Crankys Nest Egg

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3 Ways To Invest In Gold

I first became interested in how to buy gold after reading about the Permanent Portfolio. It is an asset allocation which has historically had very low volatility and a reasonable return and of which, 25% of the allocation is invested in gold.

I was curious what the easiest way to gain exposure to gold is in Australia.

Physical Gold

Some investors are most comfortable when they can actually see and touch their gold. When that is the case, a gold dealer is the best option.

The Perth Mint is one of the more well known options here. You can order online from the Perth Mint Bullion website and they will ship your order to you.

Options for storing your physical gold include:

  • at home
  • in a safety deposit box at a bank
  • with a third party who specializes in gold storage (the Perth Mint mentioned above is one such provider)

Because of the relatively high transaction costs, physically holding the precious metal is probably not your best option if you plan on trading on a regular basis. ETFs would normally be a more cost effective option.

Gold Exchange Traded Funds

In my opinion, this is the most convenient method.

A gold ETF is traded on the stock exchange in the same way as a listed company like BHP or Telstra. The ETF normally owns physical gold bullion. As the underlying price of the metal moves, so does the price of the ETF.

There are a number of ETFs currently available. The main points of difference seem to be the management fee and whether the ETF is hedged (ie. whether you are exposed to movements in the currency exchange rate).

Gold Mining Shares

Another option is buying companies which operate at the various stages of the gold production cycle. They could be explorers or producers (or at various points in between).

Explorers are very speculative as most of them don’t make any money yet. You are betting on their exploration attempts being successful and on them discovering a reasonable sized deposit. In my experience, only a very few are successful. The rest end up returning to the market on a regular basis to raise more capital - an extremely effective way to reduce the value of existing shareholders’ stakes.

At the other end of the spectrum, gold producers have reserves in the ground and existing mine and processing infrastruction in place already. As such they are less speculative than the explorers.

All things being equal, the profits and therefore the price of these companies should rise with the gold price. However all things are very rarely equal. Depending on the hedging employed by the company, they may or may not benefit from movements in the gold price. There is also the chance of unforseen operational mishaps.

So there are the options. They each have advantages and disadvantages. In the end, I never ended up investing in gold - I couldn’t justify the fact that it doesn’t produce any income.