Since the start of 2016, the price of gold has climbed steadily, gaining nearly US$150 per ounce to around US$1,200 per ounce. This is the biggest sustained gain in the past 12 months. With all the vehicles now available, which would be the best way to invest in gold?
Gold has long been considered a “safe haven” store of value when financial conditions deteriorate badly. Banking troubles, serious geopolitical crises, and runaway inflation are some of the main drivers behind sharp increases in the price of gold. Fundamentally, gold also continues to be in demand both for jewelry and industrial applications, and these factors also tend to influence the price of gold, albeit on a cyclical basis.
A small allocation to gold in your portfolio can be a cushion against troubled times. But bear in mind that gold has no yield and produces no income. The only growth available is through capital appreciation, and that depends entirely on the vagaries of the commodity markets. Essentially, when you buy gold in hopes of future gains, you are not investing—you’re speculating.
There are a number of ways to buy gold.
Bullion, Certificates, and Coins
You can purchase the physical commodity as wafers, bullion bars, or coins and lock them up in your safety deposit box. It’s the most straightforward way of buying gold.
But you will incur safe-keeping costs, and in the case of coins, you’ll pay a hefty numismatic premium. Some dealers also offer gold-bullion certificates, which are essentially a claim on a specified amount of gold (usually a minimum 5 oz. bar) held in the institution’s vaults.
You can purchase units of an exchange-traded fund (ETF) that holds nothing but gold bullion. In effect, your ETF unit represents a share of the physical gold bullion that the fund has a claim on either through physical holdings in a warehouse or in certificates it has purchased, or in some combination thereof.
In Canada, the iShares Gold Bullion ETF (TSX: CGL) is one such fund, while Central Fund of Canada (TSX: CEF.A) is a closed-end physical-gold fund that’s been around for 55 years. The U.S.-based SPDR Gold Shares (NYSE: GLD) is the granddaddy of gold ETFs, and the largest physically backed gold ETF in the world, holding some 711 tonnes of gold worth about US$27.7 billion at recent prices. With their low management expense ratios, ETFs are the most economical way to hold physical gold. Most investors go this route.
Some mutual funds also invest in physical gold, but such funds typically also hold gold-mining stocks and so cannot be considered a pure gold holding.
Options and Futures
Of all the ways to stake a claim on gold, these are the riskiest. Options and futures contracts represent an interest in a specified amount of gold at a specified price and time. These types of instruments—derivatives—carry the very severe risk of a total loss of your investment. They are for expert commodity traders and speculators only, and I recommend all others avoid them.
Courtesy Fundata Canada Inc. © 2016. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice. Securities mentioned are not guaranteed and carry risk of loss.