How to invest in gold

Co-founder of the Switzer Report
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I don’t pretend to understand the gold market. Like many people, I can rationalise (in hindsight) why the price goes up or down – however, I won’t claim that I have any more ability than the next person to predict where the price will be in three months, let alone in 12. As such, I’ve always steered clear of gold. I also have an aversion to investments that don’t pay an income like that you get from shares (dividends), property (rent) or bonds (interest).

That said, if I was feeling particularly bearish or thought my SMSF needed some ‘insurance’ in case of prolonged financial uncertainty, I might be tempted to think about the gold market. For those who are interested, what I can tell you is how your SMSF can buy gold.

But before I tell you, here’s a quick reminder about an important obligation: if you plan to buy gold, your written SMSF investment strategy may need to be updated. Gold is often categorised in the ‘alternative investments’ asset class, which for most SMSFs has an allocation of less than 20% of your total assets.

Then there’s the question of how much of that segment should gold make up. Unless you and your fellow members are real ‘thrill seekers’, it’s probably not going to make up much more than 25% to 50% of this segment – so a gold weighting of more than 10% of your total portfolio would be a big call.

Now, back to how you can buy it.

There are three relatively easy ways to buy gold or get exposure to the gold market: buying gold from the Perth Mint; buying gold Exchange Traded Funds (ETFs); and buying Australian gold producing companies. I’m deliberately leaving out the gold explorers because, while a few will succeed, most will end up in the hands of a liquidator.

With the Perth Mint ( ), you can buy gold coins or gold bars, and elect to take physical delivery of the bullion, or have them store your gold securely under a custodial arrangement. The Perth Mint is backed by the WA Government. In addition, if you want to cash-in on the gold-price rally of the past few years, you can sell your gold bullion, gold coins and gold jewellery to the Mint.

You’ll need to open an account and go through full identification checks – so allow about a week to get the account set-up if you’re in the eastern states. Once that’s done, you can buy the gold online or over the phone (if you’re taking physical delivery), or in person.

So, what are the costs in dealing? The bid/offer spread (that is, the difference between the buying price and the selling price) is around 3% on a 1kg cast bar (which will cost around $57,400), or 3.2% on a 10oz cast bar (cost around $17,900). Then there are freight and insurance costs. If you use their storage facility, the Mint charges a fee of 1% per annum.

The key point – your investment will start down by about 4%!

To put some perspective on this, with cash in the bank, your SMSF should earn at least 4.75%. Comparing gold to cash, if you buy gold now (the Aussie-dollar spot price is around $1,768), the price of gold will need to increase to $1,923 in a year’s time for your SMSF to be better off.

I prefer the second option – Exchange Traded Funds – because you don’t need to pay the same bid/offer spread. It’s not quite as safe (you don’t get to touch the gold), and there are always the usual ‘manager risks’ – although in these cases they are relatively low.

There are three gold ETFs listed on the ASX that can be traded through your online broker.

How to buy goldWith an ETF, market liquidity is very important. ETFS Metal Securities wins on this count, although the BetaShares ETF is rapidly catching up. I prefer the latter because it hedges its US dollar exposure back into Aussie dollars. (Remember, physical gold is quoted in US dollars, but there are other ways to get currency exposure. Go for the BetaShares ETF, stock code QAU.)

Finally, you can get gold exposure by buying shares in Australian gold mining producers. With the consolidation of Australia’s mining industry, there is Newcrest Mining (ASX:NCM) and then a long gap to the others. Resolute Gold (ASX:RSG) and St Barbara Limited (ASX:SBM) are in this category. Key things to look at are their production costs and the life expectancy of their mines.

If I was feeling tempted, I would go for the BetaShares ETF. While it would be nice to go down to the bank vault to inspect gold bullion (or know that it is tucked-up safely with the Perth Mint), the extra spread, holding and possibly insurance costs are a lot to make up.

Disclosure: The author or his SMSF doesn’t own gold, gold ETFs or shares in the companies quoted above.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


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