The Best Gold ETCs for UK Investors (2024)

Gold has a long and storied history, and whilst it is prone to the whims of trend and fashion, it is still seen by many as the ultimate store of value. If you’re keen to further diversify your portfolio and branch out into precious metals, a gold ETC is an obvious choice.

Why invest in gold?

Even gold fanatics can’t agree on what it is that makes gold an attractive investment. The arguments for gold range from the mundane – diversification, inflation hedge – all the way to the tin-foil-hat doom merchants stacking bullion under their beds for the end of the world.

Let’s look at three of the more sensible arguments:

Diversification

This is both the least controversial and the most important reason to invest in gold. Having all your eggs in one basket leaves you more exposed to the ups and downs of market turmoil, even when that basket is an equity ETF holding thousands of stocks. Diversifying your investments – spreading your money across a variety of different assets – is the simplest way of smoothing out your returns and protecting you from sharp market downturns.

The best diversified portfolios hold investments that don’t move in the same way as each other. Historically, gold has tended toward a negative correlation with stock markets, meaning that when equities get punished, gold tends to do well – and vice versa.

A safe-haven asset

Related to the diversification argument above, a safe-haven asset is an investment everyone rushes towards when the stock market wobbles. Gold, along with bonds, is a perennial choice for protection during market tumbles.

If you are wondering why there is a negative correlation between stocks and gold, this is it: when the stock market crashes, investors sell their shares and buy gold, driving the price up; when the stock market is doing well, investors sell their gold to chase better returns in stocks.

A hedge against inflation?

This one is more controversial. The general wisdom is that when inflation takes off, a gold investment is a great way to protect the value of your money. As we know, general wisdom is always worth questioning.

The truth is that it is an imperfect solution, and the benefits of gold as an inflation hedge are realised over the very long term – decades rather than a single economic cycle. When inflation has rears its head, it’s usually too late to rush into gold. The horse has bolted. The gain is “priced in”, as the finance jargonistas will tell you.

Flipping in and out of investments based on where you think the economy is headed is a great way to destroy your long-term returns. If you want to take advantage of the protection gold may offer, expect to sit on your investment and realise the benefits over many years. Otherwise it’s just gambling.

Gold ETC vs Physical Gold

For everyone anticipating imminent societal breakdown, whether by way of shifting poles or marauding hordes of zombies, having a healthy stack of gold bullion under your bed is the smart thing to do. How else will you pay for food and ammunition in a world where the global economic system has ceased to function?

For everyone else, grown-up considerations such as practicality and cost are of utmost importance.

Buying gold bullion

Buying and storing physical gold can be expensive. The official coins from the Royal Mint are exempt from capital gains tax, so that’s not necessarily a worry. However, you will pay a premium over the actual price of gold, and sell it at a price well under it. This is known as the spread.

At time of writing, an ounce of physical gold from the Royal Mint will cost you an extra £130 or 8.5%, which comes down to about £100 extra per ounce if you splash out on 100 ounces or more. The spread on a gold ETC, on the other hand, is typically less than 0.1%.

Gold storage costs

If you are storing it yourself you’ll need to factor in the cost of insurance, but if you want to pay for storage it’s going to cost you a percentage of the value every year. The Vault at the Royal Mint charges up to 2% per year plus VAT, which will have a serious impact on your future wealth.

Think of it like an investment fee. Would you consider paying someone 2% to manage your investment portfolio? Over 30 years, a 2% fee will reduce your return by almost 50%. Since physical gold ETFs charge only a fraction of that, the choice for long term investors becomes quite simple.

Physical Gold ETCs

ETF vs ETC: What’s the difference?

An ETC (Exchange Traded Commodity) and an ETF (Exchange Traded Fund) are both types of investment vehicles that trade on stock exchanges, but they have distinct characteristics and purposes.

• An ETF is designed to track the performance of a specific index, which can be composed of stocks, bonds, or other assets. It offers diversification as it typically holds a basket of different securities that mirror the composition of the index it tracks.
• On the other hand, an ETC focuses primarily on single commodities, either in their physical form or through futures contracts. Unlike ETFs, which are structured as funds, ETCs are often structured as debt, with the issuer promising to match the returns of the underlying commodity.
  • This distinction means that ETCs might carry a credit risk that ETFs don’t. In essence, while ETFs offer broad exposure to markets or sectors, ETCs provide a more targeted investment in specific commodities.

Physical Gold ETCs derive their value based on a stack of actual gold bullion kept safe and sound in a vault, usually in London or New York or Switzerland. They don’t track a benchmark with a basket of investments like an Exchange Traded Fund, but rather follow the price of a single commodity.

Because these physical gold ETCs are backed up by the real thing, they don’t rely on derivatives and other financial witchcraft to merely imitate the price of gold. This is also an added level of security since if the issuer winds up, there is a physical store of value protecting your investment.

As mentioned above, they are also cheap relative to the cost of buying and storing your own bullion, and have the added benefit of being just like a share – you can buy and sell them quickly and easily on the stock market.

iShares Physical Gold ETC vs Invesco Physical Gold ETC

These are the two big players for UK investors. They are identical in most respects. Both are physically backed ETCs that track the gold spot price (not gold futures). They charge the same fee and their performance is in lock step. Since 2000 the Invesco has outperformed the iShares by a meagre 0.08% per year.

SGLN vs SGLD

So it probably doesn’t matter which option you go for. The decision may come down to what your platform offers. One platform I looked at only offers the GBP hedged version of the Invesco ETC, which may push those who do not want to speculate on currency fluctuation towards the iShares offering (see below for more on currency hedging).

Is there a Vanguard Gold ETC?

Nope, so if you use Vanguard’s platform and are looking to invest directly in gold, you are plum out of luck. If you are yet to choose an ETF investment platform, this may well be a consideration. Investing through Vanguard’s platform limits you to just their own products.

Cheaper platforms, with a broader range of options, may be a better option if you are looking to diversify away from equities and bonds. Interestingly, the cheapest platform to invest in Vanguard’s range is not Vanguard itself, although their fees are very reasonable.

Should you currency hedge your gold ETC investment?

Hedging an investment to your local currency is a way of protecting against currency fluctuations. If you are invested in a gold ETC priced in USD, a strong dollar will negatively impact your returns, and vice versa. There are GBP and EUR hedged versions of the above ETCs, should hedging be something you want to do.

Is it a good idea though? Do you know what the relationship between the pound and the dollar will be in the future? Of course not.

Hedging this type of investment is a bit like speculating on the currency markets. If you believe that that a strong USD will impact your returns, then hedging is a way of protecting yourself from that dynamic. But be honest with yourself, it’s a gamble. If you’re a long term investor then judging which currency will be strongest over the next few decades is an absurd proposition.

Conclusion

Whatever your thoughts on the relative merits of gold as an investment, if it does nothing but further diversify your portfolio then it may have real value. Gold is not a perfect protection against stock market crashes, nor is it a flawless inflation hedge, but then again there are no perfect solutions in investing.

The clear benefit of investing in gold through physical gold ETCs is their cost-effectiveness. It’s undoubtedly more exciting to pile gold bars in a vault or under your bed, but unless you are deeply pessimistic about the global financial system there really is no need to go to the expense.

If you are looking to diversify your portfolio beyond your core stock/bond holding, gold ETCs are certainly worth considering.