How to invest in gold

Compare ways to invest in gold

Investors who have made the decision to invest in gold are faced with the question how to invest. Today, there is a range of investment products available for investing in gold.

The table below provides an overview of different forms of gold investments. Each gold investment product is assessed according to a set of criteria in order to evaluate the safety and cost aspects and help investors choose the right product.

 

Gold Investment/ Characteristics Physical Gold: Gold bars and coins Physical Gold: Vaulted Gold Goldbacked securities Gold mining stocks or funds Other forms of gold investments
100% Gold

(✔)

-/✔

Direct, legal ownership of gold

-/✔

Safe custody

(-)

-/✔

Liquidity (can investors easily sell?)

Delivery option

not required

(-)

(-)

Costs (indicative)

medium – high

low

low

low

low – high

 

In the following sections, we offer a detailed description for each form of investment.

Physical gold

Investing in physical gold is the original form of investing in gold. Physical gold can be bought in the form of gold jewellery, numismatic coins or gold bullion.

From an investment standpoint, bullion gold is preferable due to lower costs and higher liquidity (i.e. the gold can be sold easily at fair prices) than other forms of physical gold.

Gold bullion is also available in two basic forms: Gold bullion bars and gold bullion coins, which can be legal tender in specific countries.

The costs for smaller bars and coins are comparatively high. It’s generally the case that the smaller a bar or coin is, the higher the costs are for refining and minting charged by the distributors. If gold bullion is stored privately, security concerns must be considered. Really safe private storage is expensive.

Privately stored gold has the additional disadvantage of low liquidity. Investors who decide to sell gold bullion must arrange the sale at a fair price and may need to verify the purity of their gold.

Vaulted gold, i.e. physical gold stored in professional vaults does have the disadvantages of privately stored gold. Vaulted gold is usually cost-efficient and provides a high liquidity.

Gold backed securities

Gold backed securities are indirect investments in gold. Gold ETF (Exchange Traded Funds) and gold investment funds – both open ended or closed – are securities that (depending on the specific product) are backed by physical gold.

A security is a financial instrument that represents a value – in case of gold backed securities the value of an underlying amount of gold. In the legal sense, an owner of a gold backed security does not directly own the underlying gold but only the security, which in turn certifies the right to the gold.

While gold ETFs are funds, gold ETCs are only gold-backed bonds. That means, the holder of a gold ETC only has a claim against the issuer of the gold ETC and does not indirectly own physical gold through a fund, as with an ETF. Most gold ETCs are fully collateralized with gold, but still pose a potential counterparty risk to investors.

In most cases, owners of gold-backed securities cannot request physical delivery of the gold.

Costs of gold backed securities vary by product. Generally speaking, gold ETFs and gold ETCs are often cheaper than gold investment funds and mutual funds.

Gold mining stocks and gold mining funds

Gold mining stocks and gold mining funds are other forms of securities which allow investors some exposure to gold. Gold mining stocks and shares are not investments in gold but in gold mining companies.

In effect, the gold price is just one factor that influences the price of gold mining stocks. Company-specific factors such as management, company-owned gold reserves, etc. also play an important role.

Investments in a single gold mining stock are risky. An investment fund that invests in multiple gold mining stocks reduces risk for the investor. But as stated, gold mining stocks are not really investments in gold. Gold mining companies can go out of business and the stocks can lose all value. In contrast, physical gold can drop in value but will never become completely worthless or disappear.

Non-backed gold securities

Besides gold-backed securities like gold ETF and (some) gold ETC, there are also securities, whose value is derived from the gold price but which are not backed by physical gold.

Examples for those securities are structured products and options. Structured products are based on derivatives, e.g. options. Structured products and options can pose significant risks to investors and are therefore generally not considered a suitable form of gold investment for retail investors. Structured products are basically obligations, thus, investors in such products bear the risk that the issure defaults on them (counterparty risk).

Other forms of gold investments

Gold accounts, gold certificates and gold trusts are additional forms of gold investment. The characteristics of those products vary widely from direct gold ownership to claims on gold or the price performance of gold with no real gold ownership.

Conclusion

In our opinion, vaulted gold, i.e. professionally stored physical gold, should be the preferred choice by the typical retail investors when investing in gold. Vaulted gold gives an investor outright ownership of gold at fair prices. The gold is stored safely and insured against common risks. Owners of vaulted gold have the option of having the gold delivered to them or can sell the gold fast and easily at fair costs as desired.

In our view vaulted gold is in most cases the best way to invest in gold as it combines the advantages of a modern investment product in terms of cost, safety and ease of handling with direct ownership of 100% real gold.