How to play precious metals

As the financial markets negotiate a battlefield of rising European debt, high inflation and the fear of a double-dip recession, investors have been left in a bit of a no-man's land.

Sectors across the board have taken a hammering, and even the safe-haven allure of the commodities market has faltered.

Despite the bloodbath, analysts and fund managers alike have remained bullish on the sector, arguing that precious metals have performed well during times of economic distress, including the 2008/09 financial crisis. But how you get in on the game is a matter of preference.

Buying the metal itself does hold a certain charm, with gold often proving a store of wealth and insurance against the depreciation of paper currencies.

'Bullion investing preserves wealth. Investors buy precious metals primarily as insurance against failure of other investments. For thousands of years, gold and silver have provided a reliable way to secure wealth,' explained Robin Cornwell, founder of Catalyst Equity Research.

'Over the last 10 years, the three precious metals – gold, silver and platinum – have outperformed equities by almost four to one. Where traditional portfolio thinking went wrong was in the belief that commodity stocks and other alternative investment vehicles were a sufficient proxy for physical precious metals in investment portfolios.'

However, would-be investors are warned that buying the metal itself often runs the risk of being less liquid than other methods.

Investing in precious metal funds, on the other hand, allows exposure to a range of stocks operating within the mining industry rather than just the metal itself. Some funds prefer to home in on the big players, while others prefer to make their money in the junior sector, thus creating more leverage and volatility.

Last month, Britain's biggest gold fund, BlackRock Gold & General, hit the headlines when it suggested it could be paying dividends for the first time in a decade.

Manager Evy Hambro told the Daily Telegraph the £2.7 billion fund could be making the payment as several gold-mining stocks begin returning capital to shareholders.

'Several gold miners have started returning capital to shareholders and, if we are successful in persuading them to continue doing so, it won't be long before the income will be sufficient for us to consider passing it on to investors – just as the fund did in the 1990s,' he told the paper.

The BlackRock Gold & General fund has reported a return of 120 per cent over the five years to 28 October, exceeding the 108 per cent return of its benchmark the FTSE Gold Mines.

But if a fund sounds too daunting, a popular approach has been to invest directly into mining shares, cutting out the middle man. Junior gold explorers have continued to benefit from retail investment, despite the clear disconnect between gold bullion's performance and the lacklustre performance of gold shares in 2011.

In the past three years, gold companies' margins have increased by 219 per cent and gold bullion has appreciated by 114 per cent, but in comparison gold equities have risen by only 50 per cent, illustrating a mismatch between the position of gold companies and share prices.

Hambro said: 'Gold equities have underperformed gold bullion this year, but the fundamentals make for a different story. The equity market as a whole has been depressed throughout 2011, but mining companies are showing healthy earnings and cash generation, which in turn may lead to an increase in dividends for investors.

'Gold shares are currently looking cheap relative to the price of bullion and there are definite buying opportunities to be had. A similar discount opened up in 2008 and investors who spotted this opportunity then, were handsomely rewarded during the following year.'

Gold explorers aside, there are many other ways to play your money in the precious metals market.

Kathleen Brooks, research director at, suggests that contracts for difference (CFDs) might be the way to go. Traditionally difficult for the retail investor to gain access to, the evolution in CFDs means that it is now much easier for them to get exposure to this asset class and they only need to put up a fraction of the total value of the underlying asset class because CFDs can be traded with leverage.

Brooks said: 'It's an interesting time to trade precious metals right now as they are going through a bit of a change. For a long time gold was considered the safe-haven asset of choice and tended to rally during periods of stress in the market. But the opposite has been true during the past year with the escalation of the eurozone debt crisis. Gold and silver have been victims of their own success, and have been sold off as investors rush to book profits as investor confidence has collapsed.

'The choppy market conditions have left gold and silver trading within a range, which has allowed investors to continue putting on the same trade, but at better levels. So although precious metals may have seen their traditional role change in recent months, it remains an incredibly interesting asset class for retail investors.'

And last but not least, there's the option of spread betting for those with a slightly riskier appetite. Spread betting has been attacked by critics for being too risky for the ordinary investor and there's no doubt that it's a high-octane activity.

However, it is also a relatively easy way for investors to back their hunches with hard cash as it provides the opportunity to speculate on whether the price of an asset will increase or decrease, the beauty being that you don't have to actually purchase the underlying asset.

David Jones, chief market strategist at IG Group, said: 'Spread betting doesn't have to be risky. It is important to understand how margin works but with tools such as stop losses available and the ability to tailor the position to suit your risk profile, it doesn't need to entail enormous levels of risk.

'Clearly, in recent years, the sensible side of the market to be on, particularly with gold, has been long, but one of the beauties of spread betting is you can trade markets in both directions so if you thought that silver or gold were overpriced, you could try and profit from a slide in price.'

This was written for our sister website, Interactive Investor

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment