Five-minute guide to… Investing in gold

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The gold price is up another 26 per cent over the past 12 months

The precious metal has always had a special place in the hearts of investors and lately it has put in a glittering performance.

The gold price is up another 26 per cent over the past 12 months, which is an incredible 2600 times the return of NatWest’s cash Isa that pays just 0.01 per cent.

This kind of return will inevitably tempt hard-pressed savers, but gold does not always shine, so is now a safe time to buy it? 

GOOD AS GOLD 

Gold is traditionally seen as a safe haven in times of trouble and it has certainly been a terrific berth for your money over the last 16 years.

In that time, gold has delivered a total return of a whopping 465 per cent , according to figures from BullionVault.com.

House prices may have boomed over the same period, but they trail with a total return of 165 per cent, according to the Halifax house price index.

The total return from stocks and shares as measured by the FTSE All Share, including dividends reinvested, is a relatively lowly 96 per cent, while cash has returned just 55 per cent.

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The total return from stocks and shares is a relatively low 96 per cent

Past performance is no guarantee of future returns, so this does not mean it will dazzle in future.

However, Adrian Ash, head of research at BullionVault, says: “With stock markets struggling and interest rates collapsing since the turn of the millennium, gold has been the best performing asset by far.”

WORTH A MINT 

Mining for gold takes time and effort, which makes it attractive at a time when central bankers are devaluing currencies through rampant money printing, or quantitative easing.

Yet it is far from a one-way bet, Ash adds. “The gold price can be highly volatile, it fell 25 per cent in 2013, for example.”

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Gold is traditionally seen as a safe haven in times of trouble

Another downside is that it does not pay any income or dividends, unlike cash, bonds, shares or a buy-to-let rental property.

You have to allow for dealing costs on gold bars and coins, which you can buy from the Royal Mint or specialist traders such as Chard, Sharps Pixley or The Pure Gold Company.

You may also have to pay storage charges, and for security measures and insurance if you keep it at home, which can eat into your returns. 

GOLD RUSH 

None of this has deterred investors, many of whom use gold to offset risks elsewhere in their portfolio.

There has been a rush of private investors into gold since the Bank of England cut interest rates last month.

Josh Mahoney, market analyst at IG, says: “Low returns on bonds and cash, and scepticism about recent stock market growth, have attracted more into gold.”

Geir Lode, head of global equities at fund manager Hermes, reckons gold can continue its run of form: “It should perform well over the next two or three years because of macro-economic uncertainty, higher geopolitical risk and low or even negative interest rates.”

He recommends investing in the metal by buying FTSE-listed gold mining stock Randgold Resources.

“This is one of the best-managed and highest quality companies in the sector with low production costs, a strong balance sheet and dividend potential.”

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There has been a rush of private investors into gold since the Bank of England cut interest rates

Buying an individual gold mining stock will be too risky for many, and you should consider spreading your risk through a low-cost exchange traded fund that tracks the gold price, such as the Physical Gold ETF.

Alternatively, actively-managed fund BlackRock Gold & General invests in gold miners and other commodity companies.

Darius McDermott, managing director of fund platform Chelsea Financial Services, says gold divides investors: “Some love it, some hate it. You should never invest more than five or 10 per cent of your spare wealth, to avoid overexposure in case the price falls sharply.”

Do not be dazzled by recent growth, gold could quickly lose some of its lustre if the global economy finally recovers.

Daily Express :: Personal Finance Feed