Strike gold to achieve a glittering investment

For centuries, gold has been traded and has far surpassed its innocuous role as a precious metal. Investors today wish to hoard it, usually because its price tends to act in a contrary way to the stock market. It is therefore ideal for a balanced portfolio with some private banks recommending a holding up to 10 per cent of assets.

Its price, measured in US dollars per troy ounce, is certainly

volatile. In the last five years, it has oscillated between $411.10 in early February 2005 to $1,256 in mid June last month, according to the London Bullion Market Association.

As prices continue to hover around its all-time high, it is intriguing that demand has actually fallen for gold use this year, according to the World Gold Council.

"The price is now determined by investors who need to be careful as valuations could move against them rapidly were economic confidence to improve," warned Stephen Barber, economics advisor to Selftrade.

Ali Crossley, chief operating officer at Saga Personal Finance, said: "We would expect gold rates to match inflation. However, gains could be limited by the strength of the dollar" but added, "gold investing is not for the faint-hearted."

In inflation-adjusted terms, gold actually achieved twice its current price in 1980. So any suggestion that it cannot continue to rise is unlikely to prove correct.

Whilst most demand has been institutional, pension funds have yet to buy gold (instead of their traditional safe haven of gilts) and this could further boost prices.

Gold is the classic 'alternative' investment. Few savings have more than tripled in value in the last five or so years but savers are often confused as to the different ways to invest in gold.

Holding gold physically is the most obvious way to invest.

Gold bars and coins are exempt from VAT. Bars can be purchased and held by an investor or arrange for a trading company to buy and store a quantity on their behalf.

The Perth Mint, backed by the Australian government, will hold gold on your behalf and issue certificates of ownership. However, the fees are steep: 3.9 per cent below A$100,000 (approx 57,500) or two per cent above plus one per cent annual storage.

Gold coins form an alternative to gold bars. The world's largest gold coin was sold for 2.7m last month in Vienna. The maple leaf coin was minted in Canada in 2007 and measures 53cm (21 in) in diameter and weighs 100kg (220lb).

It was owned by the Austrian investment firm AvW, which entered bankruptcy proceedings in May, and purchased by the Spanish group Oro Direct.

British gold sovereigns, made by the London Mint, are probably the most popular gold coin. Whilst technically worth one pound in legal tender, they are commonly held for their gold value and the cost varies depending on the age. In addition to the attraction of VAT exemption, British gold sovereigns are exempt from capital gains tax.

Krugerrands are also a popular coin and have been produced since the 1960s by the South African Mint Company. They are usually purchased through gold or coin dealers but need to be physically stored by savers.

Exchange traded funds (known as ETF) track the gold price and typically trade at one-tenth of the value of gold bullion.

Gold ETFs form an exciting and alternative way to invest and are traded like shares on a stock exchange. They are normally fully backed by physical gold deposits.

This is the way for investors to obtain a simple low cost access to gold price movements with savers receiving the spot price less charges. It is betting on a commodity, just as savers can with non-metals like oil.

Gold is increasingly difficult to mine and with supply unlikely to satisfy demand, higher prices are again likely.

Saga offers a range of ETFs including Lyxor Gold Bullion and charges only 9.75 per deal online or 12.50 by telephone, in both cases through a nominee account.

Certain ETF companies additionally offer leveraged access to the gold price. For example, ETFS Leveraged Gold changes the movement in the DJ-UBS Gold Index daily by 200 per cent.

For tax efficiency, an ETF can be held in either an ISA or a self-invested personal pension (SIPP).

Jonathan Baker, investment manager at Leeds based Charles Stanley stockbrokers, says they like gold ETFs "because of their low costs, ease of access and that every share is backed up by gold held in a vault."

Simon Kaye at Rensburg Sheppards Investment Management, also in Leeds, tips the Gold Bullion Securities note which is quoted on the stock exchange just like an equity.

Spread betting on the price of gold is a third route. The twin advantages are that there are no charges and no tax on the profits.

However, the exposure if you make an incorrect judgment on the direction of gold pricing can be dramatic.

IG Index, one of the largest spread betting firms, offers both daily (with a spread of 0.25 points either side of the gold price) and futures contracts. The minimum bet is 1 per point (tel 0800 1953400).

Mining shares form another way. Several companies derive their revenues from the exploration, mining or production of gold.

Randgold Resources, for instance, is a FTSE 100 listed firm which focuses on gold mining and exploration across large parts of Africa. It has a market capitalisation around 3.7bn.

At the other end of the spectrum is Oxus Gold, which has operations primarily in Uzbekistan. It has been listed on the Alternative Investment Market (AIM) for nine years but still has a market capitalisation of just 48m. It is very volatile.

The first mining drilling contractor to be listed here, Capital Drilling, raised 20.8m in June, valuing it at 82.8m. It was founded six years ago in the Lake Victoria goldfields of Tanzania.

Centamin Egypt (a FTSE 250 share) and Medusa Mining (on AIM) are tipped by The Share Centre.

Funds which invest in companies whose business is exploration, mining or production of gold provide an alternative way. BlackRock Gold & General is the best known with 80 per cent invested in gold shares. Another is Investec Global Gold.

Martin Payne, of Leeds stockbrokers Brewin Dolphin, said: "Other funds which can be used to gain exposure to gold are general natural resources collectives which typically have a weighting in shares of gold trading companies."

He cites JP Morgan Natural Resources fund as an example with

approximately 32 per cent in gold and other precious metals.