Investing in gold: the choices

Katharine Pulvermacher is Manager of Investment Research at the head office of the World Gold Council.

In the third and final article of our series on investing in gold, Katharine Pulvermacher explains the choices available to investors

Finding a safe home for one's assets has become a much greater challenge to family offices than it was during the years of plenty that characterised the last decade of the 20th century.

However, it is still possible to manage the risk associated with the investment of family wealth by ensuring that the combination of investments is sufficiently robust to withstand the impact of financial uncertainties. Because returns on gold are not correlated with those of mainstream investment assets, the precious metal provides investors with a valuable risk management tool. As a stand-alone investment, gold will, at the very least, help families preserve their existing wealth.

This year has seen a renewed interest in gold as a safe haven. However, many families that would like to protect their wealth by investing a portion of it in gold are unaware of the full range of investment vehicles by which they can do this. There are a number of ways of gaining exposure to gold – bullion bars and coins, metal accounts, futures and options, gold-linked bonds or through investing in gold-mining companies, whether directly or through gold-oriented mutual funds.  

Gold bullion coins and small bars are popular with investors because they combine intrinsic value with artistic merit. They are also minted in affordable weights, generally containing exactly one troy ounce of fine gold or fractions of an ounce. The market prices of bullion coins are largely determined by the value of their fine gold content – ranging from 99.5% to 99.99% – to which is added a premium or mark-up to cover minting and distribution costs.

They may bear a face value, although this is largely symbolic. Bullion coins are mass-produced by the respective national mints in response to demand, thus ensuring that the premium remains small. The coins are legal tender in their country of origin and are typically traded through precious metals and coin dealers, brokerage firms and banks. The birth of the internet has made it possible to buy and sell gold coins and small bars online via specialist websites.

Certain websites provide investors with the convenience of setting up metal accounts, sometimes referred to as metal certificates or gold pools. In this case, families do not have to take delivery of their gold in order to benefit from the advantages it can bestow on their portfolios.

Alternatively, metal accounts can be opened by contacting any of the major bullion banks, all of which are members of the London Bullion Market Association and, as divisions of the world's leading investment banks, have offices (and private clients) throughout the world. The gold is then stored with secure third-party depositories, although investors can take delivery at any time should they wish to do so. 

Of course, one of the key attractions of investing in gold is its independence and purity – it does not rely on anyone else's promise to pay and its effectiveness as an investment is not dependent on regulatory or political infrastructure or poor management, for example. Should a family seek to take advantage therefore of gold's role as a store of value and safe haven, they would be encouraged to invest in gold itself rather than its derivatives.

Clearly, because the primary reason for investing gold is to store value, it should be seen as a long term investment. However, an investment of this sort must be still be liquid enough to allow the family to buy or sell gold when ever it chooses to do so.  Fortunately, gold can be traded 24 hours a day.

Although the gold market is relatively small by comparison with, for example, the bond market, it is a deep and liquid market in its own right and it is simple to execute trades.

Although an order over three tonnes (approximately 100,000 ounces) is likely to see spreads widen, many houses regularly trade in clips of up to five tonnes (US$50 million) without having any impact on outright price. Certainly, bid-ask spreads are generally comparable to those of other investments, and are typically
40-50 US cents in volumes of up to 1000,000 ounces. 

This means that for a 50 US cent spread with gold at US$320/ounce, it is the equivalent to 0.16% of the trade. Platinum spreads are much broader, representing around 4.6% of the bid, silver stands at 0.41%, and oil at 0.09%. In short, unless trades are abnormally high, liquidity is never a problem.   

Investing directly in gold in the ways described above provides the purest, most straightforward exposure to the gold price, but a number of alternatives exist, each of which should be evaluated on its own merits. These include gold futures and options, traded on regulated commodity exchanges such as COMEX; gold-linked bonds issued by a number of investment banks; and gold-mining equities, which can be purchased either directly or via a gold-oriented mutual fund, of which there are several dozen internationally.

Some of these funds have been top performers in recent months, but tend to be three to four times more volatile than the gold price itself.

Whether family offices choose to invest in gold because it is a valuable risk management tool, a safe haven or a tried and tested means of preserving wealth, a number of channels are available to them. The method, or combination of methods, selected will depend on each investor's preferences. What is certain is that there is something to suit virtually everyone.