Beginner’s guide to gold investing

There has been renewed interest in gold over the last 12 months with prices increasing by 25 per cent to just under $2200 per ounce in Australian dollars aided by a falling dollar and global political and economic instability.

Many people think gold is a good inflation hedge that can protect the value of money in uncertain times. The reality is there have been long periods where gold has been a dead weight in portfolios. During the 1970s energy crisis, gold hit then record highs of just under $A800 an ounce in 1979. If you bought at that peak you would have watched the gold price tumble and would have had to wait 27 years for the gold price to return to $A800 in 2006. From 2006 gold has increased by over 250 per cent.

In terms of what drives the price of gold, the answer can vary wildly. Richard Hayes, the CEO of Perth Mint, says: “While annual gold mining production can increase or decrease in any given year, the impact on total gold supply (all the bars and coins that have already been fabricated and are owned by investors) is negligible, with the total gold supply typically increasing by just over 1 per cent per annum. Given this supply profile, the price is almost exclusively demand driven.’’

 

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As investors get more nervous about developments in the stockmarket, or if fears of a recession rise, then it’s only natural they will turn to gold, and if they do then the price should rise. This is particularly relevant given the low to negative real interest rate environment investors face today, with research highlighting that gold has on average increased by over 20 per cent in years where real interest rates are 2 per cent or lower, as they are now.

As an adviser, I find clients continually asking if they should be buying gold.

So, where might gold fit into portfolios? Investors should consider buying gold if they are concerned about global sharemarkets and wish to purchase an asset with an inverse relationship to markets. In other words, if sharemarkets fall, expect the price of gold to rise, at least in the short-term.

How do you store gold?

Today more than ever it is easier to buy gold with several different options available to investors. There is the traditional method of buying gold ingot, coins and bars however storage can be an issue particularly if you have a SMSF. I recently met with a client who wished to purchase several kilos of gold in their self-managed super fund. After locating a gold broker who could supply PAMP bars at a good price (one of the leading gold brands in the world), we then went shopping for a safety deposit box in a bank vault at each of the big four banks in Melbourne CBD.

Remarkably, not a single major bank had space in their vault and in fact there was a 12 to 48 month waiting list for the smallest safety deposit box.

Although it cannot be determined what is inside these boxes, I’d assume jewellery and gold would make up a significant portion of the wealth stored within.

Assuming you find a safety deposit box from a bank or private vault provider, the next step for a SMSF is to get insurance on the gold. With the price of a 1kg bar of gold sitting at around $71,000, the insurance cost for a bar kept in a vault facility was approximately $200 per year.

If you are keen to buy physical bullion but do not want to deal with storage issues and insurance issues, the Perth Mint has options for investors. Hayes says: “There is no waiting list at he Perth Mint. Anyone may open a depository account and trade online with us 24/7, with the Perth Mint also storing the gold on behalf of clients. Storage fees depend on the product they purchase. Unallocated gold has no storage fee, while allocated gold has a storage fee of 1 per cent per annum.”

Separately, Joe Tai, managing director at precious metals broker Bullion List says: “Unless you are an established investor, it is best never to buy gold from private individuals on forums and online marketplaces like eBay.’’

If purchasing direct from the Perth Mint, the gold is not only insured and guaranteed by the government of Western Australia, it is also 100 per cent backed as the Perth Mint will purchase gold as unallocated purchases are made.

Tapping into gold ETFs

Interestingly, the share market which is seen as a competitor to gold, also has several different paths for investors to gain exposure to the king of metals. (We will ignore gold mining stocks for the purposes of this feature).

John Lockton, head of investment strategy at stockbroker Wilsons says: “There are several gold exchange traded funds on the ASX that provide a secure way to access gold by providing a return equivalent to the movements in the gold spot price less the applicable management fee and over 120 listed gold companies”.

For the ETF route — ETF securities have GOLD (0.4 per cent p.a. cost), Betashares have QAU (0.59 per cent p.a. cost) and the Perth Mint has PMGOLD (0.15 per cent p.a. cost).

It is clear that demand for gold is on the rise from local investors. The Perth Mint has seen the volume of customer account openings double this year while anecdotal evidence is that bank vaults are also being filled up with gold. Interest rates have long been a disincentive for investors to buy gold with investors asking why they should hold gold when they could earn 7 per cent interest in the bank on cash?

However this roadblock has evaporated with cash rates at all time lows. The gold price is not dissimilar to sharemarket movements, however you can be right with gold very quickly, but on the flip side, wrong for a very long period of time.

James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au