Gold Buying Guide

Methods of Investing in Gold

Investment in gold can be done directly through ownership, or indirectly through certificates, accounts, shares, futures etc. However, gold's benefit as a secure asset may only be truly realised when directly owned and stored in bullion or coins. Most investors would not recommend storing gold oneself (e.g. in one's home or buried in the garden) but to use a bank or dealer. 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 unfortunate 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.

Gold Bullion

The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Switzerland and Liechtenstein, these can easily be bought or sold over the counter of the major banks. Bars are available in various sizes. 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. Some European banks, particularly in Austria, Liechtenstein, and Switzerland have gold counters where bullion gold bars and coins can be bought and sold tax free, depending on an individual's circumstance. There is no capital gains tax in Switzerland. Alternatively, there are internet bullion exchanges and storage providers, such as BullionVault.

Gold Coins

Buying bullion gold coins is a popular way of holding gold. Typically bullion coins are priced only, or mainly 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, and the Australian Gold Nugget. All these coins are popular because they contain exactly one troy ounce of gold. Other popular one ounce bullion coins include the American Gold Eagle, the Chinese Panda, and the Austrian Philharmonic. Other 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, making it difficult for an inexperienced person to know their value. 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. Many bullion coin dealers can be found around the world by a simple internet search.

Gold 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.

Gold accounts

Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Unlike physical gold, the customer does not own the actual metal, but rather has a claim against the bank for a certain quantity of metal. Digital gold currency accounts, such as e-gold or GoldMoney, work on a similar principle. Gold accounts are backed through unallocated or allocated gold storage.

Gold shares

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 the share prices rise when gold rises. Some of the following questions should be asked before investing in the shares of a gold mining company: Has the company already sold 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 PE ratio and dividend yield does the company have now and in the following years? Are the mines subject to political or economic risks? Instead of personally selecting shares, some investors prefer investing in precious metal mining mutual funds.

Exchange-traded fund

Gold exchange-traded funds (or ETFs) are traded on the major stock exchanges including London, New York and Sydney, under the symbols GBS, GBL, GLD, GOLD or IAU. The first gold ETF, namely Gold Bullion Securities (GBS) by Exchange Traded Gold, was originally represented by 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 gold can be withdrawn, subject to a minimum size of 100,000 GBS. Exchange Traded Gold is two thirds owned by the World Gold Council. In February 2006, Exchange Traded Gold and iShares held 463 tonnes of gold in total.

ETFs represent a quick and easy way for an investor to gain exposure to the gold price, without the need to deal with the hassle of storage of physical bars. Typically a small commission of 0.2% 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.

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 his 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.

Gold Futures

Futures based on gold currently trade on various exchanges around the world. In the US this occurs primarily on COMEX (Commodity Exchange) which is a subsidiary of the New York Mercantile Exchange. Speculation about the future price of gold and other commodities is carried on at COMEX.