Richard Willsher is a finance and business writer with a background in international investment banking. www.richardwillsher.com
With the price of gold increasing to over $600 an ounce and the fundamentals underpinning its continued rise still strong, many investors will be considering their returns on this precious metal. So how to go about investing in it? asks Richard Willsher
There is a certain tactile appeal to owning gold that you can touch and feel. It's not quite the same as wearing gold jewellery – but it is cheaper. Bullion will not provide a return, but it is a reservoir of value and relatively easy to sell if required.
For many smaller investors gold coins and small bars are attractive. As far as coins are concerned South African Krugerrands are one option, though not the only one. They are available in sizes ranging from one-twentieth of an ounce through one-tenth, one-quarter, one-half and one ounce. Their value depends on the market price of gold plus a margin that varies on which coins you buy and through which dealer. Other types of gold coin include Gold American Eagles, Gold Britannia and gold sovereigns.
Small bars, though more prosaic, are cheaper than coins and vary in size from 1g to 400 troy oz (1kg is 32.15 troy oz). Larger investors will buy larger bars of 1kg or more. Both coins and bars can be bought from dealers such as ATS Bullion and Baird and Company, though these are not the only ones in the market.
One significant issue is the inconvenience and security implications of owning bullion is where the gold is stored. Unless investors want to keep their gold at home in their safe or strong room they may prefer to store it with a dealer who provides a storage service. This will mean a regular, annual charge against an asset that may not earn its keep unless the price you paid for it has gone up when you come to sell it.
Another, easier way to invest in bullion is to open a statement account with a bank that holds the gold for the investor and keeps track of his holding by means of a periodic statement. A so-called accumulation account works in the same way except that the investment is made as a regular payment.
Exchange traded funds
Another and even easier way to gain exposure to bullion is through buying gold exchange traded funds (ETFs). One example is Gold Bullion Securities, a company that issues shares listed on the London Stock Exchange. Each security entitles the buyer to an interest in one-tenth of a troy oz of gold held by a custodian. The securities can be traded through a stockbroker like any other quoted share or security. There is a management fee of 0.4% per annum, which covers all custody charges and other incidental expenses. This accrues on a daily basis and holders are charged monthly.
A similar fund is IShares Comex Gold Trust. Although many ETFs are backed by several different securities, gold ETFs are backed only by gold. The price of an ETF will therefore be closely correlated to the market price of gold and can be referred to as 'gold tracker funds' or 'exchange traded gold'. Also, because they are trackers the management cost is much lower than an actively managed fund.
ETFs provide liquidity. This is one reason for large, institutional investors increasingly becoming buyers of ETFs. They can be bought and sold in the same way as shares and yet still have the advantage of providing a direct link to the underlying commodity. It is, therefore, no surprise to learn that ETFs are accounting for an increasing amount of global physical gold delivery.
Mining shares and mutual funds
More direct exposure to gold can be achieved through investing in the stock of individual gold mining companies, the prices of which, unsurprisingly, tend to be strongly linked to the market price of gold. As with all commodity-related businesses their share price will be influenced by the amount of mineral reserves they actually own or control – tomorrow's gold in the ground, in other words. It will also be influenced by their track record as producers of gold: how efficiently they can mine it and sell it at the right price. Lastly, their share price will be influenced by the market supply, demand and sentiment factors that influence other listed shares. They are risky but they also offer a greater prospect of income and capital appreciation than bullion.
A safer way is to invest in gold sector shares in the form of a fund. Merrill Lynch's Gold & General Fund is probably the best known with 77.6% of the fund in gold-related assets all over the world such as Zijin Mining, Gold Fields, Anglogold Ashanti and Barrick Gold. The balance of the fund is in other minerals and the fund also invests in ETFs.
Some funds such as JP Morgan Fleming's Natural Resources Fund offer exposure to gold but blend the risk profile with other assets related to other commodities such as base metals, oil and gas and precious stones. This is likely to appeal to the investor who prefers not to commit wholeheartedly to gold. The CF Ruffer Baker Steel Gold Fund is another high performing fund spreading risk across different countries and several precious metals and commodities. It invests largely in stocks but also in cash, bonds and other asset classes. The bottom line on stocks and funds is that exposure to gold can be as great or as limited as you choose.
Last, but certainly not least, there's jewellery. Research by London-based precious metals consultants GFMS show that jewellery accounts for over half of the world's above ground stock of gold and provides more than two-thirds of world annual demand for new gold which, at 2004 prices, is worth about $35 billion.
Yet jewellery is the most expensive way to invest in gold. Not only is VAT charged on the purchase, adding an instant 17.5% to the price in the UK, but there is also the mark-up on the basic commodity price of as much as 300% dependent on what you buy and who you buy it from.
But there are upsides. Jewellery is a moveable asset as well as a reservoir of value, especially in areas of the world where poverty and or political instability are rife or where gold is commonly given as a gift. India, for example, is the world largest market for gold jewellery.
Despite the high value added, design and branding can add to jewellery's long-term value and cachet, and taste and changing fashion can also play a role in determining its value.
There is a huge and highly fragmented market among jewellers and dealers, from the larger high street retail chains to specialists in particular types of jewellery. The choice is baffling so getting to know the essentials of quality, hallmarks, valuation and potential secondary market value is something that buyers need to read up on if they are to treat gold jewellery as an investment. It is, however, relatively easy to figure out what one's jewellery is worth. Many jewellers offer on the spot, informal valuation services. Weighing and marking the price to the world price of gold is a good rule of thumb, and a good starting point. For collectors' pieces, specialists at auction houses can be approached, although value is determined by what a buyer might bid at a future sale.
If valuable jewellery is to be kept at home or worn then there's the security risk to be taken into account. Insurance coverage is essential and may dictate that the insured items are held in a safe. Out-of-home storage with a bank or other secure facility provider will come at a price though the peace of mind that comes with it may be worthwhile. Not all returns on investment are quantifiable or tangible. But there is overwhelming proof that gold in the form of jewellery is widely regarded and accepted as an important means for transferring and storing value.