When you have decided that you want to own some gold, and you think it is trading at an appropriate price, then you still are faced with the choice of whether to own bullion, shares, coins, jewellery, or some other form. Even if you are thinking of holding gold for the long-term, advisers generally recommend that you should not commit more than 10% of your portfolio to it. This will depend on your personal circumstances and risk profile.
Some people will tell you that the only way to hold gold is as the metal, something physical that can be touched and bartered with. This is the most likely reaction from those who think that gold and silver will be their salvation after a dramatic currency collapse, and societal chaos. While this is a valid viewpoint, many are less pessimistic about the future, and thus prepared to work within the existing economic framework. There are alternatives with varying levels of risk, but which still bear some relationship to the price of gold.
For instance, you can look to the stock market for shares in mining companies. As mining companies, particularly the smaller ones, tend to be all or nothing companies looking for “the big one”, this can be a risky but also potentially a very lucrative avenue to explore.
Exchange traded funds (ETFs) are also available on the stock market, and may be as simple as gold ETF’s which aim to track the price of the actual metal. They can also concentrate on shares and provide a way to invest in a diversified mixture of mining stocks.
While the risks and costs are not acceptable to many, gold is a commodity and freely traded on the futures markets, and this is another choice for some looking to make money out of gold.
Where there are markets, it is quite possible that you can trade on the prices with a spread betting account, or by using contracts for difference (CFDs). You will find them available on share prices, index prices, commodity prices, and any other place where a financial market exists.
Another popular investment vehicle is buying coins. These invariably trade at a premium to the metal price, and therefore require some knowledge and research in order to make wise choices.
In a similar vein, you may choose to invest in gold jewellery. In this way, your investment can be admired and appreciated rather than locked away. However, in this form, you should not expect the price to bear much relationship to the value of the weight of the metal.
In view of the security issues surrounding owning your own ingots of precious metal, there is an alternative offered by some companies where they centralize storage of gold and other valuables, and your investment is assigned to a particular gold bars in storage. In effect, you own these bars without any of the headaches of protecting them. Of course, there is an ongoing maintenance charge for security, but for those who feel that only the physical metal is good enough it provides a practical alternative.
Each of these alternatives is discussed in greater detail in the relevant articles. It is up to you to assess the level of risk that you are prepared to take, and compare this to the anticipated returns.
There are a wide variety of gold coins available for the collector, as most nations were part of the Gold Standard which was only ended after World War 1. However, because these are collectors’ items, often they demand a high premium over the value of the metal. This is no problem if you know exactly what you’re buying, and the technicalities in which a coin collector would be interested, which includes working out how fine an example the coin is through a detailed grading process. If you are a novice at numismatics, then you may find yourself at a disadvantage.
Often gold coins were not made of solid gold, otherwise known as 24 carat, as it is a soft metal and can be scratched or damaged easily. Gold was usually mixed with another metal such as copper to form an alloy which is harder wearing. For example, sovereigns are made with 90% gold.
Unless you’re prepared to put in the time to learn these things for yourself, the best course is to visit a reputable coin dealer. You should also mention that you are mainly interested in the value of the metal, and therefore not so concerned about the numismatic details. Some of the best coins for this are British Sovereigns and South African Krugerrands.
The advantage of collecting gold coins is that they are easily recognizable, and their value can be readily obtained. They can be transported easily and used in times of crisis, although silver coins may be more negotiable because of their lower denominations. Curiously, for British investors the Inland Revenue has determined that Capital Gains Tax is not payable on the sale of sovereigns, as they are still theoretically currency of the realm.
Against this, the premium you pay over the weight of gold is often higher than with other forms of investment, and you need to arrange security to prevent theft. In addition, it can be hard to realize the value in an emergency, as a typical coin dealer may not offer even as much as the underlying weight would suggest.
Jewellery is generally worth a lot less than the retail price charged. The premium over the value of the metal can be very high, but proponents will argue that the beauty and craftsmanship of the jewellery make up the difference. Whether you can retrieve your wealth from such objects when you want to is a matter of question. However, if you appreciate fine things and are comfortable making the investment, then as a bonus you can have gold in a form that you may use from day-to-day.
Gold jewellery is usually labelled in “carats”, as a measure of the metal’s purity. As mentioned in the gold coins article, gold is a relatively soft metal so alloying with other metals can improve its wear resistance; however, the metal value is also reduced. 24 carats counts as pure gold, and is over 99% gold. 18 carats is 75% gold, 12 carats is 50% gold, and 9 carats is 37.5% gold. This means that if you have a 9 carat gold ring you should multiply its weight by 0.375 to find how much gold it contains.
