What it actually is
Gold is a soft, dense, chemically inert metal with modest industrial demand and enormous monetary demand. Roughly two-thirds of annual supply goes into jewellery and bars; the rest into electronics, dentistry and central bank vaults. Almost every gram ever mined still exists, which is unusual — an estimated 210,000 tonnes sits above ground, and annual mine production adds barely 1.5% to that stock.
That is the key to how gold behaves. For most commodities, price is set by this year's supply meeting this year's demand. For gold, price is set by whether the owners of a 210,000-tonne hoard feel like holding it. It trades on sentiment about currencies, real interest rates and geopolitics rather than on mine output.
Where the price comes from
The global reference is the London OTC market, where bullion banks trade unallocated positions in 400-ounce Good Delivery bars held in London vaults. Twice a day, at 10:30 and 15:00, an electronic auction run through ICE Benchmark Administration sets the LBMA Gold Price — the number contracts, ETFs and central banks settle against.
Alongside it, COMEX futures in New York provide leveraged exposure and often lead the price during US hours. The two markets arbitrage against each other constantly.
Forms you can own
- Physical — coins and small bars from a dealer. UK gold coins that are legal tender, such as Britannias and Sovereigns, are exempt from capital gains tax for UK residents, which is a genuine structural advantage over bars.
- ETCs — exchange-traded commodities backed by allocated metal, bought like a share. The cheapest, most liquid way to hold a large amount.
- Unallocated accounts — a claim on a bank's pooled metal. You are an unsecured creditor of that bank, which rather defeats the point.
- Miners — leveraged and correlated, but they are equities with management, debt and jurisdictions, not gold.
Why it is not an investment in the ordinary sense
Gold produces nothing. It pays no dividend, no rent, no coupon; storage and insurance make its natural yield slightly negative. Its entire return must come from the price someone else pays later. Over very long periods it has roughly preserved purchasing power — which is the case both for and against it, depending on what you wanted.
How you would actually trade it
For physical metal, use an LBMA-associated dealer and expect a premium over spot of a few per cent on bars, more on small coins, plus a spread when you sell back. Insist on a buy-back quote before you buy so you can see the round-trip cost.
For exposure rather than possession, a physically backed gold ETC inside an ISA costs a fraction of a per cent a year and can be sold in seconds. Note that an ETC is a debt security, not a fund — check that it is backed by allocated bars with a named custodian.
Storage matters more than people expect. Home storage voids many household insurance policies above modest limits; vaulted storage costs roughly 0.1–0.5% a year.
What goes wrong
- Long dead periods. Gold peaked in January 1980 and did not regain that level in real terms for 28 years. It can do nothing, expensively, for decades.
- No income, negative carry. You pay to hold it, every year, forever.
- Retail spreads. Small coins can carry a 5–10% round trip. That is a large hole to climb out of.
- Counterparty confusion. Unallocated accounts and some synthetic products are promises, not metal. In a crisis — the exact scenario people buy gold for — that distinction is the only one that matters.
- Fakes. Tungsten-cored bars exist. Buy from dealers who will buy it back.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.