Buying gold can be both difficult and daunting for many first time investors. There are numerous providers all claiming to be the ‘best’ offering a range of products at a range of prices available to purchase in a variety of different ways. What should be a simple purchase has been made uncharacteristically difficult.
The following guide will help you make sensible, informed decisions and teach you how to buy gold confidently and safely:
1. Understand your motivation to buy gold
Your motivation for buying gold is fundamental to deciding in which form you should buy it. Are you a speculator, investor or saver? Do you wish to take a short term speculative position in gold? Are you investing for the short, medium or long term? Or are you diversifying, saving or using gold as a form of financial insurance?
Consider the Investment Pyramid:
FOUNDATION – Gold Bullion.
SECURITY – Cash Deposits, Money-Market Funds, Annuties, T-Bills
INCOME – Blue Chip Stocks, Commerical & Residential Property, Corporate & Government Bonds
GROWTH – Small Cap Stocks, Large Cap Stocks, Equity Mutual Funds,
SPECULATION – Options, Futures, Spread-Betting
What’s clear from the Investment Pyramid is that gold is the foundation of all investments and this is more clear than ever given the current climate. Be certain you understand the reasons that make gold such a good investment before you buy gold.
2. Familiarise yourself with the Gold Investment Pyramid
Our research indicates that the main barrier to people investing in gold is that they cannot differentiate between the available options. By familiarising yourself with the Gold Investment Pyramid it is possible to have a snap shot view of all available options and the type of investment motivation that they meet.
The first time investor should start at the bottom of the pyramid where there is less risk. The more experienced investor is likely to have a diversified portfolio across each stage of the pyramid.
INSURANCE – Gold Bullion in your possession.
INVESTMENT/SAVINGS – Unallocated Gold Accounts, Allocated Gold Accounts, Gold Certificates.
INVESTMENT – Junior Gold Mines, Producing Gold Mines, Unhedged Gold Mines, Gold ETF’s.
SPECULATION – Gold Futures/Options, Non Producing Junior Explorations, Spread Betting.
3. Decide which form of gold you would like to buy
Here follows a basic description of all the investment vehicles available to facilitate your gold buying and enable you to include gold in your portfolio:
BULLION COINS & BARS
Modern bullion coins and bars allow investors to own investment grade gold (between 0.90 and 0.9999 fineness) 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. Larger bars are not generally taken delivery of due to the cost of insured delivery and the security implications of having very large amounts of bullion outside the chain of integrity (say in a private residence). A London Good Delivery Bar weighs 400 troy ounces and is prohibitive in terms of cost and thus big bars are normally the preserve of large companies, institutions and central banks.
Gold, silver, and platinum are all available in the form of bullion coins and bars, minted in the UK, the US, in Canada, South Africa, Austria, Australia, China and other countries. Most gold bullion bars are minted in 1gram, 5grams, 10grams, 20grams, 1ounce (31.1035grams), 100grams, 250grams, 500grams, 1kilo & 100ounce bars. However, one ounce gold bullion bars are by far the most popular for both small investors and high net worth individuals who see the advantages of owning bullion bars, 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.
Supplier: Your Gold Fund
SEMI-NUMISMATIC & 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 surpass and increase faster than the gold price in a bull market (due to their historical and aesthetic value and to their rarity) 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. Important is the fact that, unlike the other forms of gold investment, British gold sovereigns are not subject to capital gains tax (CGT). Thus all post-1837 British gold sovereigns – because they are legal tender and have a legal tender face value – are capital gains tax free, which is obviously a significant benefit to investors vis-à-vis other gold investments.
Suppliers: Stirling Jewellers (Dudley) Limited for investments over €10,000 and Rags Metals Limited for investments over €5,000. Alternatively you should consider local bullion dealers but be prepared to pay high premiums.
A gold certificate in general is a certificate of ownership that gold owners hold instead of storing the actual gold. It has both a historic meaning as a US paper currency (1882–1933) and a current meaning as a way to invest in gold. Banks may issue gold certificates for gold which is allocated (non-fungible) or unallocated (fungible or pooled). Unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuing bank’s gold on deposit. Allocated gold certificates should be correlated with specific numbered bars, although it is difficult to determine whether a bank is improperly allocating a single bar to more than one party.
Suppliers: Perth Mint Certificates are guaranteed by the Australian government.
ALLOCATED GOLD ACCOUNTS
An allocated account is effectively like keeping gold in a safety deposit box and is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository. A monthly or annual storage and insurance fee is charged to secure the gold bullion. 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.
Suppliers: Your Gold Fund supply gold in this way through their Gold Buyers Account & Gold Savers Account. They also offer the added option of exchanging the allocated gold for individual bars that are made available for home delivery.
UNALLOCATED GOLD ACCOUNTS
With an unallocated account investors do not have specific gold bullion allotted to them. Traditionally, one advantage of unallocated accounts has been the absence of storage or insurance charges, because the bank reserves the right to lease the gold out. Unallocated accounts differ from allocated accounts in the sense that gold bullion is not guaranteed in its physical sense so eventhough you save on storage and insurance you are subject to counter-perty risk.
