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Gold: to have and to hold

David Stevenson examines different ways investors can buy the precious metal
Gold: to have and to hold

Trading volumes for gold remain at unprecedented levels, and both gold and silver prices have been boosted significantly by speculation over a further round of central bank stimulus in the US (see 'Golden opportunity', IC, 24 Aug 2012). If you believe that physical gold's time has come, you've got two main choices - a fund or physical gold.

Gold funds

The most popular route is to buy into a fund that invests in allocated, physical, 400 ounce gold bullion bars. These funds are usually operated by fund managers from the exchange-traded fund sector and include ETF Securities in the UK and State Street (SPDR) in the US. In total, there's well over $128bn (£81.06bn) invested in these gold trackers globally. These 'physical gold funds' are probably the most convenient way of owning physical gold in bullion form as you don't have to worry about storage or insurance and trading can be done online in a matter of seconds.

But these funds are not always the cheapest option (the average total expense ratio is usually between 0.25 and 0.40 per cent of the value of assets in the fund) and nor do they give you a chance to get your hands on actual gold bars - only institutions can swap their fund share certificates for allocated bars of gold delivered to a LBMA storage vault.

Gold coin prices
Gold Bars

(All 24 carat and from London Good Delivery Manufacturers) - Premiums quoted for small quantities - premiums may change according to supply and demand.

■ Kilo Bar 2.5 per cent premium - current cost £33,215

■ 500g Bar 3.5 per cent premium - current cost £16,775

■ 100g Bar 4.5 per cent premium - current cost £3,380

■ 50g Bar 5.5 per cent premium - current cost £1,710

■ 1oz Bar 6 per cent premium - current cost £1,068

Gold coins

■ 1oz South African Krugerrand 22 carat 5 per cent premium - current cost £1,058

■ 1oz UK Britannia 22 carat 7 per cent premium - current cost £1,078

■ 1oz Canadian maple 24 carat 7 per cent premium - current cost £1,078

■ 1oz Australian nugget 24 carat 7 per cent premium - current cost £1,078

■ 1oz US Eagle 22 carat 7 per cent premium - current cost £1,078

■ UK Gold Bullion Sovereign (dated 1887-1982) 0.2354 troy ounce 22 carat - 8 per cent premium - current cost £256

Source ATS Bullion

Gold bars

If you prefer the idea of holding real gold, you can use one of the growing number of allocated storage providers such as BullionVault (backed by the Rothschild family as well the World Gold Council) and GoldMoney to buy, sell and store bars of gold. These relative newcomers to the gold market offer what's called 'allocated' and very secure storage at a relatively low cost - BullionVault charges as little as 0.12 per cent per year of the value of your gold assets for storage costs (0.18 per cent per year at rival GoldMoney), plus a small monthly charge for insurance - dealing costs start at 0.80 per cent of the value of the gold and drop to as low as 0.40 per cent for $30,000 or more of gold. Crucially, this physical gold in storage is also inspected on a daily basis with both main providers. Investors can also arrange next-day physical delivery of their gold bars.

Coins and small bars

Investors can also very easily buy smaller amounts of gold, usually either coins such as sovereigns and krugerrands or small kilo bars. Gold coins can easily be bought via a bullion dealer such as ATS, or Bairds, and can then be stored at home, giving private investors the ultimate in portability.

There is an enormous choice of gold coins, with most major developed world nations offering their own coinage, but perhaps the most familiar is the South African Krugerrand (first mass produced in 1970). According to Sandra Conway, managing director of ATS Bullion: "The Krugerrand is a very popular coin, mainly because it trades at the lowest premium of all the 1oz coins and so tends to be the best value. The UK 1oz Britannia and the gold sovereign (an old pound coin, weighing 0.23 troy oz) are both popular, particularly for investors where capital gains tax is an issue. Sovereigns tend to appeal to smaller investors, as they are more affordable."

Sovereigns minted after 1837 are technically a tender coin and can thus be bought and sold free of capital gains tax. Investors should note that buying investment-grade gold bullion generally is free from both stamp duty and VAT in the UK.

Gold coins are typically issued at prices that are not fixed but based on the prevailing value of their fine gold content - they are usually also mass produced in large quantities, and are frequently legal tender in their issue country. Crucially they typically have no coin collecting value - their market value is almost always directly related to the value of the gold in the coin, based in turn on the number of troy ounces.

But this direct ownership of small units of gold introduces significant extra cost - small units of gold carry a premium to pay for dealing costs and the extra cost of refining larger bars down into small coins. In simple terms the premium charged by the dealer will increase as the fractional coin weight declines, ie a 1oz coin will have a smaller premium than a 1/20th fractional.

This premium can easily amount to more than 8 per cent for even the most popular coins - Krugerrands usually offer the smallest premium at around 5 per cent, while most competitor coins have a premium of around 8 per cent, although the premium can rise to as much as 18 per cent for small, 10 gram bars of gold. Investors also need to factor in extra insurance costs for home storage as well as an additional spread of as much as 1 per cent when they attempt to sell their coins back to a dealer.