Gold as an asset class

Gold is a highly liquid yet scarce asset, which is no one’s liability. As an investment it can play four fundamental roles in a portfolio:

  • a diversifier that can mitigate losses in times of market stress

  • a source of long-term returns

  • a liquid asset with no credit risk that has outperformed fiat currencies

  • a means to enhance overall portfolio performance.

Our analysis shows that, over the last decade, adding between 2%-10% in gold to the average pension fund portfolio would have both increased returns and reduced volatility.

How to invest

There are many ways to invest in gold. Investors should consider the options available in their market, and the form of investment that is appropriate to their circumstances.

Investment bars & coins

One of the simplest ways of investing in gold is to buy investment bars and coins, from a bank or reputable dealer. When buying gold in these forms, investors pay a premium over the spot gold price, and investors must take care of delivery, storage and insurance. Small bars and coins accounted for approximately two-thirds of annual gold investment demand and around one quarter of global gold demand over the past decade.  

Investment gold coins (also known as bullion coins) are typically issued by governments and have a face value. They take different forms but their value is derived from their gold content: they are typically of a purity between 91.67% (22 carat) or 99.99% (24 carat). 

Investment gold bars can be purchased in 1, 10, 20, 50, 100, and 1,000 gram denominations as well as 1, 10, 100 and 400 troy ounces. These bars are manufactured by industry-accredited manufacturers and have a purity of between 99.5% - 99.99%. Large institutions often rely on the London Good Delivery (LGD) bar, which is used for clearing in London and weighs approximately 400 troy ounces. 

Gold investment accounts

Vaulted gold is investment gold (bars or coins) which is stored in professional vaults on behalf of investors. Buyers of vaulted gold acquire outright ownership of the gold without needing to store it themselves. Target customers are primarily private investors, ranging from mass-market clients to high net worth individuals. 

Vaulted gold provides customers with the advantage of physical gold ownership combined with a modern investment product. Investors obtain direct ownership of gold but do not incur the typical associated challenges, such as finding a trustworthy dealer, transporting and safely storing the gold and obtaining proof of provenance and quality in the case of resale (removing the potential need for assaying).

Gold savings plans

Regular gold savings plans allow customers to build gold holdings by making periodic purchases, for example on a weekly or monthly basis. Providers of gold savings plans safely store customers’ gold on their behalf and these plans are typically targeted at mass market consumers because both minimum investments and regular savings amounts are low.

Customers pursue different objectives with gold savings plans. Some customers use them to increase their gold holdings in small, regular increments. As such, they focus on the financial benefits of gold, using it as a foundational asset, a savings tool or a means of diversification and risk mitigation. The cost average effect of small, regular investments provides an additional benefit, since the investment is accumulated incrementally over time, the investor is less exposed to short-term price fluctuations.

Gold certificates

Gold certificates provide ownership of physical gold, which is stored in professional vaults on the customer’s behalf. They receive a personalised certificate in their name, which provides evidence of ownership and is required for the sale or withdrawal of their holdings. Gold certificates are typically aimed at affluent private investors.

Gold certificates are particularly convenient for investors who want to own physical gold without taking (immediate) possession of it. The overall costs are comparatively low because ownership is often provided in pooled allocated large bars, which are available at a lower premium than individual bars. 

Gold-backed ETFs & similar products

Physically-backed gold exchange-traded funds (ETFs), exchange-traded commodities (ETCs), and similar products are exchange-traded investment vehicles which invest in gold bullion. They account for approximately one-third of gold investment demand. Shares in physical gold ETFs can be bought and sold similarly to shares of companies through exchanges. Physical gold ETFs are targeted at both individual and institutional investors and the price usually tracks the performance of the underlying gold spot price.

Physical gold ETFs allow investors to gain exposure to the gold price through the convenience of a modern investment product. Customers who buy shares in ETFs do not have to trade physical gold directly or manage the safekeeping of their holdings; they can buy shares in these ETFs as easily and quickly as they would buy shares in listed companies.

Gold futures, options & forwards

Gold futures are agreements to buy or sell gold in the future at specified terms, including price, quantity, quality and date. Gold futures are standardised contracts, which are traded on regulated exchanges and give investors the flexibility to go either long or short on gold. They are typically used by corporate customers for risk management purposes or by institutional customers for speculative purposes. 

The market for gold futures is usually highly liquid and efficient, due to the large numbers of contracts traded by professional market participants. The trades are settled through a central clearing house, at which deposit margins are required. This provides increased security for investors, reducing counterparty risk and allowing them to trade without performing their own due diligence checks. Fees or commission charged for trading futures are comparatively low.

Gold options are contracts that give the investor has the right to either purchase or sell gold in the future, at specific terms such as price. Unlike futures, the investor is not obliged to exercise the option. Options can be traded on exchanges or OTC. 

Gold forwards are similar to gold futures with the main exception that they are not traded on an exchange and are therefore not standardised. They are bilateral agreements on the purchase and sale of gold at a future date. They trade at a premium to futures as they are customised to the specific needs of the investor.