In my last article, we kicked off the subject of how you might go about investing in precious metals by looking at:
- 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.
As promised, today we will look at two other approaches:
- Buying a precious metals ETF (Exchange Traded Fund).
- “Going long” gold and / or silver with a spread-betting account.
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 and – for this reason – real gold and silver ‘purists’ insist on taking physical delivery of their precious metals.
The trouble with this – taking physical delivery that is - is that you are then faced with a choice between two potentially slightly annoying alternatives: (1) Take delivery of your highly valuable metal and worry about where to store it and how to secure it, or (2) Pay someone else to store and secure it for you.
The first option comes with the inherent risk that someone might one day stumble upon your stash and steal it – or with the cost of having a half decent safe installed in your house. The second obviously adds another layer of cost of ownership.
3. Buying a precious metals ETF (Exchange Traded Fund)
One way to get exposure to precious metals which neatly side-steps these two problems – to a certain extent at least - is to invest in them by using what’s called an ETF (Exchange Traded Fund). Regular readers and those who have read my book will already be familiar with ETFs.
An ETF is simply a financial vehicle that trades like a share on the stock market and gives you exposure to any number of different underlying investments – in this case gold or silver. In the commodities markets there are two broad types of ETF – “swap-backed” and “physical”. The first uses futures or options contracts to replicate the performance of the underlying asset (in this case, physical bullion). If that sounds rather complicated, all you need to know is that this is essentially a “synthetic” way of replicating the underlying asset. Unless you are a shorter term trader and understand these things you should probably use PHYSICALLY backed ETFs (rather than synthetic or swap-based). A physically backed ETF will actually own the same amount of physical bullion as there is invested in the fund.
This means that if you buy £10,000 worth of gold, say, then the provider will add £10,000 worth of gold to their bullion holdings within a certain time period (usually reasonably soon after you trade). Theoretically, you shouldn’t then have a problem monetising your gold ownership if there is some sort of huge global crisis – a physically-backed ETF will always own the actual physical gold or silver that you are entitled to and have enough ‘value’ in the fund to pay out. BUT – many purists argue that even this isn’t good enough for a couple of reasons:
First, in extremis, the government, could legislate to confiscate gold ‘in the system’ like this (this has happened before in many countries by the way, including ‘free market’ America) so an ETF may not be as safe and reliable as having physical bullion hidden in the bottom of your cat’s litter box ( ;-) ).
Secondly, your ability to get your hands on your precious metals or benefit from owning an ETF will also rely to a certain degree on the ETF providers continued existence and ability to function. As anyone who had an account with Northern Rock in 2007/8 or MF Global in 2011 will confirm, you should always be a little careful of relying too much on the continued existence of any financial service provider, even relatively big ones.
I think in the short and medium term, neither of these risks is particularly likely to happen but if you have quite a lot to invest in precious metals overall, I would suggest that, longer term, you should probably own physical bullion in some shape or form and consider using ETFs as an option for any additional short or medium-term exposure you’d like to have.
A final point to make about ETFs – if only because several people have asked about it – is to highlight the fact that you can buy physical gold ETFs that are denominated in different currencies. People have asked if they should buy in pounds or dollars for example. My feeling on this is that, frankly, it doesn’t actually matter that much. Whatever currency the product is quoted in, it will reflect the relative value of gold in that currency and I think any small differences in cost due to fluctuating exchange rates are not worth worrying about.
I would repeat what I said in my last article – 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 regularly 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…
This is why I wouldn’t worry too much about relatively minor frictional issues like which currency ETF you choose to own… If you’d like more information on the various ETFs available – by all means spend some time looking at the fact sheets of the various products offered by a company called ETF Securities that you’ll find here. They are a large firm that has been an innovator in the space for more than a decade and I personally own and have owned several of their products.
4. "Going long" gold and / or silver with a spread-betting account
(Some of what follows I have gratuitously cannibalised from my book to save me writing the same thing again by the way).
The other way you might look to secure exposure to precious metals, particularly in the short term, is by using a spread betting account. Many people have not heard of spread betting but, for an individual who is prepared to put the time in, it can be one of the best ways to make money from investing. If you do spend the time to learn how it works, it is one of the most powerful tools for making money available, and I would argue we are lucky that we have access to it in the UK. There are relatively few countries in the world with a developed spread betting industry. It is illegal in the US, for example, which is a great shame for Americans.
So - what is spread betting, and how does it work? The first thing to say is that it is, without doubt, a method of investing that is only worth using if you are prepared to put in a decent amount of work.
It is complicated, and if you don’t know what you are doing it is possible to lose a large amount of money very quickly. If you have a spread betting account you are, quite simply, able to bet on the movement of a massive range of assets. Rather than betting on horses, dogs or the cricket score, you can bet on a vast range of shares, commodities and other investments. You do this by betting a certain monetary value “per point” on whatever asset you have a view on. Let us say you thought the gold price was going to go up in this instance.
You would “go long” (i.e. “buy” gold). At the time of writing, gold is trading at around $1,200. If you wanted to go long, you would have to decide how many pounds to bet per point. If you bet £1, you would end up theoretically owning £1,200 worth of gold. This would mean that if gold went back up to, say, $1,500 you would make £300 (£1500 – £1200 x 1). If you had bet £10 a point you would have made £3,000, and so on.
Two great aspects of spread betting are:
- You can end up with a theoretical exposure to whatever you are betting on that is worth far more than you have in your trading account. If you wanted to own £1,200 worth of gold, as per the example above, by actually buying some gold you would need to buy £1,200’s worth. If, instead, you make a bet through your spread-betting account, you would only need a fraction of £1,200 in your account as a deposit to make the bet and you would end up with the same theoretical exposure. It sounds rather complicated (to be fair, it probably is) but if you understand what you are doing this can be extremely powerful. You can end up effectively “owning” thousands (or even millions) of pounds’ worth of an asset using a much smaller deposit.
- You can bet on things going down as well as up. If that thing falls in price, you make money. This is called “shorting”.
For those with the time and willingness to learn, spread betting is another powerful way you might get exposure to precious metals (and pretty much any other investment theme you might think of for that matter).
If you are going to use a spread betting account, however, you must ensure you learn enough about it before you start. Depending on who you ask, between 80 and 90 per cent of people who spread bet lose money. As with so many things, I would say that this is because 80 and 90 per cent of people don’t learn enough about it before they do it. If people went out on public roads in a car before learning how to drive, what percentage of them would crash for example? It is crucial that you learn enough to put yourself in the top percentage who can use spread betting prudently.
I hope these last three pieces on buying gold have been helpful. However you decide to go about securing some exposure to precious metals, I think there is a great deal of evidence that they should be part of your overall investment strategy. Hopefully you now have a slightly better idea of the various options, their costs, risks and pitfalls. Happy investing!