GOLD BULLION IN SIPP’S
UK citizens can invest in gold bullion through their Self-Invested Personal Pensions (Sipps). US citizens do so in their Individual Retirement Accounts (IRA’s). Sipps are new types of personal pension scheme that hold investments until you retire and start to draw a pension income. They are designed for people who want to manage their own fund by investing in asset classes of their choice. Investments made in gold bullion are topped up in the form of tax relief, meaning individuals can claim up to 40% back depending on the income tax band they fall in to.
Gold bullion is allowed in a Sipp providing it is investment grade gold which is gold of a purity not less than 995 thousandths or 99.5% pure and which is in the form of a bar, or of a wafer, of a weight accepted by the bullion markets. The bullion must be immoveable and stored with a secure third party. It cannot be taken possession of and used as a “pride in possession” article.
Suppliers: ETFs, allocated gold accounts and gold certificates but the provider needs to be licensed. Your Gold Fund will offer gold through a SIPP from August 2012.
GOLD EXCHANGE TRADED FUNDS (GOLD ETFS)
The recently launched ETFs are derivatives that track the price of gold and silver. There is an annual administration fee of between 0.4% and 0.5% per annum. Thus every year the amount of gold or silver backing an ETF share shrinks by that amount. This makes them unattractive as a medium or long term way to invest in gold. They are akin to derivative contracts that track the gold price and one does not own or have title to the underlying asset. Thus they are primarily used by day traders, hedge funds and institutional players going long and short and speculating on short term movements in the gold price.
Suppliers: One of the most popular is the Streettracks Gold Shares (NYSE:GLD). They can be bought through stockbrokers.
Gold stocks are not gold – rather they are shares in gold mining companies. If the gold price rises, profits of a gold mining company should rise and as a result the share price should rise. 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. It is important to consider the performance and abilities of the management, auditors and geologists; the conduct of trade unions; a company’s gold hedging position; whether it is producing or exploring; its cost basis; how much reserves it has in the ground and whether it is subject to political, economic, nationalisation or environmental risk.
Individual gold shares would be regarded as very volatile and high risk. Gold shares are regarded as more speculative as there is a higher risk-reward scenario. However, the added risk can be compensated for by the leverage which can result in higher returns. Such higher returns would be expected from mid and large-capitalisation un-hedged senior gold mining companies with proven reserves and strong earnings which have strong balance sheets and growth in resources and production and effective company management.
GOLD STOCK OPTIONS
Stock options are a contract between two parties that expires at an agreed-upon time in the future. The contract purchaser is buying the right, but not the obligation, to buy a gold mining stock (a ‘call’ option) or sell (a ‘put’ option) a gold mining stock (the ‘underlying’) at a specific price, on or before the agreed-upon date, the date of expiration.
Suppliers: Online option brokers such as Options Express and E-Trade and certain stockbrokers.
PRECIOUS METAL UNIT TRUSTS OR MUTUAL FUNDS
Instead of personally selecting individual shares, some investors spread their risk by investing in collective investment vehicles specialising in investing in the shares of gold mining companies. These include mutual funds, open-ended investment companies (OEICs), closed-end funds, unit trusts.
Suppliers: Blackrock Gold and General Fund, Sprott Gold & Precious Minerals Fund
Gold futures are traded on exchanges in London, Tokyo, Sydney, Singapore, at the New York Mercantile Comex Exchange (COMEX), the New York Mercantile Exchange (NYMEX) and at the precious metals department of the Chicago Board of Trade (CBOT).
Gold futures contracts are firm commitments to make or take delivery of a specified quantity and quality of gold on a prescribed date at an agreed price. Investors may take or make delivery of the gold underlying the contract on its maturity although, in practice, that is unusual. A benefit for some is that such contracts are traded on margin, so that only a fraction of the value of the contract has to be paid up front. As a result an investment in a futures contract, whether from the long or the short side, tends to be highly geared to the price of bullion and consequently more volatile.
Suppliers: Commodity Brokerages, Online Brokerages such as Internaxx
GOLD FUTURE OPTIONS
All the bullion banks trade in gold options and a list of bullion banks is available from the London Bullion Market Association (LBMA). Another way of trading options is through the COMEX Division of the New York Mercantile Exchange. The third route would be to contact a futures broker. They are often used to contain risk in the trading of futures.
An alternative is to use spread betting to gain leveraged exposure to precious metals. Firms such as Cantor Index, CMC Markets and IG Index offer the ability to take a bet on the price of gold through what is known as a spread bet.
No commissions or taxes are levied in the UK on spread betting. The advantages are that any gains are CGT free and one can also take a view on movements in either direction. The downside is that in a spread bet the spread can be high, your exposure is geared up and short term bets are risky as it is extremely difficult to forecast any markets short term movement. One can lose more than the initial capital thus they are for speculators with very short term horizons rather than investors.
4. Make your purchase(s)
Having read and understood all of the above you should now have enough knowledge to know what your motivation to own gold is and which form of gold you would like to buy.
It is absolutely essential that you research your providers especially when buying physical gold bullion as unfortunately the industry is scattered with questionnable firms that have little history and are financially unstable.
If you opt to buy paper gold then a financial advisor will be able to advise you on the suitablitiy of products and if you opt for execution only services then be certain that you have researched the companies that you invest in and with.
Your Gold Fund offer physical bullion bars for sale and offer allocated gold accounts through a Gold Buyers Account & Gold Savers Account. Buying gold with Your Gold Fund is simple, safe and affordable and investments are available from €1,000 upwards.