Q: Given the volatility and uncertainty in Global Share markets, 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 recorded history. However investing in gold and the performance of gold as an asset class is a little different to investing into conventional asset classes such as shares, property or fixed interest.
Gold has historically been used as an investment hedge against volatility in share markets. When share markets are volatile, the price of gold typically does not correlate. When share markets 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 the Australian dollar appreciates in value.
Investors can gain exposure to gold in a number of ways. You can 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. Alternatively, purchase gold bullion in the form of coins, ingots or bars either directly from a mint or in a secondary market. Finally you can 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 US $1896 to $1050 per ounce. The difference between what gold is sold for and bought (the buy/sell spread) can be between 3 and 10% making trading gold expensive in comparison to trading shares, Managed funds or ETFs.
The value of gold jewellery as an investment is typically determined by the gold weight and the scrap price of gold which reflects the market price of gold, allowing for processing costs to melt and re-purpose. Rare and historic pieces with provenance may attract a premium, however it is important to disassociate your attraction to gold jewellery for its aesthetic value as opposed to its market value.
Gold does not generate an income. Unlike conventional investments, the asset itself will not grow in size. It is a static 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. By all means use an investment in gold as an opportunity to diversify your portfolio. The world Gold Council recommends that investors should hold around 2.5% of their portfolio in gold for a low risk portfolio up to no more than 10% for a high risk portfolio.