Monday, 8 June 2009

Gold: the Why, What and How of Investing in It

The Chinese government is apparently now buying gold in a big way. Is it time for the individual investor to do so? You decide.

Why Invest in Gold?

A couple of reasons are often suggested:
  • safe store of value - gold is a substance that has been sought after for thousands of years and will probably continue to be so for a long time yet; it is very durable, in limited supply and does not decompose or disappear when made into jewelry or put into industrial products. Unlike paper money, governments cannot arbitrarily print more of it out of thin air and thus gold may serve as protection against currency crashes and inflation.
  • portfolio diversification as another asset class - gold's price has varied considerably over the years and is observed to be uncorrelated, or even negatively correlated with other investments (i.e.when stocks or bonds go up or down, gold is doing something very different), which reduces the variability and risk of a portfolio. See the chart and article Asset Class Correlations on Seeking Alpha and Gold: a Different Asset Class on Gold News.
How to Invest in Gold
There is a myriad of ways of varying degrees of risk, volatility and convenience. Most of these are available to a self-directed investor at discount brokerages. A good introductory description of the options is the Moneyweek Beginner's guide to investing in gold. All types of gold investments are eligible to be held in an RRSP or other registered account.
  • Coins, bullion and bars - generally obtained through a gold dealer (e.g. Bank of Nova Scotia is well-known one) not through a brokerage though some like Questrade do offer them (however note that taking delivery from a registered account means de-registration / withdrawal of the gold's value)
  • Certificates - are claims backed by physical gold stored in a bank or other secure location. You cannot take delivery of the gold but it solves the challenge of secure storage and facilitates buying and selling, which is usually done by phoning the brokerage's trading desk e.g. BMO Investorline sells certificates in USD (the usual currency conversion from CAD to USD if buying with Canadian dollars), the transaction fee is USD$35 flat plus $1 per ounce with a 5 oz. minimum purchase and no on-going storage fees, though other brokers may charge for storage.
  • Stocks of companies that produce gold - highest risk since there is the effect of company competition, uncertainties of mining added to the varying price of the metal - see the huge fluctuations of the TSX company index vs the price of gold bullion on this TMX Money chart. Canada is one of the world leaders in gold production and there are a number of major companies to choose from - Kitco.com has a table with quotes and stock symbols of the twenty gold companies in the TSX Gold Index.
  • Specialised ETFs and Mutual Funds - collective investment securities in either physical bullion or gold company stocks, or a combination of the two; GlobeInvestor has a filter to list Precious Metals mutual funds. TMX Money includes the nine currently available gold ETFs traded on the TSX within the comprehensive list of Canadian ETFs.
What Proportion of a Portfolio to Invest in Gold?
Most commentators suggest that gold should form a small percentage - 5 to 10% - of a diversified portfolio. Those who buy a Canadian equity market index fund should keep in mind that gold companies form a significant portion of that index, e.g. they represent 10% of the TSX 60 index.

Further Info and Gold Investing Websites:

7 comments:

Gold IRA said...

Gold is considered to be a safe haven worldwide with a historical trend that investors turn to the precious metal in times of inflation and instability.
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Nexpider said...

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online investing said...
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