Some of the best gold jewellery is sold in the Middle East and India, where the consumers are considered knowledgeable and prefer to keep some of their wealth in this form. This also means that you are likely to pay less of a premium over the value of the metal when buying gold jewellery in these countries.
With jewellery, you can keep your personal wealth in your possession, and can enjoy wearing it. Security is again an issue, but you can be fairly confident that no government is going to confiscate your jewellery, as happened in the United States in the 1930s with gold ingots.
The disadvantages include the mark-up that you may have to pay above the metal price to pay for manufacturing, craftsmanship, and retailing, and the fact that you may need an expert to identify the quality of the jewellery and realize its true value when you want to redeem your funds.
Investing in Mining Companies
There are several ways to invest in mining companies. For instance, if you are offered a gold or natural resources fund you might think this was investing in gold itself, but that may not be the case. Some gold funds are simply a way of investing in mining companies through a managed fund. An example of this would be the Merrill Lynch Gold Unit Trust. When you invest in mining companies through a fund, you should be aware that you will be charged fund management fees. These pay for the fund managers who research and diversify your investment.
If you prefer to invest directly in mining companies, and avoid any management fees, you must be prepared to do your homework and check out the most viable stocks to buy. Mining stocks, particularly for small companies, can be risky as they depend on particular resources and reserves. An additional factor with small mining companies is that they often have wide bid-offer spreads in price due to lack of trading volume, which means you need the stock to run a significant distance before you can even start making a profit.
There are additional issues that are peculiar to mining companies. With any company you should determine if the company is well-run, but with mining companies you may also find that the government of the country where the mines are located confiscates the property with little notice. Also some regions are known for having environmental campaigners actively trying to close down mining operations, or the workers striking for better working conditions.
Some mining companies make a practice of “production hedging”, which means selling future production in advance for an agreed price. Depending how the market goes, this can be a good choice by the company managers, but if the market price of gold rises, then the company is committed to sell production at the lower agreed price. If you do not want to take this chance, then you should look for “unhedged” mining companies.
If you still want to invest directly in a mining company, but avoid many of the issues mentioned above, you could choose to invest in a large company such as BHP Billington. Because of its size, this company is extremely diversified, and has many streams of income including substances other than gold. While the share price movements may not be as dramatic as with smaller companies, it should provide less risk. You can find such stocks on many stock exchanges.
The advantages of investing directly in mining companies include the possibility for geared returns, that is a small increase in gold price has a large effect on revenue; and discovery of new reserves can provide an instant boost in value. Against this, the disadvantages include that geared returns can work against you, with a fall in value wiping out profitability; there are political and business influences outside of the gold market; and your money is not diversified, and can be difficult to regain due to lack of liquidity.
Investing in Gold ETFs
For those who want exposure to the stock market or commodity prices, the exchange traded fund (ETF) provides a means to do so with some advantages over direct investment. ETFs are listed on the stock market and are tradable in the same way as ordinary shares. However, they can cover a wider range of products, for instance allowing you to invest directly in stock market indices.
If you use a financial advisor, you may find that they are not keen on ETFs. Depending how your advisor is remunerated, this may be because ETFs do not pay commission in the same way as other products that may be recommended to you.
There are two types of ETF that are interesting for gold investing, and you can buy shares in an ETF through the stock market, using a discount online broker. The first type of ETF simply tracks the gold price, for example iShares IAU which tracks bullion price with an expense of 0.25% per annum, or Lyxor Gold. The funds either invest in physical gold or invest on the commodities (futures) markets.
The other type of ETF you might consider is one which covers all the mining stocks listed in the stock market, giving you greater diversification than you would probably be able to achieve on your own. In this case, you could look at iShares RING or AMEX Gold Bugs.
The advantages of investing with ETFs are several. For instance, compared to a Gold Unit Trust you will find that the charges are much less. If you’re in the UK, ETFs do not suffer from stamp duty, as paid on regular shares. And your investment can track the price of the metal without any of the personal storage costs and security risks.
Against this, because ETFs are designed to closely track the metal’s price, you are not open to making additional profit, such as you might if investing in mining shares. Also, if gold’s price goes down so does the value of your ETF. Finally, as you do not hold the physical metal, you might have a little more difficulty in retrieving your investment in an emergency.