the price of gold has been surging recently so there's renewed interest in buying it but how do you do that and putting fomo aside why should we buy gold in the first place in this video we'll look at six ways in which you can invest in gold by examining the advantages and disadvantages of each approach I'll help you choose a way of investing in gold that might be right for you remember if you do enjoy our content please do like this video And subscribe to our Channel let's start with what gold is and what gold
is not the reason for that is I think there are many misconceptions about what gold provides and its essential value so let's start off with what gold is and I think that something which is definitely true is that when there's a huge shock in markets when stocks are falling bonds are falling and there's a huge crisis gold usually holds its value it provides real safety in those kind of extreme scenarios now that's not always true for example it had a bit of a wobble in 2020 with the covid selloff but generally during big crises it
provides a level of safety one of the drawbacks of gold is that unlike buying a stock or buying a bond which generates an income for you in the form of a dividend or coupons gold is a wasting asset it doesn't generate an income for you in fact it often costs money to hold gold and that's because it has to be stored safely and as we'll see later that has an effect on the price of gold and its reaction to interest rates the third point is that gold is itself quite volatile quite crashy so by incorporating
it into your portfolio sometimes it'll be a dragon return in fact if you look at the volatility of gold it's kind of similar to a global stock index now let's think about what gold isn't it's often stated that gold is a good inflation hedge whereas if you actually look at any commodity it'll track inflation over the long term because anything that's useful by definition will have to track inflation if it lags inflation it'll become super cheap and if its price growth exceeds inflation then it'll become super expensive so I think one reason not to buy
gold is as some kind of inflation hedge stocks usually are a much better way of beating inflation longterm and then the final point which is related to the point about crash and volatility is a gold is not safe certainly over the short term so if you have a huge allocation to Gold then it's not going to be a safe investment if you've got to pay a house deposit in a year's time say you'd be crazy to put all of your money into gold waiting for that deposit because it could crash I think it's also useful
to look at the long-term return of gold and compare it with stocks and bonds but also inflation here you can see that comparison over 150-e period now notice that before 1970 the price of gold was linked to the value of the dollar then in 1970 the price of gold was allowed to float freely and it surged in value but if we're thinking about long-term return notice that stocks are by far the best investment followed by bonds and Then followed by gold it has beaten inflation over this period but usually you just expect it to track
inflation there's no additional risk premium for investing in gold like any commodity so just be realistic about the kind of returns that you can expect from gold longterm and the role that it plays in your portfolio now that's not to say that you shouldn't incorporate some gold into your portfolio for example if you look at the portfolio charts website which is created by Tyler he's recently written a beautiful research note about long-term safe withdrawal rates where he looks at what you can put into your portfolio during the draw down period in retirement and that's in
order to maintain a certain level of spending without running out of money now time and time again he finds that in back tests incorporating some gold into your portfolio is a really good idea that's despite the fact that when you take it on its own it is very crashy and its return has been very poor whereas if you actually mix it with other Investments like stocks and bonds and other Commodities it actually adds a lot to your portfolio in fact what he found was for the best portfolio in terms of safe withdrawal rate globally gold
made up about 30% of that portfolio a pretty sizable allocation and he personally uses a beautiful metaphor he says do you like salt on your food can you eat an entire box of it in one sitting without getting extremely sick same concept so on its own gold can be toxic but when it's mixed in with other assets it can provide diversification for your portfolio and improve your outcome over the long term so now what we're going to do is to go through these different ways in which you can buy gold if you choose to and
with each one we'll think about the benefits and drawbacks of getting exposure that way and we'll start with physical gold owned directly by you so here we're talking about buying the shiny yellow stuff such that you can actually touch it now you can store it at home of course that's risky because if you get robbed you'll lose your investment another way of doing it is to store it in a deposit or maybe in a safe deposit box but of course that incurs a cost but one of the benefits of physical gold at least in the
