Investing in Gold

10 Ways to Invest in Gold

Introduction

Gold Bars

 

The purpose of this short guide is to introduce a number of Alternative Investments to Sophisticated Investors.

In today’s economy, many people are starting to desert traditional investments like equities (stocks & shares) in favour of “real” physical assets.  They perceive there may be some risk in paper securities, and prefer the security of tangible assets they actually own.

In this paper we look at a number of different ways of investing in Gold, both physical and paper:

  • Paper Gold
    • Mining Stocks
    • Commodity Futures
    • Spread Betting
    • Covered Warrants
    • Exchange Traded Funds
  • Physical Gold
    • Gold Bullion
    • Gold Coins
    • Numismatic Coins
    • Jewellery
    • Electronic Gold 

Paper Gold 

Mining Stocks

There is a very strong reason to invest in mining stocks rather than physical gold and that is due to leverage. Most Mining companies will have a significant level of debt which is due to the high set up costs of bringing a Gold mine to production. Assuming that these mines are now in operation and all investment costs are sunk, a small percentage increase in the price of Gold will go straight to the bottom line. If the cost of an ounce of Gold costs $500 to produce and the gold price is only $550 the companies profit is only $50 an ounce. If the gold price increases by $50 an ounce to $600 this is a 9% increase in the Gold Price. The profit increase though is 100% i.e. from $50 an ounce to $100.

The major Blue Chip Gold Producers with annual production of more than 1 million ounces per annum include the following:

  • Newmont (NEM NYSE)
  • Gold Fields (GFI)
  • Goldcorp (GG)
  • FreeportMcMoran (FCX)
  • Anglo Gold (AU)

The second tier of Gold producers with production quantities between 50 thousand and one million ounces include:

  • Bema (BGO)
  • Cambior (CBJ)
  • Glamis (GLG)

All the above companies can be bought and sold through a stockbroker, but their share price should follow the rise in price of Gold. Remember though they could still exhibit market volatility like any other share price.

Commodity Futures

Gold futures can be traded through a commodity and futures broker in theUS. There is normally a requirement to have a certain level of net worth to trade the futures market and you have to be able to put up margin in order to trade this market.

Gold futures are traded on the Chicago Board of Trade (CBOT) and the contract size is 32.15 troy ounces. The price is quoted in cents and the minimum price movement is 10 cents which equals $3.215. The Chicago Mercantile Exchange (COMEX) also has a Gold futures contract which has a contract size of 100 troy ounces. The minimum price movement on this contract is 10 points = £10.

Trading futures allows the investor to speculate about the future price of Gold and invest accordingly. Futures trading is highly leveraged and small changes to the underlying gold price can have a significant impact upon your trading position. This is a market that is best left to speculators and high net worth individuals.

Spread Betting

In theUKan Investor can trade the price of Gold via a spread betting company like IG index. Here the investor can take a leveraged position like a futures contract but the amount that can be risked can be reduced. Some betting companies allow a spread bet to be placed at a penny a point.

When looking for a spread betting company, compare a few to see which companies offer the tightest spreads.

It should be noted that using spread betting as a vehicle to invest in Gold will still leave you open to unlimited risk if you fail to protect yourself from an adverse movement against your position. If you choose to invest in Gold via a spread betting company use a stop loss or guaranteed stop loss to protect against a significant loss.

It should also be noted that investing with a spread betting company currently is tax free in theUK.

Covered Warrants

These investment vehicles are very popular inEuropebut were introduced to the London Stock Exchange in 2002. They are close cousins to traded options and like options they come in two types a call option which is the option to buy an underlying asset at a given price at a given point of time in the future or a put option which is the right to sell something at an agreed price at an agreed time in the future.

Without going into a detailed explanation of options and how they are priced, an investor who believes that the price of Gold will rise in the future will want to buy a Call Covered Warrant and if you believe the price of Gold will fall you buy a Put Covered Warrant.

These types of investments are considered to be risky as the total premium paid is potentially at risk. This is because if the underlying price of Gold is below the price at which you could buy Gold known as the exercise price it becomes worthless for a Call Covered Warrant. If the price of Gold is above the agreed sale price for a Put Covered Warrant again that warrant would expire worthless.

A good way of reducing the risk is to buy a long dated covered warrant, (which could have an expiry date up to 18 months out) and sell with at least two months to run if the market price is not where you expected it to be.

Covered warrants are normally issued by Investment banks that compete with one another to provide investment products that will appeal to investors. Covered warrants are issued by the following:

  • Goldman Sachs
  • JP Morgan
  • Societe Generale

When you visit these sites there are a number of tools that can help the investor decide which is the best covered warrant to buy based upon the investors belief of what will happen to the under asset price, i.e. is he bullish, expects the price to rise or bearish expects the price to fall.

If you visit the Societe Generale website, go to the covered warrants page, you can do this by searching in Google and go straight to it.

The page will ask you to specify your underlying?? Which in our case is Gold which can be found under commodities. then you will be asked if you are bullish (expect the price to rise) or bearish (expect the price to fall).

You will then be asked to specify a price and a timeframe. Once you have input those you can select the ok icon and a list of put or call covered warrants will be displayed with their projected return based upon the parameters you input.

If you want to invest in one of these products note the epic code and login to your stock broker account to purchase. You can then access your stockbroker account to get an up to date valuation or to sell when you desire.

Exchange Traded Funds (ETF) 

ETF’s have been around in theUSsince the early 90’s, but they have only risen in popularity in theUKandEuropein the last few years. They have certain similarities to a mutual fund.

