July 29, 2011 2:54 pm

Top tips: How to trade gold

Gold has continued to rise in price in recent weeks, as investors concerned about the debt crises from Greece to the US have been increasing buying the metal as a safe haven asset.

This week, it hit new highs above $1,625 an ounce – a 14 per cent rise since the beginning of the year – amid new concerns that the US might default on its bonds. According to the World Gold Council, gold outperformed all major bond, equity and commodity indices across the world in the second quarter of this year.

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While some investors are urging caution on gold (see box below), others believe the price will rise further. Both Mike Turner, head of global strategy at Aberdeen Asset Management, and Tom Winnifrith, of stockbroker JPJShare.com, predict that gold will hit $2,000 an ounce next year.

But how should investors get exposure? FT Money has compiled these tips for buying gold.

1. Don’t buy too much

Gold is supposed to be a safe haven asset that will retain at least some of its value if other asset classes are falling in value. So the likelihood of equities, bonds and other assets falling in tandem has to be assessed before piling into gold. Most people hold gold as insurance, rather than a belief that the global economy will combust.

Gold holdings provide no income and the price can be volatile, historically holding up best when equities are falling.

Even GoldCore, a provider of physical gold to investors, says most people should no more than 5 per cent of a portfolio in gold, while older or more conservative investors should only have about 3 per cent. However, it says that higher-risk clients who have more of their portfolio in equities tend to hold higher amounts of gold, as well.

2. Consider a gold exchange-traded fund (ETF)

Gold ETFs are a quick and easy way to gain exposure to gold: providers including iShares and ETF Securities offer these listed tracker funds. Shares can be bought and sold daily and the funds are backed by physical gold – unlike other exchange-traded commodities, which tend to track futures contracts. Annual management fees are about 0.4 per cent.

Users of gold ETFs tend to use them more as a short-term play. Physical gold ETF holdings to the end of June fell slightly from January, from 2,168 tonnes to 2,155 tonnes, after some investors took profits in the first quarter of the year, according to the World Gold Council.

3. Hold physical gold

Specialist providers will buy physical gold and store it in vaults or nominee accounts for investors – giving them the security of knowing the gold is held in their name. BullionVault and GoldCore both offer this service. But the disadvantage of holding physical gold is that it is difficult to sell quickly and upfront costs can be high. GoldCore, for example, charges 2 per cent as an initial fee and 1 per cent when the gold is sold, though there are no annual storage costs. However, after six years, it becomes cheaper to hold physical gold than an ETF, which has ongoing annual charges.

In contrast, BullionVault charges 0.8 per cent to deal and an annual storage fee of 0.12 per cent, which it points out makes holding costs more cost efficient than an ETF on positions above £7,300.

4. Buy gold miners

This is an indirect way to gain exposure to gold. Fund managers point out that the share prices of mining companies have suffered recently amid equity market volatility, making them look better value compared with the steady rise in the gold price.

“Gold shares are trading at attractive levels relative to bullion prices,” says Richard Davis, manager of BlackRock’s World Resources Equity Income fund. “We believe that earnings will expand as gold prices rise and investors will be attracted back into the sector.”

Adrian Lowcock at Bestinvest, the independent advisers, recommends investors get exposure to gold through BlackRock Gold & General, Smith & Williamson Global Gold & Resources, and Investec Enhanced Natural Resources.

But investors need to remember that shares in mining companies will be affected by any broad sell-off in equities – which is what holding gold is supposed to protect you against.

5. Opt for silver instead

Silver is often called ‘the poor man’s gold’, as the price per ounce is lower – though more volatile – than that of gold: it was trading at around $40 an ounce this week.

Kathleen Brooks at Forex.com thinks that recent concerns that silver might be in bubble territory, following strong price rises this year, have not come to pass.

“Due to the worries around the dollar, silver is being supported by its semi-safe haven status and its attractiveness may increase for as long as these troubles rage on,” she says.

But beware: silver has been more volatile than gold in the past, falling 35 per cent between April and May this year alone. It is also affected by different factors to gold. Silver is widely used as an industrial metal, so will be affected by any slowdown in production if economies falter.

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