6 Ways to Invest in Gold
With extremely volatile markets since 2007, Gold has been a favorite safe haven for investors to wait out the storm which is evident in the run up in price. There are a large number of Gold advocates that promote gold as an essential piece of any portfolio. As gold has gotten a lot of press lately, I decided to do a little digging on how a regular investor can get some (or more) exposure to the shiny yellow metal. Note that the only portion of gold in my portfolio is from my position in the Canadian Index.
Physical Gold
There are people that do not believe in the markets and hold physical gold for their gold exposure. While this strategy may avoid management fees that occur with ETFs or mutual funds, there are limitiations. Two of which are that with physical gold, like gold bars, require physical space and liquidity can be an issue. Imagine trying to sell gold bars on kijiji!
Claymore Gold Bullion Trust (TSE:CGL)
This is perhaps one of the easiest ways for Canadians to purchase and hold gold bullion. This ETF holds physical gold bullion and tracks the price in Canadian dollars. CGL charges a Management Expense Ratio (MER) of 0.50%.
SPDR Gold Shares (NYSE: GLD)
This ETF is in USD, and also holds and tracks the price of gold bullion. The pricing is set to approximately 1/10 the price of one ounce of gold and charges a 0.40% MER.
Horizon Beta Pro Leveraged Gold (TSE: HGU/HGD)
The pair of ETFs are from horizon beta pro and are leveraged 2x on a daily basis. Leveraged ETFs are specfically taylored for traders and not for long term buy and hold investors. The reason being is that the leverage is calculated on a daily basis, so even if the underlying index is trading relately flat (or basing), the leveraged ETF can potentially go down in price. As well, the MER is fairly high for an ETF where it charges 1.2% annually. Trading this security is not for the weak.
iShares Global Gold Index (TSE: XGD)
This is an iShares ETF that tracks the Global Gold index. As with any index, this ETF will move in price depending on the performance of the underlying securities. The top 3 holdings, which make up over 40% of this ETF, are Barrick Gold, Goldcorp, and Newmont Mining. This is a Canadian product, thus traded in Canadian dollars with a MER in the amount of 0.55%.
Common Stock
If you don’t like the idea of paying a management expense ratio to purchase the index, then consider purchasing the individual stocks instead. As mentioned for the iShare Gold Index XGD, owning the top 3 positions is a fairly close proxy for owning the index.
As I’m fairly new to the gold game, I’m sure that there are many other ways to invest in gold. If you have gold in your portfolio, what is your strategy?
19 Comments, Comment or Ping
1. The Biz of Life
Buying physical gold can be a major ripoff with markups in the range of 20 – 30% if you aren’t careful. For US investors, GLD or IAU are the cheapest choices.
Aug 5th, 2010 @ 10:54 am
2. Paul@Quantisan
Regarding physical gold, you can buy mint certificate or mint safeguarded gold. Kitco.com for example offers plenty of products for investing in gold. The bid/ask spread is also very tight at about USD$10. This is the real way to be investing in real gold for large amounts over long periods. All other products are mere mimics with their own fine prints.
In particular, the leveraged ETF should not even be considered as a form of investment. They suffer from a well known deteriorating price phenomenon because of the leveraging (just look at the chart of spot gold price vs. HGU over a long period). These should not be held for more than a few days at most.
However, I agree that the regular unleveraged ETFs are better for the regular investors.
Aug 5th, 2010 @ 11:48 am
3. Laura
I’ve always heard that investing in gold is a terrible idea and only really paranoid people generally do it. I think that’s because most people who invest assume that all currency is going to tank and gold will be the only wealth left. I’ve personally never considered investing in it, and you did point out two of its big flaws. I would hate storing that gold and then trying to sell and ship it to its new owner.
Aug 5th, 2010 @ 3:01 pm
4. Joseph
HGU/HGD are both pretty decent plays if you’re into Technical Analysis as the tend to behave in consistent chart patterns fairly well. As has been noted though are not long term investment products whatsoever.
I would personally look at an ETF although Gold companies would become increasingly interesting as most of them are now removing their hedges making themselves more pure gold plays.
Aug 5th, 2010 @ 3:12 pm
5. John
The first question one has to ask is why invest in gold
As a hedge against inflation?
A source of funds if the apocalypse happens?
As an equity investment like any other?
If you believe in option 1 then owing physical gold or a gold bullion ETF are viable choices
If you believe in option 2 then physical gold is your only choice.
If you are option3 then all the ordinary issues of purchasing company shares apply. Strikes, operating costs, reserves, selling prices, etc.
Buying gold mining companies either directly or through an ETF is only indirectly speculating on the price of gold. There are also gold bullion closed end mutual funds but the premium is usually too high to consider a purchase.
I think that increased inflation has a high potential and therefore I own CGL and GLD. I believe that this is the easiest most cost efficient way to invest in gold.
Curiously although but CGL & GLD hold gold bullion the performance of CGL is about 10% less than GLD even correcting for the Cdn $ and the higher MER. CGL is hedged against the Cdn $ which has a cost and a drag on the performance.