They are issued by investment banks and aim to track an underlying index or commodity. The advantages of an ETF are as follows:

  • You can buy or sell them like a share.
  • You pay a normal broking commission just like a share.
  • They normally carry a lower management charge than mutual funds or Unit Trusts.
  • Prices are quoted continuously unlike with Mutual funds where the price is set once a day.
  • There is no stamp duty on the purchase in theUKat present.

There are a number of Gold ETF’s that can be purchased if you want exposure to an upward movement in the Gold Price.

  • Db Physical Gold (XGLD)
  • ETFS Gold (BULL)
  • Lyxor Gold Bullion Securities Ltd (GBS)
  • Gold Miners ETF (GDX) to gain exposure to the Gold mining sector.

If you believe that the price of gold will fall rather than rise then you can buy a Short Gold ETF where the price rises as the gold price falls.

  • ETFS Short Gold (SBUL)

Physical Gold 

Gold Bullion

Gold can be purchased from any reputable Gold Bullion dealer. Gold can come in a number of different forms as follows:

  • 5 Gram Bar
  • 10 Gram Bar
  • 20 Gram Bar
  • 50 Gram Bar
  • 100 Gram Bar
  • One Ounce Bar
  • One Kilo Bar

They can be purchased either online, over the phone or in person.

In the UK and US Gold can be purchased as part of an individual’s personal pension in theUKor an IRA in theUS. It should be noted that in the UK VAT is charged on the purchase of Gold Bullion but VAT is not charged on the purchase of Gold Coin’s.

If you are looking for a Gold Bullion dealer ask for a recommendation from a colleague who has invested in bullion previously.

Gold Coins

Gold coins are produced by many countries.  In theUKthe Royal Mint, mints a limited supply of Sovereigns (75,000) and even fewer Britannia’s. The following countries produce Gold Coins:

  • South Africa: Kruggerands
  • US: American Eagles andBuffalo’s
  • China: Chinese Pandas
  • Austria: Austrian Philharmonics
  • Australia: Australian Kangaroos

All the above coins are produced in limited quantities and will sell at a premium to the quantity of Gold in the Coin. The price above the gold spot price will be dependent upon the retail demand for the coin by gold coin collectors.  These coins can be bought retail from any good coin retailer.

One of the advantages of Gold coins over physical bullion is that it is more portable and easier to store outside of a Bullion Vault. For some this ability to store either personally or closer to home is an important consideration.

Numismatic Coins

What is the difference between a Gold coin and a Numismatic Gold coin? Generally numismatic coins are much older than newly minted coins and therefore they are much scarcer. The value of each of these coins is greater than the intrinsic value of gold in the coin and more to do with the relative scarcity of the coin and the demand by collectors for the coin in hand.

Generally in the US Rare coins are those that were minted between 1890 and 1933 when Gold coins were confiscated from US citizens. Due to their rarity the intrinsic value will be significantly above their Gold content examples:

  • $20LibertyHead 1904 Premium over Gold Price 62%
  • $10 Indian Head 1926 Premium over Gold Price 346%.
  • $5 Indian Head 1909 Premium over Gold Price 1715%.

If this is a market you want to get involved in there are a number of things that you need to bear in mind.

  • Prices are volatile short term so invest for the long term.
  • Be aware of rip off coin shops and websites.
  • Pick coins that are popular with both investors and collectors.
  • Only buy certified rare coins.
  • When investing only buy high quality rare coins.
  • Find a dealer you can trust and verify that you are getting a good price.
  • If you are looking for high end rare coins, consult with an expert before you buy.

Even with all the potential risks associated with numismatic coins if you follow the above guidelines you can earn yourself double digit annual returns.

Jewellery 

With the rise in the Gold Price to historically high levels and people suffering from high levels of debt, the desire to hold onto those pieces of sentimental jewellery seems to be diminishing due to the need for cold hard cash.

Unfortunately for many the amount of Gold content for Aunt Nelly’s old wedding ring is normally quite disappointing, and the amount of cash that you get is not very great.

Normally the price of jewellery is only partly valued upon its Gold content and mainly on its aesthetic quality, so selling those sentimental pieces in most cases won’t rise very much. It used to be the case that it was hard to sell but with the increasing number of traders offering to buy your jewellery for cash this seems less of a problem.

It would be sensible to note that you should get a number of different assessments as there are a number of unscrupulous traders out there.

Electronic Gold 

Gold money’s aim is to provide an inexpensive way for individual investors to buy and sell Gold and other precious metals. There is no minimum investment to buy Gold but there is a minimum fee for the purchase which should be borne in mind.

As an investor with Gold money you own 100% of the gold that you have purchased. You have the security of knowing that your Gold is stored in a vault and that it is independently verified by a third party, and that the value of holdings matches the investments made by the Company’s investors.

The company will store your gold for a fee and will sell it on your behalf when you need to liquidate your holdings. As the gold is stored in the vault it has been appraised as 99.5% purity. If you prefer you can arrange physical delivery of your Gold rather than leave it in their vault.

This form of investment is 100% backed by gold unlike investing in an Exchange Traded Fund.

Summary 

There are many ways of investing in Gold which we have outlined in this report. Each investor will have a different motive for investing in Gold and different level of Finance available.

For many the preservation of wealth is a key requirement and paper forms of Gold investment may be good enough for them. For others the need for physical ownership is key as there may be distrust in the state of the current banking system and Governments ability to manage a successful soft landing from the current crisis.

It should be noted that the US Government has confiscated gold from private ownership during the great depression of 1930. However unlikely this possibility is today some want the additional security of physical ownership, this could be stored within vaults, but easily traceable or in the form of coins where your wealth can be easily transported.

If Gold investing is something that you want to invest in www.alternativeinvestmentsinfo.com  can provide a recommended bullion dealer.