Paul Lewis: Going for gold – but is it a good investment?

Paul Lewis 

Is gold an investment? Last week I would have been very tempted to answer “who cares?” as I fondled a kilogram bar a little smaller than an iPhone. The colour, smoothness and sheer weight of such a small object was totally seductive. “Yours for £28,250,” I was told. I was not in the market, just researching the new retail gold shop called Sharps Pixley in London’s St James’s Street. If I had handed over my debit card (and two separate forms of identification) I could have taken it away. Apart from the small matter of my overdraft, I am glad I did not because just two days later I would have found myself £500 poorer as the price of gold fell.

It does that, gold. Up and down like a fiddler’s elbow. So is it an investment? Many think so. The World Gold Council recently reported that demand for gold reached a 30-year high in the first quarter, driven by investors more than doubling their need, while use in jewellery fell by a fifth.

Gold is an odd investment. It does not produce a return. There is no income, no dividend, no interest. The American gold evangelist and author of The New Case for Gold Jim Rickards says that is because it is just money. A bundle of £50 notes produces no return either. Only when you lend it on deposit to a bank or buy shares with it or trust it to a company does your money make money. Gold, he says, is essentially cash, so no return should be expected.

In practice gold has a negative return. Unlike £50 notes you pay a premium when you buy it. That is around 1.5 per cent over the spot gold price. When you sell you will lose at least another 1 per cent. If you buy smaller amounts you will pay much bigger margins. A single gram will cost you £48 at – a 75 per cent mark up on the spot price. Even at kilobar levels, just buying and selling the gold means the spot price must rise more than 2.5 per cent before you break even. Profits on gold bars are subject to capital gains tax though not VAT.

There is also an ongoing cost: storage. At home, such portable wealth will be well above your policy’s single item limit and many insurers will baulk at covering it outside (or even inside) a safe. Specialist insurer Hiscox would not give a price but told me: “We would query why the customer did not want it in safe storage. But if it was kept at home it would need to be in a safe.”

A safe deposit box at the Sharps Pixley shop costs £250 a year with another £75 for enough insurance to cover a kilobar, making the annual cost around 1.3 per cent of its value.

As with any commodity the chance of a capital gain depends when you buy and when you sell. A quick look at will show the massive volatility of gold over the short to medium term. The price peaked recently on 6 May at £28.72 per gram but as I write it is just £26.74. If I had bought then and sold now I would have lost 9.3 per cent of my investment after charges.

But as with any investment the last thing you should do is look day to day at the price and fret about it. In the long term, gold does have one big advantage over £50 notes: it does not feel inflation.

If you put those £50 notes under the bed, the inflation mice will eat away at them year by year. Over the last 20 years, prices have risen 71 per cent on the RPI measure. So each £50 note would be worth £20 less now. Over the same time, the gold price has risen more than threefold. Even allowing for the buy/sell spread and annual costs, gold has certainly beaten inflation over the last 20 years.

A common trope about gold is that an ounce will always buy a good suit – true from Roman times, through the Tudor era and into the 19th and 20th century. Today 1oz (troy) is worth around £835, so we are not talking Savile Row but nor are we in Primark.

Although gold is a good long-term inflation hedge, if you need the cash now the volatility may far outweigh the gain. Gold bought at its peak in September 2011 would today be worth almost 25 per cent less.

The alternative to gold bars is an ETF backed by physical gold. Seven Investment Management has six tonnes of it in an ETF – slightly more than the 5.9 tonne reserves of Lithuania. Charges are 0.25 per cent a year plus any platform or broker fees. Alternatively, you could buy shares in a mining company or, as Warren Buffet has, a bullion dealer. But where is the fun in that?

There is another downside to gold. Investors who care what their money supports might baulk at the conditions today in which it is extracted. The easy gold has gone. Today’s seams are either in remote and inhospitable areas, such as those mined by peasants risking their health and lives in the Peruvian Andes for a pittance. Or they require mass scale industrialised mines like those in Indonesia that pollute the local environment with as much tonnage of waste in a day as all the 161,000 tonnes of gold ever mined. Mercury, arsenic, destroyed rainforests and polluted waterways follow goldmining like evil wraiths. New gold is not an ethical investment.

But for many people, ethics and volatility are outshone by the sheer joy of owning the untarnishable, malleable and beautiful element 79, so they can wake up like Ben Jonson’s Volpone:

“Good morning to the day; and next, my gold:

Open the shrine, that I may see my Saint.”

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programmeYou can follow him on Twitter @paullewismoney