Who’s buying gold … and how you can join them

We take a look the best ways to gain exposure to the yellow metal.

Summary: The Netherlands, Russia and Kazakhstan have been buying gold, a sign that many governments retain faith in the metal as a long-term store of value. For individual investors, the more risky options include buying gold jewellery or shares in a gold mining company. ETFs and physical gold are less risky, and my preference is physical gold, far away from the potential for human error.

Key take-out: Governments retain faith in gold as their own currencies falter. The yellow metal represents a sheet anchor underpinning a balanced portfolio.

Key beneficiaries: General investors. Category: Gold.

Governments have joined private investors in buying gold, strengthening the case for the precious metal as an investment option at a time when uncertainty is dogging the global economy and the underlying value of most currencies.

The only difference between the action of governments and small investors is the size of the acquisitions, with the Netherlands revealed yesterday by the International Monetary Fund as the buyer last month of 9.6 tonnes of gold.

The Netherlands acquisition has been added to its already impressive holding of 612.4 tonnes of gold, the world’s sixth biggest hoard, and comes after an earlier gold-linked move by the same country to repatriate 120 tonnes of its gold from vaults in the US.

Other countries, including Russia and Kazakhstan, have also been buying gold and some have been selling, including Mozambique, but the overall trend in official gold investments is up, a sign that many governments retain their faith in gold as a long-term store of value.

According to the IMF, governments have been steadily acquiring gold since 2010 after spending the previous 20 years selling.

While governments are able to move their gold in standard 400 ounce bars from vault to vault, or simply make a book entry about who owns what gold in a particular vault, private investors face a more difficult choice, as well as a storage challenge if they buy gold in its physical form.

The hunt for a safe way to acquire and hold gold has led to a myriad of options which start with two questions: Why would you buy gold, and how confident are you in the quality and security of that acquisition?

Most people who buy gold do so for the same reason as governments. They want an investment which is beyond the control of government and while gold can be seen as just another metal like copper or zinc it has also been treated as a store of value for thousands of years.

Lord Keynes famously trashed gold as an historic relic but that hasn’t stopped the Netherlands, and other governments, from putting some of their faith in gold rather than all of their faith in the currencies of other countries or, in the case of the Netherlands, its own currency, the tumbling euro.

Before considering gold-buying options a small example of what’s happening best tells the story. This can be found in the one-ounce gold bar I bought from the Perth Mint two weeks ago, on a day when gold was selling for $US1256 an ounce and the Australian dollar was worth US82.19c. After Mint charges the price of the small bar was $A1575 (see Golden moment: It’s time to top up, January 21).

The purchase was not meant as a speculative punt on gold but as a personal currency experiment, which has done quite well with the one-ounce bar rising in value today to $A1629 thanks to a combination of the gold price rising to $US1292/oz and the Australian dollar falling to US79.35c.

The Netherlands, it seems, has been conducting a much bigger experiment in currency speculation, shifting more of its assets away from the euro, into the world’s oldest currency, gold, which is traded in the world’s currently preferred currency, US dollars.

Different ways to make a purchase

For most investors there are at least five ways to acquire gold:

  • Buy it in bar form from a reputable source such as the Perth Mint, or Britain’s Royal Mint which earlier this month started selling gold and silver bars to the public for the first time

  • Invest in an exchange-traded fund (ETF) in which every dollar is supposed to be backed by an equal amount of physical gold

  • Buy gold coins produced by a reputable organisation such as the Perth Mint, Royal Mint or US Mint

  • Buy shares in a gold mining company, or

  • Buy gold jewellery.

A quick assessment of that list, in reverse order, shows how risk rises with each step down, with jewellery the least preferred way of gaining exposure to gold because the value will be distorted by fabrication and artistic costs.

Most gold jewellery has the added problem of not being pure thanks to the addition of another metal. Pure gold is too soft for everyday use, with copper generally added for strength. This means you’re not buying gold; you’re buying an amalgam of metals.

Shares in a gold mining company introduce another level of risk: human failure and the problems associated with all forms of mining, ranging from geological (mines can collapse) to botched risk-management strategies such as forward selling and other forms of hedging which are designed to preserve cash flow but sometimes fail.

Small gold miners are particularly risky today because after a three-year investment drought many need cash to survive and some are using the gold price recovery to raise fresh capital, which means issuing new shares and watering down your investment.

In Canada, small gold miners (and the even higher risk category of explorer) have raised around $US800 million over the past few weeks while in Australia there is speculation that share issues are on the way. Investment bank UBS is tipping a possible $A1.4 billion share issue at $12 a share from the sector leader, Newcrest, as a way of reducing debt.

Gold coins sound good, but like jewellery they contain a fabrication cost and while easier to buy and sell than small gold bars they are not always pure gold. Nugget coins from the Perth Mint are pure gold (or 99.99% gold which is close to as pure as possible) while South Africa’s once-famous krugerrand is 91.67% gold with copper added to strengthen the coin.

Evaluating ETFs

ETFs offer an attractive alternative to owning physical gold with the world’s biggest fund, the New York Stock Exchange-listed SPDR Gold Shares, last week lifting its holding to 742.24 tonnes, the highest level for five months.

In Australia there are a number of stock exchange-listed gold ETFs to consider, including:

  • Perth Mint Gold (click here for more information) which is a listed product with units backed by 1/100th of an ounce of gold and which is currently valued on the market at $5.2 billion – perhaps the biggest multi-billion dollar ASX-listed stock you’ve never heard of (ASX code: PMGOLD).

All ETFs in their many forms charge management fees. SPDR has what it calls a 0.4% gross expense ratio, the same cost as ETFS Physical Gold. BetaShares Gold Bullion carries a fee of 0.49%.

Most ETFs conduct their business on a cash basis but Perth Mint Gold offers a physical delivery option meaning you can take your cash out as bullion, though there is a catch. The Mint prefers to deliver 400oz bars which are currently valued at $A651,600 each – with smaller bars and other gold products subject to availability.

Problems can occur with gold-backed funds with the most unfortunate being the 2007 collapse of the Gold Link Income Plus fund which failed despite the gold price rising strongly at the time.

An estimated 2800 investors poured up to $100,000 each into the fund, but received little in return when gold trading activities unwound, which was quite an achievement as the gold price rose from $US520/oz in early 2006 to reach $US831/oz at the end of 2007.

Purchasing physical gold

The final and purest way of owning gold is to actually own gold, not a piece of paper saying you are entitled to a certain amount of gold, but a physical bar of the metal in its purest, 99.99% form. This is sometimes referred to as “four-nines” gold.

The positive aspect to owning physical gold is that it is beyond the reach of any government, an appealing attribute (even to governments) at a time when no-one seems to know whether the world is entering a period of inflation or deflation – and where “paper” currencies such as the Australian dollar, the euro and the Japanese yen have been falling in value against the US dollar.

Physical gold for an Australian investor is a double-edge bet on the prospect of a rise in the US dollar gold price, or a future fall in the value of the Australian dollar – with both events obvious over the past few weeks.

There are two costs to owning physical gold. The metal will never pay interest, and there will be a storage cost because one thing all sensible gold buyers do as soon as they take delivery from a bank or mint vault is return the gold to another high security vault.

However you see gold, love it or hate it, the key points are that governments retain faith in the metal as their own currencies falter and it represents a sheet anchor underpinning a balanced portfolio.

My gold preference is physical gold, as far away as possible from the potential for human error, government interference in a market, or someone else’s greed.

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