Aug 5th, 2010 @ 3:45 pm
6. sco
I don’t invest in gold for the long term as I don’t think the world economy will crash and burn anytime soon.
For bear markets, I think a better investment is trading the short side than being long in gold.
At this particular moment, if I’d trade gold, I’d be short, as I expect a 30-40% drop over the next couple of years.
Aug 5th, 2010 @ 5:09 pm
7. Returns Reaper
I think a great way to invest in gold is either CEF.A on the TSX (http://www.centralfund.com) or GTU.UN on the TSX (http://www.gold-trust.com). The administrative fees for these funds range between 0.15% and 0.3% depending on net asset values (higher values = lower fees). Currently both funds are at around 0.18%.
CEF maintains a roughly 1:50 gold:silver ratio by weight (this currently works out to roughly 1:1 ratio by value).
GTU on the other hand focuses entirely on gold.
There are also $US versions that trade on the TSX (CEF.U and GTU.U). They also trade on the NYSE Amex (CEF & GTU).
Aug 5th, 2010 @ 5:18 pm
8. Zip
You forgot about gold futures and options. :)
Aug 5th, 2010 @ 6:18 pm
9. JFG
You can walk into any bank and purchase “Precious Metal” leaf, bullion or certificate.
The downfall is that it is purchased in US funds.
You can also go to the Canadian Mint, but that’s more of the collectors road.
Aug 5th, 2010 @ 10:22 pm
10. GTK
Does anyone have any experiences selling bullion? I randomly have 70 oz of silver sitting in my closet that my parents bought in the 60s or 70s!
What is the most cost effective way of selling this?
Aug 6th, 2010 @ 12:25 am
11. JFG
Black market…
Seriously though, shop around. Banks will do it, but it has to be traceable. Reputable exchange houses (not money mart) or a silver smith might take them off your hands (seller beware).
Aug 6th, 2010 @ 2:09 am
12. Eric
You can also buy a gold stock. I wanted gold exposure while it was on the way up (and did well) so I bought Newmont Mining. Barrick Gold is another option.
Aug 6th, 2010 @ 2:09 pm
13. Andy
In the current economy, with deflation more of a threat than deflation, I would be careful about investing too much in gold. Still, it is good to have a little bit in your portfolio from a diversification perspective.
Aug 7th, 2010 @ 12:25 pm
14. David
Perth Federal Reserve Bank – Australia
Aug 9th, 2010 @ 4:49 pm
15. Joe
I agree that purchasing mint safeguarded gold is the most cost effective rout, however owning a small amount of gold you physically possess is a very comforting feeling.
Aug 11th, 2010 @ 8:29 pm
16. Martin Hurford
Beware where you buy your precious metals from. There are plenty of CONpanies ready to take advantage of the current rise in awareness in Gold and Silver.
I have written about one of these less than honest programs here http://su.pr/2yOAqw that promises free Silver!
For those looking to sell some bullion your local coin shop would be your first stop. Do some research at Apmex.com or Kitco.com to get the current ‘buy’ price before you go. Expect your coin dealer to give you a little less than the big boys as they can’t really compete but you do save on the postage! Also try to look like you know what you are doing……;)
Oct 15th, 2010 @ 11:45 am
17. La Rog
One, don’t do it…to invest & make a lving requires more than being Canadian. You’d be best with a low-interest savings account. There is no guide to “sudden riches” other than hard work!
Feb 1st, 2011 @ 11:32 pm
18. m
I have a smal amount of gold and silver coins… Not a significant part of the portfolio, but a little just in case. I have physical gold as it is a small amount it takes little to store, but certificates are anouther simple option backed by actual gold not a promisary note… I have a half decent portfolio of mutual funds mainly. It is a nice diversification out of the paper money system that you don’t get without physical gold or certificates…
The botton of the economy could fail out, it is have from secure(ie recent housing and debt crisis).
My current goal is to eliminate debt and mortgage…
Sep 18th, 2011 @ 7:50 am
19. SST
Hmmm…what should I say about this?
First, the article should perhaps be re-titled as ‘Two Ways…’ — physical and paper. Listed are five paper components and one physical.
The difference is something akin to buying a plot of land or buying a mortgage ETF.
As of today, I would say pretty much all the ‘easy money’ in gold (and silver) is gone. What is left is the intrinsic security feature.
My recommendation?
Instead of holding cash in your investment portfolio, exchange this portion for physical precious metals. They are just as liquid as cash but more importantly, inflation does not erode their purchasing power as it does with cash.
Peter Schiff (who was constantly laughed off the media stage for calling the housing bubble, and now gets summoned for talks with congress) recommends holding a MAXIMUM of 6% in gold and 3% in silver of your investment portfolio (and a minimum of half that).
This translates into FrugalTrader holding a min. of (approx.) 5 ounces of gold and 4,750 ounces of silver.
Precious metals ‘guru’ David Morgan recommends between 10-20% along with this caveat: “The older you are, the more you should favor gold over silver. The younger you are, the more you should favor silver over gold.”
Me? Yes, I own some of each. :)
Sep 20th, 2011 @ 11:05 pm
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