Don’t get ripped off in the new gold rush

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The metal grows ever more popular and the market value is still high, but there are various ways to invest

Consumers rushing to sell their gold as the price of bullion hovers around $1,000 have been warned they are being ripped off to the tune of £500m a year.

Unscrupulous dealers are offering well below market value for scrap gold, including jewellery, said Gold-Traders.

One such company, the US based Cash4Gold, which recently started offering “cold, hard cash” for gold, admits it pays as little as 20% of the gold’s market value. Gold-Traders claims to pay a minimum 90%.

“Buying scrap gold is big business and big news right now,” said chief executive Phil Williams. He said 35 tonnes of gold bullion will be recycled from scrap gold in the UK this year, which at current prices would be worth about £700m.

“Based on their current practices, the cheating scrap gold buyers would only pay out around £270m,” he said. “Over the course of a year, it means British people selling their gold risk being swindled out of almost £500m.”

Evy Hambro, co-manager of the Blackrock Gold and General fund, believes gold prices will continue to rise for the next three to five years. He said: “The production of gold peaked in 2001 and has been declining since. There is also increased pressure from countries like China and Russia where central banks are buying up more gold, mainly to move away from holding large dollar reserves.”

Others like Bryan Collings, who manages the Ignis International Hexam Global Emerging Markets fund, suggests an increase of 25% in the next 18 months.

Though selling your scrap gold may seem attractive with the price having breached the $1,000 an ounce mark earlier this month (although it fell to $992 on Friday), there are plenty of other ways to benefit from its increasing value. Here we suggest some options.

1 TRADE IN YOUR SCRAP GOLD

Gold-Traders, which buys gold and jewellery from the public, said it had seen a 40% increase in people sending it gold in the past six months.

It offers a minimum of 90% of the value of the gold sent, compared with the 40%-50% that your average high street jeweller would offer. You have to put your gold in the post by Royal Mail using a recorded and insured delivery service.

The minimum cost is £4.95 for 100g with £500 insurance. The maximum cover is for £2,500 and costs £7.40 for 100g.

2 EXCHANGE TRADED FUNDS

These are like tracker funds in that they passively follow an index, but are in fact shares that are traded on the stock exchange.

There are several ETFs that allow you to benefit from gold, although the main difference is between those that buy physical gold and those that buy gold contracts.

Ben Yearsley of Hargreaves Lansdown, the adviser, recommends ETFS Physical Gold, which buys gold and holds it in an HSBC vault. Yearsley, who has this as part of his portfolio,said: “Its performance is directly correlated with the price of gold, so is the purest way of benefiting from prices increasing.”

There is a 0.39% annual charge and no minimum investment. You can also wrap this into an Isa to benefit from tax-free gains.

Another ETF option is Gold Bullion Securities, which also holds physical gold, although you cannot hold it in your Isa. You can, however, take physical possession of the gold. The annual charge is slightly higher at 0.4%.

ETFs that have an indirect exposure to the precious metal, such as ETFS Gold, where an investment bank buys and sells through contracts means it carries a counterparty risk.

If the investment bank buying the gold fails, then you will not have the physical gold to back it up.

This type of ETF tracks the price of gold much faster as contracts, rather than physical gold, are traded.

ETFS Gold has an annual charge of 0.49%.

3 GOLD IN YOUR SIPP

Physical Gold, which was launched in Britain at the end of last year, allows you to invest physical gold into self-invested personal pensions (Sipps).

Pension rules changed in April 2006, allowing investors a wider range of assets in their Sipps. Daniel Fisher of Physical Gold said: “Most people took advantage of the rule changes by investing in commercial property. However, gold is now becoming an increasingly popular alternative.”

Physical Gold buys gold bars — the only type of gold you can place in your Sipp — on behalf of clients. There is no commission but you will be charged a margin of between 7% and 10% on the wholesale price.

The advantage of placing gold in your Sipp is that you benefit from 20% tax relief when you buy it and then a further 20% when you file your tax returns as a higher-rate taxpayer — in effect a 40% discount.

4 GOLD COINS

There has been a surge of interest in gold coins that also benefit from tax breaks. The Royal Mint limits production of gold sovereigns to 75,000 each year. This year, however, the total allocation had been pre-sold by March.

Investments in sovereigns do not incur Vat or capital gains tax as they are classed as legal tender, which is why this does not apply to South African Kruggerrands. Physical Gold charges £180 a sovereign.

You can also opt for Britannia coins, which are equivalent to one ounce, or four sovereigns. You can buy one of these for £750. The gold spot price is £620. The gold is posted to you by recorded and insured delivery, costing £15.

5 GOLD MINERS

Hambro of Blackrock prefers gold miners to the actual metal. He said: “In the past couple of years, gold mining stocks have underperformed physical gold. It suggests there is more growth potential in mining stocks than the commodity itself.”

Since January 2007, the price of gold is up 89% in sterling terms. However, the FTSE Gold Mines index, which tracks the performance of gold miners, is up only 43.7%.

One way of buying gold miners is through a fund such as the Blackrock Gold and General fund. This holds about 79.2% in gold mining stocks and 7.5% in platinum miners. The fund has returned 31% this year, compared with its benchmark, the FTSE Gold Mines index, which is up only 12%.

Mick Gilligan of Killik, a broker, also suggests the much smaller Junior Mining fund, which launched at the start of the month. It holds about 70% in small cap gold miners. “It’s a slightly riskier option but well worth considering,” he said.

The fund, which is available through the Hargreaves Lansdown Vantage platform, has remained largely flat since launch.

You could also buy into individual gold miners. Killik advisers suggest Centamin Egypt, (up 133% this year); Allied Gold (up 39%) and Medusa (up 467%).

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Well with the strikes looming I'm buying a pair of pliers for my gold teeth and we need to start ripping up the streets of London