Gold is not just an ancient metal with no usefulness in today’s society. Gold’s value is also on the rise. Therefore, the obvious question is this: How do you get gold for yourself?
Gold Markets Around the World
Today, gold trades in many markets around the world. At any time of the day or night, a current market price is being established somewhere. Two of the most important world markets, however, are in London and New York.
The London market is one of the oldest in the world and is the largest market for physical gold. Since September 12, 1919 the price of gold has been set at “the London gold fix” and this price is used in contract arrangements around the world. Today, the gold fixings take place at 10:30am and 3pm and provide published prices that are used as official pricing medium by producers, consumers and central banks.
The New York market opens as the second London fix takes place and gold then trades throughout the day. The New York market is particularly noted for the volume of “paper gold transactions” such as futures contracts that are traded on the exchange.
There are other important gold markets in Zurich, Tokyo, Sydney, Hong Kong and elsewhere – so gold is being traded somewhere 24 hours a day.
Investment in gold can take many forms. What follows is a summary outlining various investment vehicles, their advantages, disadvantages, and levels of risk.
Gold Bullion Bars & Coins
Gold bars are offered in a variety of weights and sizes. Since broker commissions are typically low, bullion is the most cost efficient way of owning actual gold. Be sure to get gold that bears the hallmark of internationally recognized refiners so that it will be easier to sell.
Another popular way to own gold and have it in your physical possession is through gold bullion coins. Gold bullion coins are actually the money of the issuing country and have a guaranteed gold content. The face value of the coin is not the true value. The true value depends upon the gold content and the price for gold at the time.
Bullion coins are minted in affordable weights such as 1/20, 1/10, 1/4, 1/2, and one ounce (about 31 grams). The bullion coin represents an investment in pure gold and, because it is legal tender, its authenticity is guaranteed by the country of origin. Gold bullion coins can be easily bought and sold virtually anywhere in the world. Prices for the most popular one ounce coins are quoted daily in most newspapers around the world.
Some of the most popular bullion coins are the American Eagle, the Australian Kangaroo Nugget, the UK Britannia, the Canadian Maple Leaf, the Austrian Philharmonic, and the South African Krugerrand.
Gold coins are traded throughout the world on a daily basis as an integral part of the international gold business, so they always have a ready market, and the spread between the buying and selling price is usually quite small.
While bullion coins are normally purchased for their intrinsic value, they are also appreciated for their artistic appeal and beauty. Coins make memorable and valuable gifts, are easy to store, easy to transport, and anonymous.
Gold Statement Accounts
Gold statements are obligations of the issuing institution to deliver upon demand, a specific quantity and fineness of gold. An investment in a statement account provides safe and convenient storage and allows investors to buy gold in convenient dollar amounts.
There are two types of gold accounts: allocated and unallocated.
Holding gold in an allocated account is like keeping it in a safety deposit box. Specific bars, which are numbered and identified by hallmark, weight, and fineness, are allocated to each particular investor, who has to pay the custodian for storage and insurance.
Many investors prefer to hold gold in unallocated accounts, which are similar to foreign exchange accounts. Unless investors take delivery of their gold, they do not have specific bars ascribed to them. An advantage of unallocated accounts is that investors do not incur storage and insurance charges. However, they are exposed to the credit-worthiness of the bank or dealer providing the service in the same way that they would be if they had any other type of account.
Gold Accumulation Plans
Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based on the principle of putting aside a fixed sum of money every month. What makes GAPs different from ordinary savings plans is that the fixed sum is invested in gold.
A Gold Accumulation Plan is set up just like most other savings accounts. The investor commits to investing a fixed amount every month, usually for a minimum period of one year, although about 90% of contracts are rolled over (extended) when the one-year term is complete. Once the Plan is set up, installments are withdrawn from the investor’s bank account automatically.
The monthly amount is then used to buy gold every trading day in that month. The advantage of this is that less gold is bought when the price is high, and more is bought when the price is low, since the daily amount of money invested is fixed.
At any time during the contract term, or when the account is closed, investors can get their gold in the form of bullion bars or coins, and sometimes even in the form of jewelry. Of course, they can also get cash should they choose to sell their gold.
Gold Options
A gold option provides you with the right to buy or sell gold at a fixed price at some specified future date. Investors may take or make delivery of the gold underlying the contract on its maturity although, in practice, that is unusual. The major benefit is that such contracts are traded on margin, that is 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.
The cost of a futures contract is determined by the “initial margin”, that is the cash deposit that has to be paid to the broker. This is only a fraction of the price of the gold underlying the contract thus enabling the investor to control a value of gold that is considerably greater than the cash outlay.
Futures contracts are traded on regulated commodity exchanges, the largest of which are the New York Mercantile Exchange Comex Division and the Tokyo Commodity Exchange.
Gold options give the holder the right but not the obligation to buy (“call option”) or sell (“put” option) a specified quantity of gold at a pre-determined price by an agreed date. The cost of such an option depends on the current spot price of gold, the level of the pre-agreed price, known as the “strike price”, interest rates, the anticipated volatility of the gold price and the period remaining until the agreed date.
Mutual Funds
A number of mutual funds and investment trusts specialize in investing in the shares of gold mining companies. The appreciation potential of a gold mining company share depends on market expectations of the future price of gold, the costs of mining it, the likelihood of additional gold discoveries and several other factors. To a degree, therefore, it depends on the future earnings and growth potential of the company.
Most gold mining equities tend to be three to four times as volatile as the gold price. While they are subject to the same risk factors that influence the prices of most other equities there are additional risks that are specific to the mining business generally and to individual mining companies specifically.
With gold mutual funds, you are buying general market risk instead of company-specific risk. Mutual funds diversify their holdings among dozens of companies. Some funds offer a broad mix of international mining stocks, while others invest in specific regions such as North America, Australia or South Africa.
If you are planning to have gold as part of your portfolio, you will undoubtedly have it in one of these many ways. Determining which way is right for you is a matter best discussed with your broker or financial advisor. Regardless of the path you choose, always remember to diversify!