28 February 2021

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Investing in gold: how to go about it

Author: Luigi Campopiano

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The price of gold is at an 8 year high: a price rise that reflects the times of uncertainty and the historic role of gold as a safe haven, after having however had a sharp fall in March like other classes of assets. It opened the year at $1,500 OZT, then moved up on the back of low or negative interest rates to reach $1,675 OZT, to fall to $1,480 on March 18. A change of direction, from March 20, in just three days bullion regained most of its loss, a return to a bull market. It now stands hovering in the range of $1.720-$1.760. 

Why are investors seeking gold?

Whereas Central banks, in parallel to resorting to the printing press,  have continued buying physical gold as a reserve, the present context of low interest rates, reduced growth, political uncertainties and turbulent markets will affect investors pushing them to look at gold with great interest and not only as a diversification strategy. 

The four souls of gold

Historically gold has been held for four main reasons:

1. Safe haven. We all know that gold is the ultimate refuge, a safe place to go when markets are troubled. It maintains its intrinsic value regardless of financial price.

2. Diversification. Historically gold has shown a very low correlation to shares and bonds, and a better resilience in times of market downs. 

3. Hedge against inflation. In both deflation and inflation or devaluation of currencies, gold tends to compensate changes in purchasing power, as it is a reserve.

4. Long term investment. The decision to hold gold (especially if physical) tends to be in a long term perspective rather than a short term speculative punt, as it is a fundamental safe haven, a diversification and a hedge.

How to invest in gold

The gold market is large and liquid, and weekly the London Bullion Market Association (LBMA) publishes data on trade volumes in London and Zurich. LBMA is also responsible for determining the standards for refining in the London Good Delivery List. The trading unit is a troy ounce (OZT), the minimum purity is 99.5% and the weight of a bar is 400 OZT or around 12.5 kilos. Spot prices are fixed twice a day as a result of on-line auctions (10.30 and 15.00 GMT). The LBMA price for gold is transparent, and is accepted as the basis for spot transactions. “With an average of 112 billion US dollars traded every day in Otc, futures and instruments traded on the stock exchange, gold is one of the most liquid assets in the world” say Invesco specialists. 

What are ETCs 

Exchange-traded commodities, are investment instruments traded on the stock exchange that replicate the performance of a single commodity or a basket of commodities. An investor takes a position on a raw material without taking delivery of the underlying commodity. ETCs can be bought and sold on markets: the issuer of the ETC will pay the investor a given yield. The issuer uses the proceeds from the sale of the ETC to buy the physical commodity

ESG proof gold

Always keep in mind the advice given in Responsible Gold Guidance, issued by LBMA, to ensure that the investment solution respects human rights, is conflict free and also respects the regulations on money laundering or financing of terrorism.