In my last post I highlighted how gold has returned no less than 12.3% per annum since 2002 (in sterling terms). Today I thought I might spend a little time discussing various different ways you can invest in gold (and silver) since many people have been in touch to ask about this very topic recently.
As is so often the case in investment, there are lots of different ways of doing essentially the same thing – and the devil is in the detail. With precious metals, specifically, there are the following different ways you can get financial exposure:
- Buying physical bullion and taking delivery – i.e. hiding gold and / or silver coins or bars in your own home (ideally doing this should involve a safe or, at the very least, a spade).
- Buying physical and paying a company that specialises in such things to store it for you.
- Buying a precious metals ETF (Exchange Traded Fund).
- “Going long” gold and / or silver with a spread-betting account.
It is perhaps worth mentioning in passing that if you believe in gold as an investment theme, you might also consider investing in companies that mine and produce gold or a fund which invests in such companies. Doing this can produce exceptional returns at the right stage of the gold cycle but – make no bones about it - this kind of investment is not for the faint-hearted. All other things being equal, investing in gold mining companies is inherently a far riskier and more volatile investment than buying bullion itself.
It is my belief that allocating a certain proportion of your overall wealth to bullion should be a fundamental building block of everyone’s long-term investment strategy. Investing in gold miners is a totally different kind of investment in that doing so should only ever be part of any ‘higher risk’ monies that you might want to get to work.
So let’s look at each of the above approaches in turn:
1. Buying physical and taking delivery.
There are lots of different firms that specialise in selling you physical gold or silver and it is important to use a reputable one to ensure that you are actually buying the real thing. It is vital not to cut corners here as there are plenty of stories about unscrupulous companies selling fake bullion. I have personally used a firm called Silver To Go to buy silver coins and there is a great company called Sharps Pixley who have been selling gold and silver bullion to British investors since 1778. They even have an actual shop in St. James’s, London which is all rather James Bond if you ask me – (I love the idea of popping into a shop to buy some gold bullion on the weekend - in arguably the poshest part of London too).
Gold purists (or ‘gold bugs’ as they are commonly known) – will generally tell you that buying physical bullion in this way and actually taking delivery of it so you can look at it and touch it, is the only way to go when buying gold. As far as they are concerned any other “synthetic” kind of gold ownership (e.g. through a fund or by taking a position in a spread betting account – methods that we will look at shortly) – is to be avoided.
I have a certain amount of sympathy for this stance. One of the problems with the precious metals market generally is that there is a vast amount more ‘theoretical’ gold and silver in the world (i.e. trading as financial instruments that seek to represent gold or silver) as there is in existence in the world – if you look at estimates of how much gold and silver has ever actually been mined. The generally accepted estimate here is that there is about fifty times as much “theoretical” gold as real. Some reputable analysts think this number is even higher.
At the macro level – there are lots of conspiracy theories about the fact that numerous governments do not actually possess the gold that they claim they have, particularly the Americans. You can find any number of people in the blogosphere highlighting that the Germans have only got a tiny fraction of their physical gold back from the US since demanding it be returned to them in January 2013, for example. Below is a link to an article I found on the subject with a quick google, there are plenty of others. The theory (probably correct IMHO) is that the Americans simply don’t own anywhere near as much gold as they claim they do anymore and are using their investment banks and the futures market to pull the wool over the world’s eyes.
The counter argument to this relatively alarmist / conspiracy theory-esque stance is that there can (and to some people, should perfectly naturally) be significantly more theoretical / ‘paper’ gold in the world is similar to the reason that banks only hold a fraction of what they lend out in the economy – ultimately the global financial system works on what are called fractional reserves. If traders are making bets with each other long and short, the existence of physical metal only becomes relevant for the tiny minority of contracts where physical delivery actually takes place – i.e. most contracts are just a bet that something will move a certain way today or tomorrow and the participants close out these bets with each other without going anywhere near actually owning the underlying asset.
This is analogous to something called the "velocity of money" in the economy more generally. I.e. you pay £20 for a hair-cut, the hairdresser spends that £20 on a bottle of wine, the retailer, distributor and wine-grower spends that same £20 on three other things and so on. One £20 note in this example has created hundreds of pounds worth of activity in the economy and no-one argues there was "only one £20 note" so that shouldn’t work.
