How to buy gold
There are many ways to invest in gold. Different products can be used to achieve a variety of investment objectives.
Investors should consider the options available in their market, the form of investment that is appropriate to their circumstances, and the nature of professional advice they will require.
The various gold-related investment products have different risk and return profiles, liquidity characteristics and fees. Typically, an asset allocation strategy will consider long-term versus medium-term returns, and how gold investment products perform in positive or negative correlation with other assets.
Bars and coins
Small bars and coins accounted for approximately two-thirds of annual investment gold demand and around one quarter of global gold demand over the past decade. Demand for bars and coins has quadrupled since the early 2000s, and the trend covers both the East and the West. New markets, like China, have been established and old markets, like Europe, have reemerged.
Bars and coins come in many denominations and measures of gold content (also called fineness). Fineness is either measured in karats (the highest being 24 karats) or in parts of gold per thousands (usually 995, 999, or 999.9 parts per thousand).
Coins are commonly produced in denominations of 1/20, 1/10, ¼, ½, and one troy ounce. Bars can be purchased in 1, 10, 20, 50, 100, and 1,000 gramme denominations as well as 1, 10, and 100 troy ounces.
Central banks, many gold-backed ETFs and other large institutions rely instead on the London Good Delivery (LGD) bar. The LGD bar is the standard gold bar used for clearing in London, and weighs approximately 400 troy ounces.
Investors pay a premium over the spot price on bars and coins. Generally, the smaller the coin, bar or size of the investment, the larger the premium per ounce. Owning physical bullion may involve additional costs beyond the expense of the gold, including insurance and storage. Care and diligence are necessary when purchasing physical gold and the authenticity of the gold should be verified by the assay mark. Gold should be purchased from a bank or reputable dealer.
Gold-backed ETFs and similar
Physically-backed gold exchange traded funds (ETFs), exchange traded commodities (ETCs) and similar funds account for approximately one-third of investment demand. These funds were first launched in 2003 and, as of March 2016, they collectively hold 2,300 tonnes of physical gold on behalf of investors around the world.
Gold-backed ETFs and similar funds allow investors to generally track the price of gold, giving them access to the properties and security of owning physical gold without the need to arrange for storage and insurance separately. These gold backed funds seek to combine the flexibility and ease of stock-market trading with the benefits of physical gold ownership.
Exchange-traded gold-backed funds are regulated financial products, with each share corresponding to a specific amount of gold and a share price that generally reflects the underlying gold price, less expenses. Unlike gold derivative instruments, most of these funds are fully backed by physical gold. Generally, only authorised broker-dealers can exchange shares for physical gold. Some funds allow the exchange of shares for physical gold by retail investors, but require additional (often high) fees.
Investors can purchase shares of gold-backed funds like stocks through a stock exchange, hold them in a custody account for securities and sell them when they wish at a relatively low cost. The most liquid gold-backed ETFs generally have low bid-ask spreads and closely track the spot price of gold.
Currently, there are approximately 80 exchange-traded gold-backed funds across the world. Collectively, they hold 1,600 tonnes of gold worth approximately US$90 billion.*
*as of March 2017
Bullion banks and many gold dealers offer their customers gold accounts consisting of gold deposits and resembling currency accounts. When a customer orders gold in grammes or ounces, the bank will buy the gold on the customer’s behalf and electronically book the transaction into the account.
The investor can typically select between an unallocated deposit account and an allocated deposit account. The gold is physically attributed to the account holder only in the case of allocated deposits in specially assigned accounts. In the case of these allocated accounts, the bank cannot lend this gold and if the bank becomes insolvent, the bank’s creditors do not have an interest in this gold. A customer with an unallocated account is an unsecured creditor of the bullion bank or gold dealer. Gold held in unallocated accounts, just like with many other bank deposits, may be lent by the bank.
As a general rule, bullion banks do not deal in quantities below 1,000 ounces in either type of account. Bullion bank customers are typically institutional investors, private banks acting on behalf of their clients, central banks and gold market participants wishing to buy or borrow large quantities of gold.
Fees and transaction costs on both allocated and unallocated accounts may vary greatly by the size of investment and the credit-worthiness of the investor.
Gold derivatives: futures, forwards and options
Investing in derivatives requires more knowledge of financial securities than other forms of investing and may not be suitable for all investors.
Derivatives trade over-the-counter (OTC) and on exchanges. Derivatives traded on exchanges settle in a central clearing house that matches buyers and sellers. OTC derivatives are bilateral contracts that have more flexible structures but include additional counterparty risk.
While there are many types of derivatives, the most common ones include futures, forwards and options. These contracts often allow settlement in-kind, as well as in-cash.
Derivatives trade on margin. The initial margin – or cash deposit paid to the broker – is a fraction of the price of the underlying contract. Consequently, investors can achieve notional gold value considerably greater than their initial cash outlay. While this leverage can increase return-on-investment, it also increases the chance for significant losses in the event of an adverse price movement in gold.
Gold mining stocks
Investors can invest in shares of gold mining companies. Gold mining company stocks may correlate with the gold price. However, the growth and return in the stock depend on the expected future earnings of the company, not just on the value of gold. Factors such as effective management, production costs, reserves, exploration and project development, and hedging activities are some of the factors to consider when deciding whether to buy gold mining stocks. As such, investments in gold and gold mining companies are often used as complementary investments.
The gold mining sector is large with over 300 gold mining companies listed and publicly traded. Market values of mining companies range from micro-cap companies to those with a market capitalisation larger than US$10 billion.