Many ways to buy into gold as bears threaten to party

The yellow metal is approaching record price levels and investors are finally spoilt for choice.

Access to gold bullion has been simplified in Australia with the Perth Mint’s products.

Gold prices are jumping and the best thing for investors is that the forms in which you can buy into the yellow metal have multiplied in recent times. Only a decade ago gold remained a relatively obscure way to hold investments. In effect, it was restricted to the very rich who could hold it in vaults. Now all that’s changed. You can hold gold-backed receipts, exchange traded funds …. there is even a “gold savings account” launched with excellent timing just two months ago.

The price of gold is powering ahead as investment “bears” begin to stir: Investors have become increasingly wary over the dismal efforts of central banks to stimulate the major economies. More recently that concern has lifted a notch off the back of the surprise Brexit vote.

But as you look closer, the story of gold in 2016 gets even more interesting. It’s not because the yellow metal has spiked — that will often happen in times of crisis or elevated uncertainty — rather the intriguing aspect is that investors are coming to gold as an alternative to cash.

The argument in favour of gold has always been that it is a steadying influence on diversified portfolios — it will rise over time, it will act as a hedge against inflation. On the flip side the failing in gold as an investment has been that it does not pay any income … there are no dividends.

But when rates are so low as to border on insignificant then gold as an asset class moves into a new league entirely. The theme is more pronounced in overseas markets where rates are at rock bottom — but it is taking root here too, according to industry analysts.

Separately, gold stocks are having a magnificent run: they represent the standout sector on the ASX over the past 12 months when the gold index has risen by a stunning 93 per cent.

If you wish to put the performance of gold stocks in perspective, compare it with the ASX 200, which managed to lose 4.5 per cent over the same period.

It’s no surprise then to hear some innovation in this “hot” sector: Since the GFC, when the ETF (exchange traded fund) sector was in its infancy, a string of gold-based ETFs have been launched on the local market. Put simply these products offer stock exchange securities that are underpinned by gold holdings and move in tandem with gold prices. ANZ, Betashares, ETFS and van Eyck have all launched gold ETFs in recent times.

Separately, the Australian Bullion Company certainly picked good timing to open “gold savings accounts” back in April: ABC economist Jordan Eliseo says the account acts like a bank account but your money is converted into holdings in gold. It’s a novel idea in Australia, but extremely common in Asian markets where major banks such as HSBC and others have long run such services for general customers.

For any serious investor gold should always be on the agenda — and don’t for a moment buy into the nonsense that bitcoin is the new gold or that gold has lost its place in modern investment allocation … why, you might ask, are central banks still buying it then?

There are two distinct gateways to gold — investing directly through buying bullion or some proxy of bullion such as ETFs. Alternatively, you can buy gold mining stocks and there are hundreds to choose from on the ASX. Let’s look at both separately:

Direct access

Apart from bullion itself, which is awkward and must be stored and insured, the most common form of gold holding is in ETFs — many of these products are up over 10 per cent in the past month alone. No wonder, the ETFs simply mirror the commodity price and in Australian dollars that sits at around $1776, seriously within sight of breaking the all-time high of $1850.

However there are issues with ETFs — they are far from perfect and one of the concerns is that they may not exactly match their securities to underlying gold holding at any given time — in other words if the gold price moves quickly the operators of the ETF have to scramble to buy the underlying physical gold — there have been some serious concerns about this issue in the US in recent times.

An antidote to the problem comes from the unlikely source of the government-owned Perth Mint: which makes and sells gold bullion. The mint also offers what it calls depositary receipts and they act just like an ETF. You hold a paper-based product that is linked to the underlying value of the gold with one splendid twist: The depositary receipts are guaranteed by the state government of Western Australia.

Richard Hayes, the CEO at the mint, says: “We make gold, and we attract investors rather than speculators.”

Indirect access

You might think tagging goldmining stocks as offering indirect access to gold is inappropriate but the smart money has always had this attitude — you are buying into a company attempting to find or produce gold it is a very different investment than putting money into the commodity itself — just look at the long and trouble-plagued history of market leaders such as Newcrest or St Barbara to figure that one out.

But allowing for that distinction goldmining stocks are soaring — and my colleague Richard Hemming (Under The Radar) pinpoints a couple of gold stocks among his favourite stocks for the year elsewhere on these pages today. As prices continue to move higher Australia’s biggest goldminer Newcrest is now worth about $18 billion and there are another three goldminers in the top 100 stocks … Oceania Gold, Evolution Mining and Northern Star.

For long-term investors looking for diversity and especially what’s known as non-correlated investments — which are expected to rise when the sharemarket goes down — gold is a good home for a limited allocation of funds … just remember there’s no income and don’t get gold and gold stocks mixed up. They are only loosely related.