Methods
of investing in Gold.
Investment in gold can
be done directly through ownership, or indirectly through
certificates, accounts, shares, futures etc. Other than storing gold in one's
own safe deposit box at a bank, gold can also be placed
in allocated (also known as non-fungible), or unallocated
(fungible or pooled) storage with a bank or dealer. In the
case of the latter going bankrupt, the client will be unable
to claim the gold and would become a general creditor, whereas
gold held in allocated storage should be returned to the
client in full. However even with gold held in allocated
storage, many gold bugs would still choose their storage
provider carefully, making sure of high net worth, with
some preferring an offshore bank or storage facility.
Bars
| The
most traditional way of investing in gold is by buying
bullion gold bars. In some countries, like Austria,
Liechtenstein and Switzerland, these can easily be bought
or sold "over the counter" of the major banks.
Alternatively, there are bullion dealers which provide
the same service. Bars are available in various sizes,
for example in Europe these would typically be in 12.5kg
or 1kg bars (1kg = 32.15072 Troy ounces), although many
other weights exist, such as the Tael, the 10oz or 1oz
bar. |
Coins
 |
Buying
gold coins is a popular way of holding gold. Typically
bullion coins are priced according to their weight,
with little or no premium above the gold price. Amongst
the most popular bullion gold coins are the South African
Krugerrand, the Canadian Gold Maple Leaf, the American
Gold Eagle, the American Gold Buffalo, and the Australian
Gold Nugget, all of which contain exactly one troy ounce
of gold each. Other popular one ounce bullion coins
include the Chinese Panda, and the Austrian Philharmonic.
Gold coins which are used as bullion coins include the
British gold sovereign and the Swiss Vreneli, but these
are much lighter than one ounce. Again the large Swiss
and Liechtenstein banks will buy and sell these coins
over the counter. Also available is the gold dinar which
has Islamic significance. |
Certificates
A certificate of ownership can be held by gold investors,
instead of storing the actual gold bullion. Gold certificates
allow investors to buy and sell the security without the
hassles associated with the transfer of actual physical
gold. The Perth Mint Certificate Program (PMCP) is the only
government guaranteed gold certificate program in the world.
Some argue that it is not the same as owning the real thing,
as a certificate is just a piece of paper, especially in
a war, crisis, or credit collapse.
Accounts
Most Swiss banks offer gold accounts where gold can be instantly
bought or sold just like any foreign currency. Digital gold
currency accounts and the BullionVault gold exchange work
on a similar principle. Gold accounts are typically backed
through unallocated or allocated gold storage. Different
accounts impose varying levels of intermediation between
the client and their gold, for example through bailment
or within a trust. Bailment is the legal action of a client
entrusting their physical property to another party for
safekeeping, and paying for the service.
Exchange-traded funds
Main article: Gold exchange-traded fund
Gold exchange-traded funds (or GETFs) are traded like shares
on the major stock exchanges including London, New York
and Sydney. The first gold ETF, Gold Bullion Securities
, was launched in March 2003 on the Australian Stock Exchange,
and originally represented exactly one-tenth of an ounce
of gold. Due to costs, the amount of gold in each certificate
is now slightly less. They are fully backed by gold which
is both deposited and insured. The inventory of gold is
managed by buying and selling gold on the open market.
Gold
ETFs represent an easy way to gain exposure to the gold
price, without the hassle of buying gold directly. Typically
a small commission is charged for trading in gold ETFs and
a small annual storage fee is charged. The annual expenses
of the fund such as storage, insurance, and management fees
are charged by selling a small amount of gold represented
by each certificate, so the amount of gold in each certificate
will gradually decline over time. In some countries, gold
ETFs represent a way to avoid the sales tax or the VAT which
would apply to physical gold coins and bars. Economies of
scale, liquidity, and ease of purchase and sale make ETFs
an increasingly popular method of investing in gold.
Mining companies
These do not represent gold at all, but rather are shares
in gold mining companies. If the gold price rises, the profits
of the gold mining company could be expected to rise and
as a result the share price may rise. However, 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.
Some of the following questions might be relevant before
investing in the shares of a gold mining company: Has the
company hedged the gold price i.e. already sold part of
its future gold production through forward sales? Is the
company already producing gold, or is it mainly exploring
for gold? Does the company make a profit? How many years
of ore reserves are left in the mines before they have to
be closed down? What P/E ratio and dividend yield does the
company have now and in the following years? Are the mines
subject to political or economic risks?
Unlike
gold bullion, which is regarded as a safe haven asset, gold
shares or funds are regarded as high risk and extremely
volatile. This volatility is due to the inherent
leverage in the mining sector. For example, if you own a
share in a gold mine where the costs of production are $300
per ounce and the price of gold is $600, the mine's profit
margin will be $300. A 10% increase in the gold price to
$660 per ounce will push that margin up to $360, which actually
represents a 20% increase in the mine's profitability, and
potentially a 20% increase in the share price. Conversely,
a 10% fall in the gold price to $540 will decrease that
margin to $240, which actually represents a 20% fall in
the mine's profitability, and potentially a 20% decrease
in the share price. The amplification of gold mining profits
during periods of rising prices can cause a gold rush.
In
order to reduce this volatility many gold mining companies
hedge the gold price up to 18 months in advance. This provides
the mining company and investor with less exposure to short
term gold price fluctuations, but reduces potential returns
when the gold price is rising. The AMEX Gold BUGS Index
is comprised of the largest unhedged gold stocks listed
on AMEX (BUGS - Basket of Unhedged Gold Stocks). As of January
2007, the two largest stocks listed in the index were Goldcorp
and Newmont Mining. The AMEX Gold BUGS Index has outperformed
general gold mining stocks, represented by the Philadelphia
Gold and Silver Index, over recent years .
Spread
betting
Firms such as Cantor Index and IG Index, both from the UK,
offer the ability to take a bet on the price of gold through
what is known as a spread bet. Say the price of December
gold was quoted at $475.10 to $476.10 per troy ounce. An
investor who thought the price would go down would "sell"
at $475.10. The minimum bet is $2 per point, (i.e. equivalent
to 200 ounces). If the price of gold finished at $480.10
when the seller closed their bet, the loss would be 500
points multiplied by the bet of $2 making a loss of $1000
in total. No commissions or taxes are levied in the UK on
spread betting.
Derivatives
Derivatives, such as gold forwards, futures and options,
currently trade on various exchanges around the world and
over-the-counter (OTC) directly in the private market. In
the U.S., gold futures are primarily traded on the New York
Commodities Exchange (COMEX), a division of the New York
Mercantile Exchange (NYMEX), and Chicago Board of Trade
(CBOT). In November 2006, the National Commodity and Derivatives
Exchange (NCDEX) in India introduced 100 gram gold futures.