UK is that if you buy bullion coins from the Royal Mint they're exempt from capital gains tax now that only applies to UK residents and that's because of the gold coin status as legal British currency as you can see here on the Royal Mintz website now some people just love the idea of physical gold that they can touch because they don't trust fun managers to keep it safely if there is some kind of world-ending event then at least you'd be able to hold that physical gold and not worry about electronic systems not showing you're the
owner so for real gold bugs this is usually the preferred way of getting exposure however I think there are certain drawbacks the first one is the safety and the storage aspect the second one is to do with liquidity and selling it it is a bit of a pain to sell physical gold plus I'm not convinced you always get such a good price as you would if you buy it electronically now you can't hold physical gold in an Isa an individual savings account but you can in a self-invested personal pension there are restrictions as to the
purity of the gold you can't use coins for example they're not pure enough and hmrc also insists that it's stored safely at a certified depository but given the capital gains tax benefit of holding gold bullion in the form of coins i' probably hold it outside the Sip anyway another way of buying gold is indirectly via a fund now personally I'd probably avoid buying physical gold I'm not really a gold bug and I'm not a gold maximalist I'd prefer to hold it via this fund form and the reason for that is it's just so liquid if
you wanted to sell it tomorrow you could do that and do so very quickly and cheaply and of course do it online you don't have to physically hand your gold to someone in return for money plus there are lots of gold funds out there now and due to competition the total expense ratio of those funds is very low here for example beside me you can see a list of those ETFs actually exchange traded products because strictly speaking they're not ETFs but these would allow you to get that gold exposure for a very low fee of
0.11% maybe 0.12% for the cheapest funds if you live in the US the choice of funds which give you exposure to gold is much wider of course and here are the largest 10 by total assets the two really big funds are GLD and IOU now when I do speak to real gold bugs they tell me they don't like these funds because they're paper gold personally I'm not convinced by that if you look at the fact sheet for example for one of these funds in this case the one from XT trackers you can see that when
you buy some of the fund it is backed up by physical gold they'll go out and buy gold bars and they'll store them somewhere safely as more people buy some of their fund so it is physically backed by the metal somewhere you just have to trust the fund manager that they've done that and kept the records properly and legally you can see that they say in the fact sheet that the issue has direct and sole ownership of the gold which is stored in Secure accounts some funds will tell you where it's stored in case you're
worried that it's in another country how much of that gold are you entitled to well it's just your proportion of the fund so that's called the metal entitlement which you have as an owner of the fund and then finally the value of your holding depends on obviously the price of gold they call that the gold spot price and that's usually calculated according to a standardized index minus any fees which you're being charged by the fund manager so physical gold is good if you're very paranoid about not trusting fund managers and you don't trust paper gold
but personally I prefer the liquidity the e of holding things like gold funds plus if you have a gold fund you can hold it inside an Isa or a sip or indeed outside an Isa or AIP in a general investment account so I think it gives you the greatest flexibility now people often say to me what's the cheapest fund to do X or Y and we've actually got a list of the cheapest funds for us and UK investors which we maintain so if you do become a premium member on our website then you'll have access
to that cheapest fund list which you can see beside me here another choice is to get exposure to Gold indirectly via gold miners so one way to do that is to buy a physical gold mining company so that involves Dynamite diggers and dumpers these people dig The Ore out of the ground they purify it and they sell it notice I've also put copper and silver there in parentheses because those are often found with gold and they're obviously quite profitable metal Metals in their own right and so often what you find is that there isn't a
pure gold mining company it also mines those other metals now the benefit of buying a gold mining company is that unlike gold where you're not paid an income for a gold mining company you will be paid a dividend so this is not a wasting asset furthermore because these are stocks you're going to earn the equity risk premium so I think you stand a greater chance of beating inflation long term however as a hedge for Equity you're buying equity which clearly is not going to work if there is a huge crash in the equity Market well
gold miners will sell off along with all the other stocks so that argument for holding gold via gold miners doesn't really stack up but there are also other ways of getting gold exposure via buying shares so you can own gold royalty companies where the company pays a mine or a mining operation an upfront fee in return for revenues which are generated from a mine or alternatively the profits generated by a given mining operation now you're assuming the management knows what it's doing it chooses the good mines rather than the bad mines but here you're taking
