How to Invest in Gold

As I go about building up my investment portfolio, I decided that it would be apt to include gold into my collection. I acknowledge the fact that there are other options for getting your hands on this asset. However, in this article, I am going to present my thoughts on investing in gold from the perspective of an average investor.


Why Invest in Gold

Gold is seen traditionally as a safe haven when the stock market is in turmoil. When there is high volatility in the stock market, the participants back off to get their hands on gold. Such behaviour is apparent such that it is known that gold has a low correlation with other assets and investors routinely uses gold to hedge against inflation. Gold is also used a tool for diversification and was conferred the highest honour of being a currency in its own right – the Gold Standard.


Why Should Not Invest in Gold

Physical ownership of Gold do not generate cash flows like stock and cash dividends and coupon payment does.


Methods of Investing in Gold


(i) Bullion Bars, Coins and Jewelry

Physical ownership is the easiest way and provides direct ownership. There are investment grade gold (between 0.90 and 0.9999 purity) and legal tender coins sold at a small premium to the spot price of gold. Which means the break-even price higher.

You can buy or sell gold bars and coins from UOB Main Branch and Singapore Mint.

Do take into consideration the storage cost that will ‘eat’ into the gains from the commodity. A quick search at BullionStar‘s website shows that fees schedule is 0.39% per annum with a daily minimum storage fee of SGD 0.19. The withdrawal of bullion products per instance is SGD 129. Luckily, there are other forms of getting involved which I will elaborate on below.


(ii) Gold based ETF and Mutual Funds

Each share of these specialized instruments represents a fixed amount of gold, such as one-tenth of an ounce. These gold based ETF’s tracks the movement of the underlying gold price. With a low minimum investment, individual research on companies are not required, ETF’s are suitable for the average investor. Do take note of the expense ratio when selecting the ETF’s.


Examples:
– SPDR Gold Shares ETF (NYSEARCA:GLD) – largest gold ETF
– iShares Gold Trust (NYSEARCA: IAU)
– iShares Comex Gold Trust (NYSEARCA:IAU)
– ETF Physical Swiss Gold (NYSEARCA:SGOL)
– VanEck Merk Gold Trust ETF (NYSEARCA:OUNZ)
– VanEck Merk Gold Miners ETF (NYSEARCA:GDX)
– ALPS Sprott Junior Gold Miners ETF (NYSEARCA:SGDJ)
– Sprott Physical Gold Trust ETV (NYSEARCA:PHYS)


(iii) Gold Mining and Exploration Companies

If you prefer to have firms in the gold-arena added to your portfolio, consider gold mining and exploration companies. Like any other investment, the investor is expected to do their own due diligence on the firms they have an interest in.


Factors to consider include:
– Strong production and reserve growth
– Good management and inventory supported by either buying smaller-cap companies or by maintaining consistent production
– Many investors make the mistake of buying small gold miners that are in the exploration phase with no cash flow.
– How much it costs the firm to produce an ounce of gold affects the net profits
– Currency issues, Energy costs and Geopolitical factors


Examples:
– AngloGold Ashanti Limited (NYSE:AU)
– Agnico Eagle Mines Limited (NYSE:AEM)
– Eldorado Gold Corp (NYSE:EGO)
– Yamana Gold Inc (NYSE:AUY)

Credits to thestreet.com for this particular section of the article


(iv) Streaming and Royalty Companies

A business model when a miner is still in its pre-production stage, the streaming and royalty company offers to purchase gold at a reduced price in the future in exchange for capital now to help them run their business.

Safer method to invest in gold as compared to investing in a mining firm with predictable cash flows and minimal cash costs.

Examples:

– Franco-Nevada (NYSE:FNV)
– Osisko Gold Royalties (NYSE:OR)
– Royal Gold (NASDAQ:RGLD)
– Sandstorm Gold (NYSEMKT:SAND)
– Wheaton Precious Metals (NYSE:WPM)


(v) Gold Futures and Options

Futures and Options are derivatives of the underlying asset. Investors must be mindful of the leverage and risks involved and assess their risk appetite to see if they are suitable for this product.


(vi) Gold Certificates

These certificates represent certain quantity of gold bullion or coins. The owner of the gold certificate gets to save money on gold trading and storage, insurance costs. However, the validity of these certificates are only as good good as the company that backs them, are largely illiquid and are at risk of duplicate certificates and forgery. Also, gold certificates are typically unallocated gold with an option to convert into allocated at the investor’s option and a considerable cost. For those that are keen to go ahead, check out UOB Main Branch for their gold certificates.