Investing in Gold – Alternatives to Buying Bullion

Gold

The current market downturn has me thinking more about safe havens. Earlier this week I shared an overview on safe haven investing across asset classes. For each asset class, there are safe havens but the ultimate safe haven that has stood the test of time is none other than – gold. Holding part of your portfolio/net worth in gold allows your portfolio to weather the storm of a recession/depression/currency collapse etc. But in order to hold gold, one does not have to necessarily buy gold bullion as there are alternatives available to investors. This article discusses some of the options.

Why Gold?

The reason to invest and hold gold is strong. In case of a major crisis, investors always rush to gold and hold the metal to preserve wealth. Previous civilizations and generations have been obsessed over it and current gold market is still huge with central banks buying up as much physical gold as they can. Some investors suggest that its a barbaric metal that does not serve any purpose, but history has proven otherwise.

The loose monetary policy over the past 7-8 years has inflated asset bubbles across the globe and as things stand currently, there are sure-fire signs of a global recession or even a depression. The bond market, commodity market, manufacturing market indices, global transportation market, and plenty of other economic datapoints indicate a global slowdown/recession in the coming months. With such strong headwinds facing the economy, owning part of the portfolio in gold makes a lot of sense.

Another worrying development has been the war on cash in western countries. Countries from Norway, Sweden, Denmark, Switzerland and many others are now in negative interest rate territories; and in order to avoid a bank run by the population and holding physical cash indefinitely, have turned to banning cash or forcing some form of control in order to push people to spend it (the velocity of money has collapsed in the recent years) or make risky moves in order to get a return – thus inflating more asset bubbles.

The Currency Conundrum

Gold prices in the international markets are usually quoted in US Dollars. The US$ has been on a bull run over the past few years and the trend is expected to continue. As it stands currently, gold prices have been in a downtrend in US$ terms thanks to the strength of the US currency. So, on the surface it may appear that investing in gold is a bad idea. But outside the US (and a few other select countries), most of the world’s population does not use US$ on a day-to-day basis. They use their own local currency, and the value of those currencies are falling (with a few exceptions, of course).

So, investors should always think about investing in gold in their own local currency terms and look for opportunities. It is easy to get caught up in a world of US-centric media where investors can get convinced otherwise. In my case, I live in Canada and the Canadian dollar, called the Loonie, has depreciated at an alarming rate over the past few months. The Canadian economy is a resource and service based economy, and as such the collapse of commodity price has resulted in a collapse of the Loonie. Purchasing power has fallen off way down and basic necessities such as food prices are skyrocketing. So, if we look at the performance of gold in CAD$ terms, the metal has performed pretty well. The following table shows the performance of gold in various different currencies for each year. As can be seen, gold has done pretty well for non-US investors thanks to their falling currencies or another way to look at it — gold has increased and kept value in the midst of falling currencies and purchasing powers.

Gold Performance

Gold Performance in Various Currencies

The most obvious answer to own is to go out and buy either a coin or a bullion, depending on the amount you want to invest. But then, you have the problem of storing this bullion. Storing such a valuable commodity in your own house can be a recipe for disaster. The only obvious solution is to rent a bank vault and store it there – thus paying a small fee to use the vault facilities. Then, you have the problem of selling the gold bullion when you want to liquidate and shop around to find the best offer for the bullion. All this seems pretty tedious. Luckily, there are other options for investors.

Investing in Gold – Alternatives to Buying Bullion

One option to invest in gold is to actually own shares of companies that benefit when gold prices go up. The obvious choices are the gold miners, and I have discussed them in detail here. The problem with this approach is that it is not a direct investment in gold and depends more on how each of these companies are run. One company can be better than other, and equity prices may swing wildly depending on market conditions.

The second option is to own gold-backed securities, still trading on the capital markets. The major advantage here is that you have immense liquidity and transaction costs are very low. There may be some differences between each type of security and will depend on each security. Another added advantage is that these securities can be traded inside a tax-sheltered account.

As to the specific securities and which ones to pick – depends on lot of things. One of the most popular ones in the market is SPDR Gold Shares (GLD). This is a gold-backed ETF but look a bit deeper and you realize that it is simply based on paper contracts. While the company claims that its backed by gold, the gold is only redeemable by “authorized participants”, and the accuracy behind the actual physical gold held in the vaults has been called into question. Much has been written about the disadvantages of using securities like GLD for gold exposure, so I will try not to repeat, but in summary: the whole point of investing in gold is for safety, where you do not trust fiat currencies and paper contracts or take someone’s word that your money is safe with them. In case of a collapse, GLD will not be able to back it with real gold if you choose to redeem, which is the whole point of the investment anyway. So, investing using GLD is probably not the best course of action.

But luckily there are some investment vehicles that are available backed by physical bullion. I present securities that trade Canada as that is my main interest. US and International investors will need to check their local options.

In the Canadian market, there are five funds that investors can use to invest in gold. These funds are backed by physical gold bullion and can be called/redeemed anytime you choose. There is varying degree of transparency and each security should be investigated before picking one.

