Methods of investing in Gold

Modern bullion coins allow investors to own investment grade gold legal tender coins at a small premium to the spot price of gold as quoted on the markets. The value of bullion coins and bars is determined by the price of gold and thus follows the bullion price.

Gold is available in the form of bullion coins, minted in the US, in Canada, South Africa, Austria, Australia, China and other countries. Most bullion coins are minted in 1/10oz, 1/4oz, 1/2oz & 1oz form (and some can be bought in 2oz, 10oz & 1 kilo). However, one ounce gold bullion coins such as Krugerrands, eagles and maples are by far the most popular for private investors as they are internationally recognized.

Gold Certificates

The Perth Mint Certificate Programme is the only government backed precious metal certificate programme in the world. It allows investors to own bullion in unallocated or allocated accounts. The Perth Mint is rated AAA by S&P credit rating agency and is one of the safest and securest ways to own investment grade gold bullion. There are no initial or ongoing shipping, insurance, holding or custodial fees and thus it is one of the most cost effective ways for investors to own bullion.

Most investors opt to own their bullion in unallocated accounts as there are no insurance or holding fees on them and there is the flexibility of being able to transfer to an allocated account simply by paying small fabrication fees should the investor deem it necessary. Bullion can be shipped internationally from an allocated account or from an unallocated account once it has been converted to allocated.

Investing in paper gold

Mineral exploration, mining and the processes used to mine and produce metals are highly technical. Therefore investors in gold production and exploration company stocks should equip themselves with a basic understanding of the industry, in order to identify possible pitfalls and the risk-reward relationships of entering this investment sector. Investors should generally not buy just one or two stocks, but rather a basket of unhedged stocks or a mutual fund.

Derivatives, such as ETFs, gold forwards, futures, options and spread betting are normally short term speculations on the future price of gold and other markets such as commodities, shares or bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather conditions). They are financial instruments which derive their value from or whose price is dependent on the underlying equity, indices, commodity or currency. One does not directly own the underlying asset and one does not have a right to take possession of the underlying tangible asset. Leverage or borrowing substantially may increase investment gains but also increases risk as if the price goes against the purchaser they may be subject to a margin call. There is significant leverage involved with derivatives and they are thus considered risky for non professionals as the potential positive or negative outcome is greatly magnified.

Gold Exchange Traded Funds (ETFs)

The gold ETF being an exchange-traded fund can be bought and sold only on stock exchanges thus saving you the trouble of keeping physical gold. What's more, unlike with jewellery, coins and bars which come with high initial buying and selling charges, the gold ETF costs much lower. The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold, and therefore, the benchmark is the physical gold price.

Gold Stocks

Gold stocks are not gold - rather they are shares in gold mining companies. If the gold price rises, profits of a gold mining company should rise and as a result the share price should rise. There are many factors to take into account and it is not always the case that a share price will rise when the gold price increases. It is important to consider the performance and abilities of the management, auditors and geologists; the conduct of trade unions; a company’s gold hedging position; whether it is producing or exploring; its cost basis; how much reserves it has in the ground and whether it is subject to political, economic, nationalisation or environmental risk.

Individual gold shares would be regarded as more volatile and risky. There is a higher risk-reward scenario and thus gold shares are regarded as more speculative. However, the added risk can be compensated for by the leverage which can result in higher returns. Such higher returns would be expected from mid and large-capitalisation un-hedged senior gold mining companies with proven reserves and strong earnings which have strong balance sheets and growth in resources and production and effective company management.

Precious Metal Unit Trusts or Mutual Funds

Instead of personally selecting individual shares, some investors spread their risk by investing in collective investment vehicles specialising in investing in the shares of gold mining companies. These include mutual funds, open-ended investment companies (OEICs), closed-end funds, unit trusts.

Collective investment vehicles are a good way to invest in the precious metal mining sector as an investor’s risk is greatly reduced; mutual funds are not dependent on the performance and profits of one individual gold mining company and specialists in the field choose a diversified portfolio of gold mining companies.

Also see information on Gold Sovereigns

Copyright © 2021