Gold bullion is a popular investment. The metal is clearly recognisable and is universally recognised as a store of value. Throughout history gold has been seen as a hedge against economic, political and financial crisis. At the time of writing the metal enjoys a strong market price with commentators predicting a positive outlook for prices in the long term.
Taking possession of gold in the form of gold bullion, or gold bars, is an intuitive form of investment which has its drawbacks. Gold bars, cast direct from the refineries, are suitable for type of large scale investment conducted by national governments and their central banks who have large secure vaults for their storage. Although it retains a glamour it is less suitable for the modest investor. The traditional 400 ounce of 12.5 kilogram bar that is sold in the London market is far too unwieldy. Investors need also consider the costs and practicality of storing, transporting and insuring the bullion. Bullion is generally kept for the long term and not widely traded. Traders need to be careful that the gold has not been contaminated; diluted with impurities, and generally insist on a new quality assay at each transaction.
Investors who wish to buy gold in smaller denominations than the 400 ounce bar can turn to “biscuits”, gold coins, jewellery and medallions. Although convenient these commodities generally carry a premium over the raw gold price. Dealers sometimes justify the premium by considering the artistic merit of collectable gold coins, jewellery and medallions. The artistic premium is rarely recovered. When resold gold coins, jewellery and medallions are generally valued for their gold content. There are relatively few collectors or designer pieces. Coins have the advantage that the design is recognisable and difficult to forge or adulterate with lower quality metal. However, be warned, fake coins made of gold plated lead are not uncommon. There is a small market in numismatic gold coins. Numismatic coins are valued upon their condition and ratity value as opposed to their gold content.
Gold certificates offer a way to benefit from the ownership of gold without taking physical possession. These are available from banks. The practicality of exchanging certificates in exchange for a promise to release a set weight of gold from an issuing bank was recognised in the seventeenth century. These became the first bank notes. Two types of certificate are available: allocated or unallocated. Neither is entirely secure in that the bank could default on its obligation, or ability, to exchange the certificate for gold. Allocated certificates are supposed to be assigned to specific numbered gold bars within the bank vault. Most certificates are in unallocated form and are less secure because they do not relate to specific bars. Gold certificates have a great drawback in that they may not be 100% secure. They depend upon the integrity of the issuing bank in honouring its agreement to exchange the certificate for gold. Gold is supposed to be am investment that is independent of the financial system. Gold certificates couple gold investments to the banking system. To overcome this objection, the Perth Mint Unauthorised Certificate is guaranteed by the Government of Western Australia. It claims to be the only current gold certificate scheme to have a Government guarantee. Gold certificates are typically sold through intermediaries who charge a commission and typically carry an annual service fee (though this may not be publicly disclosed).
Gold denominated bank accounts are a more flexible way in which to hold gold. These bank accounts can refer to either allocated or unallocated gold and have similar drawbacks to the use of certificates. In reality, gold denominated accounts offer less security than certificates. The account operator sits as an intermediary between the investor and the bullion holding bank. The commission, service charge and integrity of the intermediary has to be considered as well as that of the bank. Electronic accounts which record the holding in physical gold are known as e-gold or digital gold accounts.
An alternative idea is to track the price of gold using exchange trading products that can be openly traded like shares on most major stock exchanges. These products are known as exchange traded funds, exchange traded notes and closed-end funds. The products vary widely in their structure and inherent riskiness. Some funds hold physical gold for the benefit of investors, others have no physical holding and track a gold price index. Exchange traded products typically involve a small upfront commission change and an annual service charge covering aspects such as management expenses, storage and insurance fees. The annual service charge is usually recovered by the management selling a small amount of gold each year so the physical amount of gold in each certificate will fall from year to year. Exchange traded products can be traded on the stock market or redeemed by the issuing organisation. The redeeming organisation typically repays the certificate in an equivalent value of gold.
As with other commodities it is possible to trade a wide range of derivate, futures and spread betting products. These are higher risk products which increase the levels of risk and reward that can be gained from the price of gold. Much of the trade is speculative and does not involve the physical movement of gold. In 2009 the New York Commodities Exchange suffered severe difficulties at the maturity of some gold futures. The exchange was unable without delay the specific gold inventories (in terms of serial number and weight) requested by the maturity of the futures contracts. These products are risky and are best left to the professional market.
An alternative idea is to track the price of gold using exchange trading products that can be openly traded like shares on most major stock exchanges. These products are known as exchange traded funds, exchange traded notes and closed-end funds. The products vary widely in their structure and inherent riskiness. Some funds hold physical gold for the benefit of investors, others have no physical holding and track a gold price index. Exchange traded products typically involve a small upfront commission change and an annual service charge covering aspects such as management expenses, storage and insurance fees. The annual service charge is usually recovered by the management sellinghttp://www.helium.com/items/new?id=278161-alternatives-to-buying-gold-bullion a small amount of gold each year so the physical amount of gold in each certificate will fall from year to year. Exchange traded products can be traded on the stock market or redeemed by the issuing organisation. The redeeming organisation typically repays the certificate in an equivalent value of gold.
The current outlook for gold prices is exceptional. The metal prospers in low inflationary, uncertain economic times. Demand is increasing, the emerging middle class in India is a major buyer in the jewellery market while the Chinese and Indian central banks are expressing increase in increasing their reserces. At the same time supply is relatively constant. According to the World Gold Coucil gold prduction peaked at 2,500 tonnes in 2001. In 2010 production was 2,350 tonnes.
As this essay shows, there are many ways in which to take part in the current bopm in the gold price.