If you want gold investments as part of your diversified investment portfolio, you then need to decide how to invest in gold. There are a number of ways to invest in gold, either through physical investments in gold bullions or gold coins, exchange traded funds, or buying shares in a gold producer.
In this article, we will look at the options of how to invest in gold.
In my article Pros and Cons of Investing in Gold, I discussed the reasons why I believe you should include some gold in your diversified investment portfolio. But investing in gold can take a number of forms, so how to invest in gold?
How to Invest in Gold
1. Gold Bullion
Investing in gold bullion has been the traditional method of investing in gold for hundreds (if not thousands) of years. You can purchase gold bullion directly from a gold trading company or from a local mint (eg. The Perth Mint in Australia). If, for example, you bought gold from the Perth Mint you can also arrange for them to store your gold in their vault, and you have the peace of mind the Perth Mint is owned and guaranteed by the State Government of Western Australia. If you prefer, you can also arrange for the Perth Mint to send your gold directly to you by secure transport.
Gold bullion has the advantage of having a perfect correlation to the market price of gold, and if you hold the bullion yourself there is no third party risk. However, you need to arrange secure transportation, storage and insurance. While gold bullion is very liquid in terms of being able to sell it, you will also need to consider the transaction costs involved, particularly if you are only investing a small amount of money.
2. Gold Coins
There are two types of gold coins to consider – regular bullion coins and collector or numismatic coins. Many people who want to invest in physical gold will do so by purchasing bullion coins. When investing in bullion coins, it doesn’t really matter whether you are buying a bullion coin from a mint in USA, Canada, or Australia. The intrinsic value of the gold will be the same.
The alternative to a bullion coin is a collector coin (or often referred to as a numismatic coin). These coins trade at a substantial premium to the underlying value of the gold in the coin. And the long term investment returns of investing in a collector coin will be a combination of the intrinsic value of the gold in the coin and the numismatic value of the coin in terms of its “collector value”. The collector value can be a function of the age of the coin, it being a limited release, having special marks or having some other unique feature which gives it collector value.
The Perth Mint in Australia sells both bullion and collector coins. Collector coins (in particular its lunar series) have been in very high demand in recent years. There are also collector coins commemorating significant events such as the 400 year anniversary of Dirk Hartog’s landing in Australia.
3. Exchange Traded Funds / Exchange Traded Commodities
When someone asks me how to invest in gold, I always recommend using an exchange traded fund (ETF). ETFs are most commonly known as a form of index fund traded on the stock exchange, designed to track the performance of the relevant index to which it is benchmarked. Common examples of ETFs are ones that track say the ASX200 share index or global sharemarket index by investing directly in the shares that make up the index. However, there are also ETFs or ETCs (Exchange Traded Commodities) that track the gold price by investing directly in gold bullion.
ETFs (or ETCs) are attractive as you do not need to physically own the gold and therefore worry about storage and insurance costs, and you can easily buy and sell the ETF /ETC on the Australian or international sharemarkets. To understand more about ETF’s, you can read Why Australian Expats Should Consider Investing in ETFs.
4. Shares in Gold Producers
Shares in gold producers (such as Newcrest Mining and Newmont Mining) are another option to get exposure to gold price that may provide an income stream. However investing in gold producers will not always correlate with the gold price and introduces new investment and equity risks. Every company has its own unique risk profile that needs to be considered before investing – whether it is the political risks of the countries they operate in, how diversified their mining portfolio is (do they have only one mine, or a multitude of mines spread around the world), how much debt they carry, and their operating costs.
There are also managed funds that specialise in investing in gold stocks around the world. These manage funds mitigate against the risk of performance of individual stocks, however still retain the equity risks of investing in shares. For expats, there may also be additional tax benefits – I discuss this more in my article on investing in the sharemarket for Australian expats.
Many people think that their expensive gold jewellery is a form of investment in gold. Unfortunately for most people the value of the underlying gold in your jewellery will be a fraction of the cost to buy the jewellery in the first place. The other disadvantage of investing in jewellery is the ability to monetise or sell the jewellery when you need money. So, by all means spend money on beautiful jewellery, but don’t buy jewellery expecting it to be a great long term investment.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. We may receive referral commissions from companies mentioned in this article.