How to invest in gold

There is an increasingly wide range of methods available to investors wanting to buy gold, or gain exposure to gold price movements. From gold coins to complex structured financial products, the most appropriate way will depend on the requirements and outlook of the individual investor.

Coins and small barsThe first gold coins were struck by King Croesus, ruler of Lydia in western Asia Minor from 560 to 546BC, whose wealth came from the gold from the mines and sands of the River Pactolus. Gold coins have been legal tender ever since. Bullion coins and small bars offer private investors an attractive way of investing in relatively small amounts of gold. In many countries - including the whole of the European Union - gold purchased for investment purposes is exempt from Value Added Tax.

Bullion coins

Investors can choose from a wide range of gold bullion coins issued by governments across the world (see panel, below right). These coins are legal tender in their country of issue for their face value, rather than for their gold content. For investment purposes, the market value of bullion coins is determined by the value of their fine gold content, plus a premium or mark-up that varies between coins and dealers. The premium tends to be higher for smaller denominations. Bullion coins range in size from 1/20 ounce to 1000 grams, although the most common weights (in troy ounces of fine gold content) are 1/20, 1/10, 1/4, 1/2 and 1 ounce. It is important not to confuse bullion coins with commemorative or numismatic coins, whose value depends on their rarity, design and finish rather than on their fine gold content. Many dealers sell both.

Small gold bars

Gold bars can be bought in a variety of weights and sizes, ranging from as little as one gram to 400 troy ounces (the size of the internationally traded London Good Delivery bar). Small bars are defined as those weighing 1000g or less. According to industry specialists Gold Bars Worldwide, there are 94 accredited bar manufacturers and brands in 26 countries, producing a total of more than 400 types of standard gold bars between them. They normally contain a minimum of 99.5% fine gold. The Gold Bars Worldwide website provides a wealth of additional information regarding the international gold bar market.

Exchange-traded gold

Gold-backed securities

Gold is traded in the form of securities on stock exchanges in Australia, France, Hong Kong, Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the United States. By design, these forms of securitised gold investment, all regulated financial products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds (ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the securities are 100% backed by physical gold held mainly in allocated form. These securities have had a major impact on the gold market, representing an annual average of 32% of identifiable investment and 6.5% of total physical demand over the 5 years to 2008. Financial advisors and other investment professionals can provide further details about these products

Structured products

The market for structured products is dominated by institutional investors - or, in the case of forwards, by gold market professionals - because the minimum investment can be high. The following is a general overview of what these products are like and how they work