Why is gold the most popular investment hedge against any economic, political, or social crises? Because it is self contained, liability free, and universally valued. Few other assets can compare.
While today’s market offers many ways to invest in gold, current economic conditions set a few gold investments apart from the rest. With this in mind, Greg McCoach and the Gold World team bring you the three best ways to invest in gold.
Investment #1: Gold Bullion
Physically owning the metal is the most direct and traditional method of investing in gold. In some countries, gold bullion can be bought and sold at major banks. In most regions, however, bullion dealers provide the services necessary to purchase physical gold.
Gold bullion is generally sold in two main forms, bars and coins.
Gold bars are available in various weights, generally ranging from one ounce to one kilogram. There are approximately 100 active gold refiners around the world whose bars have earned “good delivery” status from one or more of the associations and exchanges. Johnson Matthey, Pamp Suisse, and Credit Suisse are among the most popular.
Gold coins are another way to invest in physical gold. Priced according to their weight and purity, coins often carry a slightly higher premium than gold bars. Among the most popular are the American Gold Eagle, American Gold Buffalo, Canadian Gold Maple Leaf, Australian Gold Nugget, South African Krugerrand, Chinese Gold Panda, and Austrian Gold Philharmonic. All of these coins contain one troy ounce of gold— except the American Gold Eagle, which is only 91.67% pure gold.
Both gold bars and gold coins are priced according to their weight and purity, but they always carry a premium above spot gold prices. We recommend investing in gold bars because the premiums are always lower than coins.
Investment #2: Gold ETFs (Exchange Traded Funds)
If you’re not comfortable owning and storing the physical metal, gold Exchange-Traded Funds (ETFs) are your next-best bet.
Gold ETFs are special types of exchange-traded funds that track the spot price of gold and are traded on major stock exchanges such as New York, Paris, Zurich, Tokyo, and London.
The main drawback is the management fee charged by the issuing company. On average, a commission of 0.4% is charged for trading in gold ETFs, in addition to an annual storage fee.
U.S.-based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. Annual expenses such as storage, insurance, and management fees are charged by selling a small amount of the gold represented by each certificate— a process that gradually diminishes the value in each certificate. In some countries, gold ETFs represent a way to avoid the sales tax or VAT which would apply to physical gold coins and bars.
In the United States, revenue from the sale of a gold ETF is treated as a sale of the underlying commodity. Thus, it’s taxed at the 28% capital gains rate rather than the 15% long-term capital gains rate for non-collectibles.
Investment #3: Gold Production Stocks
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. As a result, the share price may rise. However, there are many factors to take into account, and a rise in the price of gold will not always lead to a rise in the price of a share.
Unlike gold bullion, which is regarded as a safe haven asset, unhedged gold shares and funds are considered to be higher risk, more volatile investments. This instability is a result of the inherent leverage in the mining sector.
For example, if you own a share in a gold mine where the costs of production are $250 per ounce, and the price of gold is $750, the mine’s profit margin will be $500. A 10% increase in spot gold prices to $825 per ounce will push that margin up to $575, which actually represents a 15% increase in the mine’s profitability and a potential 15% increase in the share price. Conversely, a 10% fall in spot gold prices to $675 will decrease that margin to $425, which actually represents a 15% drop in the mine’s profitability and a potential 15% decrease in the share price. The amplification of gold mining profits during periods of rising prices can cause a gold rush in mining exploration.
In order to reduce this volatility, many gold mining companies hedge the gold price up to 18 months in advance. This provides the mining company and investor with less exposure to short-term gold price fluctuations, but reduces potential returns when the gold price is rising.
Greg McCoach and Gold World Staff
Contributing Editor, Gold World
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