That said, this system does leave itself open to manipulation on a massive scale and it isn’t difficult to demonstrate that even central banks don’t trust each other when it comes to real, physical gold holdings these days. That being the case, you as a private individual might be even more nervous. If there is a ‘run’ on gold tomorrow and everyone owning a paper claim on the metal suddenly wanted physical delivery, potentially 49 out of 50 of those people wouldn’t get any, given the point I made above about there being about fifty times more “paper” gold than actual bullion. It is for this reason that gold bugs insist on being able to see and touch their gold and silver.
The only problem with taking physical delivery is, pretty obviously, that there is a certain security risk in doing so. Unless you have an expensive safe that is built into your property (i.e. so it can’t be picked up and carried away by thieves), or you are willing to dig a pretty large hole in your garden somewhere and keep a treasure island kind of “x marks the spot” map, there is always a risk that physical bullion kept in your own property might be stolen – not ideal if it constitutes as much as 10% or even 25% of your net worth. It is for this reason that many people opt for the second of our methods.
2. Buying physical and paying a company that specialises in such things to store it for you
For those who are a little less paranoid than the ultimate purist gold bugs, there are plenty of companies who will let you buy physical gold and store it with them for a small fee.
My favourite one of these is a company called Bullion Vault. If you want to own gold and / or silver, Bullion Vault is a web-based service that enables you to do so without taking delivery. They are the world’s largest company of this kind with 65,000 clients who own more than $2 billion worth of gold between them.
The bullion is held legally in your name and you can elect to keep it stored in places like Switzerland or Singapore (i.e. so the US or British government won’t be able to confiscate it if it ever comes to that – remember, if this sounds like a crazy conspiracy theory to you - this has happened before - and in living memory for people alive today. As you may recall from my most recent email on gold, the Americans made holding gold illegal for private citizens in 1933 and this remained the law until 1974! It is entirely possible that this kind of thing may happen again, in which case you will be glad that you are in physical possession of your bullion or, failing that, that you have it stored in Switzerland or Singapore out of the reach of confiscatory governments).
I have had an account with Bullion Vault myself for some time and have found them to be first class. By all means check out the reviews of the site for more evidence of how good they are. Setting up an account with them is very easy. You register as you would with a site like Amazon or Facebook and you get an email immediately (with a free gram of gold thrown in, no less). You can then just transfer money from your current account as you would with paying any bill or transferring money to a friend.
Regular readers will know that I am a big believer in regular investing as a general rule so it is perhaps worth highlighting that if you are in a position to invest more than $100 a month in gold, then you can even set up a direct debit with Bullion Vault to automatically invest in gold every month.
If you don’t have $100 a month, then I would suggest you might consider investing every three months or so. Let some cash build up from your monthly savings habit and then set an alarm in your diary to transfer some funds into gold or gold and silver every few months. Very soon you will get used to doing this. In the long run, it doesn’t really matter what price you are buying in at if this is something you just do reasonably regularly as a matter of habit. Over time you should average in at a good price and end up with a sensible allocation to precious metals.
It should be noted that the minimum monthly charge for storing gold with Bullion Vault is $4 – which means that this is obviously quite a high percentage if you only have a relatively small amount to invest. I don’t think this is really that problematic, however, given that as you add more and more to your Bullion Vault account these percentages will come down pretty quickly (to 0.01% for storage). There are two more general points that I would make on this subject:
First, that buying precious metals is a bit like buying insurance. You buy your car insurance every month for however much it costs because if you are unlucky enough to have an accident - you will get a large pay out. You buy precious metals every month because if there is a monetary crisis or other serious market volatility you will get a big pay out and be glad you have them. The thought process, therefore, is a little different to other investments.
Secondly, and related to this - although I would argue that it is fantastic that gold has averaged over 12% for us Brits going back nearly twenty years now, what I really expect from gold and even more from silver is that there is going to come a time where they explode - just as they did in the late 70s. Gold went up 24-fold from 1971 to 1980! This is why you're buying exposure to them - as an insurance policy of sorts. I think it is entirely feasible that gold will hit $3,000 or even $5,000 and silver will get to $100 or even more. Silver 'should' theoretically be about 1/15th the price of gold as there is fifteen times the amount of it in existence in the world - so if gold hits $3,000 - it could go as high as $200 (from about $17.5 at the time of writing). Assuming this happens (and there is plenty of evidence from history that these levels are entirely possible) - you aren't going to be that worried about paying fees for commission and storage as you build your position to take advantage of this scenario.
In my next post I will discuss buying precious metals with ETFs or using a spread betting account.