If you buy the argument that gold retains its value in times of economic instability when paper money is losing its buying power and credibility, then buying the physical metal would probably make most sense. The most obvious advantage of holding physical gold is that it gives you direct control over your investment, while certificate/paper/share gold does not necessarily assume or ensure delivery of the physical metal to the investor.
When comparing different forms of physical gold ownership you should look at the percentage over the gold price for each option. This is known as the ‘percentage premium’. Krugerrands are probably the best known of all the modern one-ounce gold bullion coins, readily available in large quantities and at lower prices than any other one-ounce bullion coins. But having been issued en masse by the South African Chamber of Mines to promote South African gold from 1967, these coins are hardly a rarity and of little historic value.
UK investors might be better advised to buy sovereigns, which have a greater historic value and demand a slight premium over and above krugerrands. Gold sovereigns, half sovereigns and gold Britannias also have the advantage of being exempt from capital gains tax (CGT).
Gold bars are another way of buying the yellow metal but be sure to buy ‘Good Delivery Bars’, which carry the guarantee of 99.5 per cent pure gold and are recognised and approved by the London Bullion Market Association (LBMA). Buy from recognised dealers and traders with a long history in the physical gold market.
Given the high storage and insurance costs that go with buying physical gold, it usually makes more sense for larger investors investing in ‘Good Delivery Bars’ to buy the yellow metal via an internet gold bullion exchange or digital gold currency. A digital gold currency, such as GoldMoney, operates on a similar principle to an online bank by creating a digital gold currency which functions as a form of electronic money based on ounces of gold. The gold is stored in a secure market-approved vault and subject to regular audits.
An alternative model is offered by BullionVault which sees gold bought and sold directly between private investors who quote their own dealing prices on a public order board. This functions like a stock-exchange for privately owned ‘Good Delivery’ gold and competition between users determines the dealing price which stays close to the world spot price.
Managed funds
Fund regulations under Ucits (Undertakings for Collective Investment in Transferable Securities) dictate that a fund should have a diversified portfolio, and as such it is impossible for a fund or exchanged-traded fund (ETF) to hold or track a single commodity such as gold.
However, you can buy into gold via mutual funds such as the BlackRock Gold & General or Investec Global Gold Fund; both invest in gold mining companies rather than gold bullion.
More recent gold fund launches include the Junior Gold Fund, launched in September last year and managed by Angelos Damaskos. The fund has 90 per cent invested in gold companies and recently changed its name from the Junior Mining Fund.
SF t1ps Smaller Companies Gold Fund, launched in July last year, has been one of the top performing gold funds this year having raced ahead by 57.75 per cent in the 13 months since its launch, outperforming more established gold funds such as the BlackRock Gold fund as well as physical gold. The fund seeks growth by investing in small- and midcap companies involved in the mining and development of mines for gold and silver, investing across companies in London, Australia and Canada.
Exchange traded funds
ETF providers such as db x-trackers and Lyxor offer diversified commodity indexes holding a proportion in gold but if you want to hold direct exposure to physical bullion ETF Securities’ exchange-traded commodities (ETC) will be more suitable. Structured as notes rather than funds, products such as the ETFS Physical Gold and Gold Bullion Securities track the spot price of gold less the management fee. Deutsche Bank this year also launched an ETC investment issuance platform with the launch of four new ETCs, including one on gold.