less of a risk assuming they've made the right choices because you're not exposed to all of the operational risks that go along with a mine and then finally we've got gold streams now these are companies which are paid in physical metal rather than cash payments so it's the same idea there's an upfront payment to a mining operation but then the company gets some proportion of the production of the mine in metal so here for example are a selection of mining companies one of them Franco Nevada is a gold royalty stock so it's really important to
understand what type of exposure you've got it's not just about going out there and buying a random mining company and you probably want to have more than one Mining stock in order to diversify your exposure so the benefits for Mining stock are that you get the income the dividend usually the Dividends are also quite High it is linked to the price of gold it'll go up if the price of gold goes up it'll go down if the price of gold Falls but it's not such a great hedge against Equity it'll fall along with the rest
of the stock market if there is a big selloff the final way we'll look at to get exposure to gold is via Junior Gold Miners so here we throw out the idea of a safe hedge altogether because these are very speculative stocks usually they're small caps which immediately tells you they're going to be volatile but also these are gold exploration companies or even if Gold's being found it'll be early stage development of Mines that they'll be involved in now that's very risky so some of these companies will fail if they do succeed however and identifying
new gold reserves then it can have a huge payoff so Junior Gold minor stocks will be very volatile this is the kind of growth stock approach to investing in gold personally I think I wouldn't touch this or if I did it would be in very small size because it is very speculative it's not a hedge it's just speculation to end we'll take a look at the fair value of gold now normally when you try to price an equity for example you look at the cash flows which it'll generate in future you'd guess what those would
be and then you discount those future cash flows to get a present value so for cash flow generating assets you can always build a discounted cash flow model to see roughly what it should be worth for gold however remember that it doesn't generate an income it's a wasting asset so its price according to a discounted cash flow model would be negative which is a nonsense but that doesn't mean that we can't have a go at working out what it should be worth so as I said the price of gold should roughly track inflation long term
so that's one input to our model another important one is interest rates because if interest rates are high you can buy a Government Bond which will pay you a very safe income and that makes it much more attractive than gold so high interest rates should push down the value of gold and then finally if we think about currency the price of gold is measured in dollars so high price of gold is actually high price relative to dollars so dollar strength pushes down the price of gold and dollar weakness pushes up the price of gold gold
so if we combine those ingredients the level of CPI inflation the real interest rate in the US and finally the strength of the dollar we end up with a very simple fair price of gold here you can see that going back to roughly 2001 so the fair value from the model is in blue and the actual price of gold is in yellow of course and what you can see is there are huge deviations above and below that Trend that the model would suggest is the fair price but it does give you a rough idea of
what the price of gold should be and at the moment it's very overpriced according to this fair value model and not just by a little bit but by 25% so while I wouldn't trade on the basis of a model like this a very simple model I think it is useful to know roughly what the price of gold should be given those fundamental drivers now of course this model will be out of date by the time you see this video but if you do have a premium membership on our website you get access to this value
model the most upto-date one here in our trackers so I just click on the fair value tracker and this will give you the fair price of gold according to that very simple model we also have one for silver and what's kind of interesting is that silver is also overpriced at the moment in fact even more so than gold so if you are interested in joining our membership it's very easy just go to our website pension craft.com membership to learn more and hopefully this video has given you some insight into whether you think gold is right
for your portfolio but also how to get exposure to it I don't think it's that easy to decide personally I think the best way to get exposure for me is to go for one of those funds one of those gold funds I just like the liquidity And the fact I can buy and sell it very cheaply and I don't have to worry about storage but that's just me and my personal preferences yours I'm sure will be different to mine and as always thank you for listening
