How to invest in gold

Given the stockmarket volatility, I am thinking of investing in gold. What are my options?

Given the stockmarket volatility, what are my options? Picture: Bloomberg

Q: Given the volatility and uncertainty in global sharemarkets, I am thinking of investing in gold. What options do I have to invest?

A: As a commodity, gold has been traded as a currency, a store of wealth and for its aesthetics throughout history. But investing in gold and the performance of gold as an asset class is a little different to investing in conventional asset classes such as shares, property or fixed interest.

Gold has historically been used as an investment hedge against volatility in sharemarkets. When sharemarkets are volatile, the price of gold typically does not correlate. When sharemarkets fall, history would suggest that this is a positive for the price of gold.

The price of gold globally is denominated in US dollars. This is a positive when the value of the Australian dollar is falling but a negative if it appreciates in value.

Investors can gain exposure to gold in a number of ways: buy shares in gold mining or gold royalty/streaming companies; invest in managed funds that seek to invest in gold mining companies; purchase exchange traded funds (ETFs) that seek to replicate the price of physical gold; purchase gold bullion in the form of coins, ingots or bars either directly from a mint or in a secondary market; or buy gold in the form of jewellery or collectibles.

When you buy or sell gold bullion, you are at the mercy of the spot price of the commodity at the time you wish to trade. The spot price of gold in the past 10 years has ranged from $US1896 to $US1050 an ounce. The difference between what gold is sold for and bought (the buy/sell spread) can be between 3 per cent and 10 per cent, making trading gold expensive in comparison to trading shares, managed funds or ETFs.

Gold does not generate an income. Unlike conventional investments, the asset itself will not grow in size. It is a lump of metal, whose value will rise and fall on the basis of demand.

I don’t believe investing a meaningful portion of your wealth in gold is a good idea. But gold can diversify your portfolio. The World Gold Council recommends investors should hold about 2.5 per cent of their portfolio in gold for a low-risk portfolio and no more than 10 for a high-risk portfolio.

Q: I am interested in investing in pink diamonds. Are they a good investment?

A: Pink diamonds have received considerable attention over recent years due to the record prices being attained for some stones at auction. As an investment asset class, the annual rate of return for the past 15 years has been reportedly in excess of 15 per cent. Drivers of the price increase has been a combination of the demand for pink diamonds and the scarcity of supply.

Pink diamonds can be bought from a dealer or at auction. An entry-level investment grade pink diamond will cost about $20,000. Like any collectable, the challenge is understanding and determining fair value for the diamond. Whether it be from a dealer or an auction house, you should insist that the diamond is independently certified and valued.

Investment-grade gemstones typically sacrifice carat weight and clarity in favour of colour. The more intense or deeper the colour, the more valuable the stone. Fancy red is the most coveted colour but individual colour grade scales exist for red, purplish red, purplish pink, pink, pink rose, pink champagne and blue.

Ultimately, valuing gemstones is subjective and the value will always be determined by how much someone is prepared to pay on a given day.

The auction or dealer fees to trade diamonds will range up to 10 per cent. Management costs may include storage, insurance and valuations.

Andrew Heaven is an AMP financial planner at WealthPartners Financial Solutions.

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