make everything from rings and coins to bars held in bank vaults, if all the gold in circulation was smelted down it would only amount to a cube with sides of 21 metres.
This scarcity – allied to gold's enduring popularity – has made it a store of value that's outlived any currency or civilisation.

Traditional ways to hold gold

Still, gold has never been particularly cheap or easy to hold as an investment.
Because it is valuable and easily transported, gold is vulnerable to theft. This means you need to keep it somewhere safe such as a bank's safety deposit box – and that comes at a high cost, especially for small investors.
Another problem is that when you sell gold – whether bars, coins, or jewellery – you'll need to have it appraised for its purity, which again has a cost. To avoid this, professional investors and institutions use so-called accredited storage facilities that guarantee the integrity of gold stored with them, but this raises the holding costs.
As an alternative, investors may buy shares in gold mining companies. This way you hope to benefit if the gold price rises, boosting your company's fortunes.
However gold miners can be volatile, partly because their profitability is so leveraged to the gold price. Miners are also vulnerable to energy and labour cost inflation, which can hit returns even when the gold price is rising.

The modern way to invest in gold

These days, Exchange Traded Products (ETPs) enable you to track the price of gold from the comfort of a share dealing account.
In Europe, you do this by buying an Exchange Traded Commodity (ETC).
ETCs are a subset of Exchange Traded Products. Most investors are more familiar with Exchange Traded Funds (ETFs), but ETCs are a distinct and legally different kind of ETP.
ETCs came into being because the regulatory framework in Europe does not allow ETFs to hold one specific asset, which means it's not possible to setup a gold ETF. (Some countries, such as Switzerland, have different rules).
Hence gold ETCs were born.
ETCs are certificates issued by financial institutions. They are backed by holdings of physical gold as collateral, so that if the financial institution behind the certificate gets into difficulties in meeting its obligations, the investors in the ETC should have recourse to the gold held as collateral.

The benefits of gold ETCs

From a standing start in 2003, the total amount of gold bullion holdings held by gold ETPs hit a record 2,632 tonnes in December 2012.
The attractions are obvious:
  • Liquidity: Gold ETCs are bought and sold like any other share.
  • Cheap to own: Gold ETC annual costs range from 0.25% to 0.40%.
  • Cheap to trade: The spread on gold ETCs is minimal compared to that on coins or small bars. This is especially useful if you want to trade gold in and out of your portfolio.
Of course there are downsides, too.
If you own a lot of gold it might be cheaper to hold it directly or via a physical gold investment platform.
Also you can't put a gold ETC into your jacket pocket, so it might not be very useful if society breaks down and you want to trade your gold for food…

Physically-backed gold ETCs

Almost all the precious metal ETCs listed are physically backed products. These products are linked to the spot (current) price of gold.
In contrast, some ETCs are linked to an index which reflects futures pricing. An investor really needs to understand how the futures market works in order to knowledgeably invest in synthetic ETCs.
Most private investors don't have such knowledge and find in the spot price products the best option.


Gold and your portfolio

Even investors who are agnostic about the future direction of the price of gold may include the metal in their portfolio.
This is because gold has in the past exhibited a low correlation with other asset classes such as equities, and also with other commodities.

Illustration of correlation between equities, gold and commodities

  Equities       Gold      Commodities

Source:; As of 24/10/16, Calculations in GBP
According to economic theory, holding a diversified portfolio of imperfectly correlated assets like this can reduce portfolio risk.
A particular attraction of gold is that it often does well when the investing landscape seems especially frightening and many other assets are performing badly, such as during a financial crisis. At such times, investors can flock to the time-honoured safe haven of gold.
A 5-15% allocation of gold in a portfolio may therefore be appropriate as a form of 'portfolio insurance'.

Top Gold ETCs in Comparison
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