“Gold and silver are money… everything else is credit” J.P. Morgan
One of the most common stores of value since the early days of human history is a precious yellow metal known as gold. Yet as common it is to talk about investing in gold there is often little knowledge and understanding about how to invest in gold as a conscious form of investment.
Gold first and foremost is a commodity, whose price is determined by supply and demand. Like most of its peers it is hard rock mined. It is found in many countries. It is often held by Central Banks as form of reserve. Post WWII and the Bretton-Woods agreement it used to back the USD until 1973. The precious metal has got many practical uses in aerospace, medicine, dentistry, electronics and jewelry of course. Investors usually purchase gold to hedge against geopolitical risks, inflation, recession or depreciation of a currency. The common investment case is that, you cannot always forecast unwanted events so it makes sense hold assets that do well when general market declines. Occasionally, people also invest in gold as it corresponds to their passion, much like watches or classic cars.
Now that we know a little more about what makes gold a form of investment, lets look at how it can be purchased.
Perhaps the most ancient form of investing in gold consists of physically buying the precious metal. It is a very common to buy physical in South East Asia. You can do that buy physically purchasing jewelry, coins or bullion. Usually bullion trades very closely to the price of gold, as it does not have artistic value. The premium that is usually paid to acquire a bullion is 3-10% above the gold price. Usually, a vault is needed to store the gold that you have bought. Before you decide to buy bullion, it is recommended that you check whether what you are being sold is real gold and whether the price that you are buying is fair. When it comes to buying jewelry, it usually trades at a higher premium of the gold price due to the artistic value that it carries. You can also consider buying old jewelry if you would like to reduce the premium you pay for the artistic part of the gold. Should you decide to store your gold and jewelry at home it is recommend that you do take precaution and do take insurance for your gold.
If you do not want to take the risk of having physical gold somewhere, financial markers are here to help you. There are number of Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) that can give you great exposure to gold without you having to physically store the metal. You can easily purchase share units in these via your broker or bank. Usually, these are liquid forms of investment so at little cost you can enter or exit your investment. A very popular one is GLD , it tracks the price of the bullion. The expense ratio is 0.4 a year, which makes it a really affordable form of investment.
Some banks and gold dealers offer specifically allocated gold accounts to some of their institutional and ultra high net worth clients specific allocated gold accounts. These accounts consist of physical gold deposits. When the customer deposits funds to the account the bank/dealer goes and buys gold on their behalf and stores it on their name. These accounts are specific, as if the banks or the dealer becomes insolvent the creditors do not have interest in this specific gold as the bank or the dealer cannot lend it on first place. Fees vary on the size depending on the size of the transaction and the solvency of the investor. As a general rule bullion banks do not accept deals in quantities below 1000 onces.
Gold mining companies shares largely correlate with the price of gold. There are many( (about 300) gold mining companies that trade on stock exchanges, raging from small caps to huge conglomerate. You can check FTSE Gold Miners Index for example to find out some of the names in the sectors. Their shares can be purchased via a broker of your choice that has got access to the exchange where they trade. It is to note that although gold mining companies share prices largely correlate with the price of gold, their stock performance will vary depending on how well the company performs against its peers. Purchasing gold mining stocks is usually complimentary to having an exposure of other forms of gold investments.
This form of investment in gold is perhaps the most complex. There are a number of options, futures and options on futures reflecting the price of gold that can be purchased. These forms of investment create significant exposure to the direction of gold prices trough the power of leverage. They should not be used by non-financial professionals as their risk management is complex. The value of your investment in these can be wiped out easily by market swings and can also lead to liabilities that exceed your initial investment. There are many invisible costs in these instruments and in my personal opinion these should not be used by retail investors nor individuals striving to achieve financial independence.
There are variety of avenues that can be used to get an exposure to gold. Gold itself is a precious metal that can often find its place in a well rounded portfolio. Although, it is perceived as a form of safe heaven investment, due to the complexity of our world today it needs to be purchased with a pinch of salt as these days things change quicker and not exactly like they used to. Will be a pleasure to hear whether you share the same opinion. Hope that this little article on alternative investment form brings value. Let me know what you think. Like always – Like. Share. Comment. Thank you for reading.
Boris Grozev is a seasoned fintech executive. Entrepreneur by heart Boris has helped number of businesses to create and implement business development and product strategies. His advisory work in Emerging and Frontier markets has promoted culture and technology change, fostered innovation and lead to tangible results. He invests in variety of asset classes. Boris is a fast learner, whose leadership abilities, ambition, stamina, passion to succeed and attitude naturally spread to others helping to achieve common goals.