Economics

The Age of Gold?

Oct 21, 2017
The Age of Gold?

How to buy Gold:

Physical:

The first option we will consider is buying physical gold bullion, in bars or coins. This is ideal if the primary purpose of buying gold is to have a tangible and physical item. The immediate concern of this would be the cost of safeguarding the gold, and this might involve fireproof safes, locks and hidden safe spots. For UK citizens there are tax reductions available when buying physical gold.

The Rise of the ETF:

Another option is buying into an ETF fund that is invested in and has exposure to assets in the gold or “Precious Metals & Commodities”. This type of investment would generally provide exposure to the miners, refiners, and the logistics and warehousing needs of the industry.

An example of this is GDX - Market Vectors Gold Miners ETF. This ETF fund tracks major gold indices, such as NYSE Arca Gold Miners Index alongside traditional holdings in companies such as Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM).

These types of funds are usually less correlated to the performance of the underlying assets (in this case the price of physical gold) as issues within individual companies may improve or hamper performance. That said, there is still a link, when prices are high individual producers benefit from higher margins, and when prices are low producers are disadvantaged by lower margins, thus a link, but it is a tenuous one.

Gold ETC & Recommendations:

(Exchange traded commodity fund), like an ETF, but holds commodities not companies.

For those wanting to buy into an ETC that moves up and down as the physical price of gold moves, then the SPDR Gold Shares fund may be ideal, as its assets are made up directly of gold bullion, providing a highly correlated performance outcome between physical gold and this ETC.

Derivatives:

Futures may be another cost effective way to undertake exposure to the gold market. The key benefit of futures is that storage and transportation costs are nill, due to no physical commodities being stored/transportation. This becomes apparent when you consider that the amount of gold futures far exceed the total physical amount of gold we have in the world.

Other financial instruments: Such as a gold CFD.

Gold CFDs or “Contracts for Difference” allow individual investors to invest in gold quickly and conveniently. In the authors opinion, this is the least desirable way to purchase gold, due to the inherent risks of CFDs. Without getting, it is important to fully understand the spread between the buy and sell, and whether the broker used is taking the other side of the trade (which leads to profits on your losses). Many unsophisticated investors have blown up by utilising CFDs in unfavourable ways.

Gold Analysis:

What do we expect global economic variables to do over the next 1-5 years?

The current economic conditions are resulting in many investors selling positions in gold, as central banks from the UK, to the EU and the US hint that the start of interest rate rises is fast approaching. The primary reason behind why this is happening is simple. As gold is an asset that does not provide any form of residual income, interest rate rises will make it increasingly expensive (as an opportunity cost) to maintain current positions in gold. Many investors will be selling holdings in gold and transferring the available capital into a CD (cash deposit) account which does provide a residual income. As the central bank continues to rise interest rates between now and 2020, the amount of residual income generated from CDs will continue to increase in line with interest rates.

Which method of owning gold is right for me?

This is a tough question – and ultimately it is up to you to decide which vehicle best fits within your own circumstances. The primary factors to consider include: potential tax implications, ability to leverage, ability to hedge against other asset classes, and the tolerance to risk of the investor.

Tax implications vary from state to state, country to country, and we reccomend seeking local tax advice from a qualified tax accountant.

Leverage may also form part of the decision making process as to which vehicle to use to buy gold assets. A clear example of gold assets open to leverage is CFDs, which we discussed earlier. Leverage is discouraged for new and inexperienced investors, as your exposure to risk exponentially rises with leverage. Until you are calculating your own implied future volatility predictions and projections, leverage is probably best left in the hands of the experts.

Conclusion:

Gold must always be considered a speculative investment. Investors usually choose ETFs to spread risk among several assets. However, some of these funds invest exclusively in gold, so gains or losses in those cases are tied directly to the price of gold. In terms of the consensus in expert opinion, the vast majority would suggest keeping between 5% - 15% of a well-managed and diversified portfolio.