  • Royal Canadian Mint (MNT.TO) – Royal Canadian Mint makes Canadian (and other) currencies and holds gold reserves. The mint makes some of the best/purest coins and bullion available in market. But you can also purchase an Exchange Traded Receipt (ETR) that is listed on the TSX and tracks the price of gold. There is a version of the ETR that tracks the price of gold in US$, if you choose (ticker symbol: MNT.U.TO). The management fee is 0.35%.
  • Central Fund of Canada (CEF.A.TO) – Central Fund is a Calgary, Alberta based fund that holds gold bullion and provides plenty of transparency for fund holders. There is also a US version trading on NYSE (ticker: CEF) and US$ version trading on TSX (ticker: CEF.U.TO). Management fee is 0.184%.
  • Sprott Physical Gold Trust (PHY.U.TO) – This tracks the price of gold, but in US$ terms. The trust fund is backed by physical bullion gold and is held at the Royal Canadian Mint. Management fee is 0.35% of NAV per annum, payable monthly.
  • BMG Funds (mutual funds) – A mutual fund that is backed by physical bullion held in Scotiabank vaults. The website is not clear on what the management fee and indicates “the fees vary”, but considering that it’s a mutual fund, I imagine the fees are higher than other ETF options.

Summary

There are many ways to invest in gold as a safe haven. Investors can go and buy gold coins or bullion to own the physical asset, but that comes with the added tax of storage and paying a regular fee for a bank vault. Some investors choose the alternative method to invest via owning gold mining companies, which can give a good exposure, but the performance depends more on the company’s fundamentals and operations than the actual price movement of gold. While some ETFs exist that claim gold exposure, investors have to be careful in which ones they choose as they can be simply based on paper contracts, which goes against the fundamental reason for investing in gold. Luckily some funds provide direct exposure backed by the actual bullion with plenty of transparency and the option of redeeming the gold bullion, if you so choose.

What are your thoughts on using gold as a hedge? Do you use any in your portfolio? Share your thoughts below.

Disclosure: None. My full list of holdings is available here.

13 thoughts on “Investing in Gold – Alternatives to Buying Bullion

  1. Thanks for sharing Sabeel. I wanted to ask your opinion. My wife wanted me to buy a gold bar at the bank. It’s trading around 1100 usd but converted to Canadian, it’s about 1500. That’s still expensive? What are your thoughts? Thanks bud.

    • Hi Tyler,
      Buying gold can be a good idea, but you have to be careful. Buy from a trusted place (if you are getting it from a bank, its probably a good one), you need to think about storage too. They will probably sell it to you at spot price + premium. From what ive seen, premium can vary a lot.

      Look at some resources online (goldprice.org is a good one), you can see listings and there are premiums also shown. That would be a good starting place for your research and shop around.

      Best
      R2R

  2. Hey R2R,

    gold is part of my portfolio. It is a small part only. I consider it a safe heaven it the sense that the market runs for gold when they think the whole system will collapse.

    I have a tracker-PHAU – that is back by physical gold bullion in London. I bought it a year to soon…in the middle of the Greek EU crisis…
    Next to that, I have a gold mine tracker-GDX- in portfolio. I tend to think these companies are beaten down too much, or nit, lets wait and see. I also use this tracker to write options. It is a nice small side income.

    • Hi AT,
      I think those are good options to hold. A good way to get some gold exposure. I like that you own something that is backed by physical bullion.

      Also, I agree that the gold miners are completely beaten down and provide a great investing proposition right now.
      I need to add some gold exposure myself. I own one miner – but dont have gold bullion or bullion-backed security in my portfolio.

      R2R

  3. My dad gave me an ounce, in the height of the market. Now it’s only worth 70% of what it’s used to.

    Gold is great, but recently, when th mark t sell off, gold stocks would also went down sharply. The market is not behaving like we would predict. That’s why some people are happy to invest in an index fund and forget about the market.

    At this stage, I’d like to the the cash flow and testing my budget and income, so I’m still favoring stocks over commodities.

    • Hi Vivianne,
      I think gold could go either way when it comes to US investors – so, one can make a case either way for Americans. But for non-US investors, I think it protects their erosion of wealth in a better way than some other asset classes out there.

      Best
      R2R

  4. I know that precious metals are never a popular asset to own among the dividend blogging community. It’s an asset that produces no income. That being said, I do own some gold and silver. I agree that it’s OK to own some physical precious metal as part of a balanced portfolio of holdings. Plus, holding gold and silver has a magical feeling. Something innate about modern man that covets this shiny stuff. Thanks for sharing.

    • Its prudent to hold some precious metals, DivHut. I dont hold any but am looking to add some. Looking for alternatives and considering all options before I make a decision whether to hold bullion or use one of these other securities out there.

      Thanks for stopping by and sharing
      Best
      R2R

  5. I have to echo DivHut’s comments 100%. I just bought some silver for the first time and having a tangible asset in your hands is something else. No gold, as it’s too expensive (more expensive than even platinum!), but silver is roughly $15/ounce. And being an industrial metal, it does great in good and bad economies.

    My precious metals portfolio will remain small as I don’t care too heavily for investments that don’t generate income, but I’m still interested in seeing it grow.

    Great article, R2R!

    Sincerely,
    ARB–Angry Retail Banker

    • I hear ya, ARB. I am considering buying some precious metals myself…but dont really want the hassle of renting a safety deposit box…so i might consider using some other security measure. I can totally see the allure of buying physical gold or silver and holding it….and no paper can match that feeling.

      Thanks for stopping by and sharing your thoughts
      R2R

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