Gold can be a very useful way to diversify your portfolio. It’s
relatively rare, and its value often doesn’t move in line with other
assets such as equities or property.
At MoneyWeek, we’ve said that gold provides insurance for your
portfolio. Most people should probably allocate around 5%-15% of their
portfolios to gold or gold-related investments.
So the follow-up question is: how should you invest in gold?
Investing in physical gold
Physical gold is worth holding because it’s a universal finite currency, held by most central banks.
In the same way that the family home should not be regarded as an
investment, gold bullion is not an investment per se, rather a form of
‘saving for a rainy day’ or of financial insurance. You shouldn’t trade
your gold. You wouldn’t trade an insurance policy, so don’t trade your
gold.
Gold is a good way to ensure wealth preservation and for passing
wealth from one generation to the next. Once you’ve got some gold
bullion in your portfolio, then other investments such as mining shares,
investment funds and other more speculative gold investments can be
considered.
Modern bullion coins and bars
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 almost solely by the price of gold, and thus follows the bullion price.
Gold, silver, and platinum are all available in the form of bullion
coins, minted in the UK, 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 or Britannias are by far the most popular for both small
investors and high-net-worth individuals who see the advantages of
owning legal tender bullion coins, either in their possession or in
depositories, and recognise the advantages of the divisibility afforded
by them.
Buying investment-grade gold bullion for investment is stamp-duty
free and tax free (VAT exempt) in the UK and EU due to the EU Gold
Directive of 2000.
For free and impartial information on where and how to buy gold bullion coins and bars, see MoneyWeek’s comparison of leading gold brokers.
Semi-numismatic and numismatic gold coins
Numismatic or older and rare coins are bought not solely for their
precious metal content, but also for their rarity and their historical,
aesthetic appeal. They are leveraged to the gold price, which means that
the price of these coins will generally increase faster than the gold
price in a bull market and will decrease by more when gold is in a bear
market.
The British gold sovereign (originally the one pound coin) is the
most widely traded and owned semi-numismatic gold coin in the world.
It’s worth noting that British gold sovereigns are also exempt from
capital gains tax (CGT).
For free and impartial information on where and how to buy gold bullion coins and bars, see MoneyWeek’s comparison of leading gold brokers.
Gold certificates
The Perth Mint Certificate Programme is the only government backed
precious metal certificate programme in the world. It allows you to own
investment grade gold which is stored in vaults in the Perth Mint of
Western Australia.
The gold is stored in a government mint and insured by Lloyds of London.
That said, this is ‘unallocated gold’. That means that you don’t own
actual gold, you own a promise from the Perth Mint to give you back your
gold if you want it. (With ‘allocated gold’, you are the legal owner
of the gold, and the account provider is the custodian.)
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 over the long term.
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.
Allocated accounts
Allocated gold accounts allow an investor to buy gold coins and bars
from a bullion brokerage which will transfer or ship the bullion to an
individual’s account in a depository or bank. Allocated accounts involve
ownership of specific gold and the owner has title to the individual
coins or bars. Due diligence should be done on allocated gold account
providers and the history, security, credit rating and net worth of the
provider is of vital importance.
Two respected providers are Bullion Vault and Gold Money. They offer
allocated accounts where gold can be instantly bought or sold. Every
gold bar is audited and accounted for and it is considered a safe way to
own bullion.
Digital gold currency or e-gold
Digital gold currency (DGC) – ‘goldgrammes’ or ‘e-gold’ – are also
increasingly popular. There are no specific financial regulations
governing DGC providers, so they operate under self-regulation. DGC
providers are not banks and therefore do not need to comply with bank
regulations, and there are concerns that there are unscrupulous
operators operating in this emerging sector.
Digital gold is primarily used by clients to buy gold for saving or as an investment and/or as electronic money amongst users.
Investing in paper gold
Another approach is to invest in companies that either mine gold or
are exploring for new gold deposits. Some companies are both miners and
explorers.
If you’re going to invest in mining companies, it’s a good idea to
diversify your investment across several companies. Investing in a miner
is riskier than investing in gold itself.
You can also invest in gold via financial products such as options, futures and spread betting.
With all of these products, you’re betting on the future movements in
the gold price. You don’t own any gold, and you don’t have the right to
take possession of any gold.
All of these products give you the opportunity to ‘leverage’ your
investment. In other words, you can borrow to boost the size of your
bet. That will boost your profits if the gold price goes in the right
direction, but it can also increase your losses if things go wrong. You
could end up losing all of your original investment, or potentially a
sum greater than your original investment.
Gold exchange-traded funds (ETFs)
These are funds that track the price of gold.
Two of the more popular are the Streettracks Gold Shares (NYSE:GLD) and in London, ETF Securities’ Gold Bullion Securities (LSE:GBS). They can be bought through stockbrokers.
There is normally an annual administration fee of between 0.4% and 0.5%.
• This article was written by Mark O’Byrne, Head of Research at GoldCore.
0 comments:
Post a Comment