Monday , March 4 2024
ETFs, gold futures, or physical ownership? A guide to the different ways to invest in gold.

A Quick Guide to Investing in Gold After the Brexit Vote

downloadOn June 23, 2016, the UK made the controversial decision to break away from the European Union with a close vote of 52 percent for and 48 percent opposed. This singular move has shaken global economic markets in many ways.

As usual during times of crisis, war, or general market volatility, many investors have been seeking safety in the strength of gold. All other markets were shaken just hours after the Brexit vote, while the gold market remained in a relatively “tight trading range.” That means that, as predicted, while the value of the pound took a dive, gold did the opposite.

Gold had already been doing well before the Brexit vote, with super-low interest rates stimulating higher investment demand – up to 30 percent higher so far in 2016. The price is also on the rise: since January of this year, gold has risen 28 percent and is now valued at $1,358 an ounce, according to a report by U.S. News. Additionally, starting off the month of July, gold trade was buzzing on the COMEX, with net long gold positions on the commodities exchange jumping 4.6 percent to 273,076 contracts (a new high since 2006).

Looking at these numbers, it’s obvious that the Brexit vote, being the single most important financial event in almost a decade, has caused investors to take a more serious look at gold. And rightfully so. Gold is a stable, long-term investment that will always be worth something.

There are several ways to invest in gold, including from ETFs (Exchange Traded Funds), futures (traded on the COMEX), and ownership of physical gold coins, bars, and rounds. While gold prices are high now, and will likely be for a while, investing in gold is smart, and there are pros and cons to each approach.

Exchange Traded Funds (Gold ETFs)

ETFs “replicate movements of the underlying commodity,” with one share of ETF equivalent to one tenth of an ounce of gold. This way of investing in gold is one of the easiest ways to get into the gold market. ETFs can be traded and sold just like other stocks on the stock exchange, and just like the stock market, the price of gold will change throughout the day.

This approach is popular during “pop-up” times of financial crisis when more people are considering adding gold to their investment portfolio, because it’s a very easy process for the most part. However, there are some drawbacks, such as additional fees and tax concerns.

When you purchase an ETF, you are not actually purchasing any physical gold; you’re rolling the dice as a shareholder. Long-term ETFs in gold are subject to high capital gains taxes, so this investment approach is more short-term (under a year is ideal) to avoid them. When it comes to fees, as explained in an article by Yahoo! Finance: “because the gold itself produces no income and there are still expenses that must be covered, the ETF’s management is allowed to sell the gold to cover these expenses.” This can translate to a diminishing investment since the no income is produced from the gold itself.

Gold Futures

This is one of the higher-risk routes into the gold market, but it if you like to have more control over your investments, gold futures might be the right fit. With futures, investors incur little to no fees (usually just a brokerage fee), and the price of gold futures follows the market price as with ETFs.

With gold futures, investors have a greater ability to leverage their investment to get a larger quantity of gold for a smaller price. For example, one gold ETF share is priced at one tenth of an ounce of gold. Ten shares of gold is equivalent to one ounce of gold whereas one gold futures contract is equivalent to 100 ounces of gold. This means a ratio of 1,000 shares of gold ETFs are equal to one gold futures contract.

There are no added premiums for futures, and they offer a tax advantage for investors that ETFs do not. As far market entry and exit, futures also offer a lot of mobility.

The tried and true saying stands: with high risk comes high reward. Futures are designed for more advanced investors, and might not be ideal during global political or financial upheaval.

Physical Ownership

When gold is physically purchased, it’s usually through a dealer or bank, and is available in bars or coins. Coins are more popular simply because they are easier to store, handle, and transport, and each gold bullion coin carries a small premium over the spot price of gold, usually by 3 to 4 percent. Bullion coins include: the South African Krugerrand, the Canadian Gold Leaf Maple, the Chinese Gold Panda, the American Gold Eagle, and the British Britannica.

The South African Krugerrand was the first legal tender bullion, and the first to be over one troy ounce of 22-karat gold. Investing in the Krugerrand is smart as it’s the most actively traded gold bullion coin on the international market and the most popular by volume sold. Another common option is the gold American Eagle coin, but it’s been losing some traction this summer.

Owning gold in its physical form offers a sense of security that a piece of paper cannot, which is important to people who are concerned about central-bank money printing, inflation, and economic turmoil. The cons of owning gold itself: the price is fixed at what you currently have, and you can’t easily trade and sell gold in its physical form. The pro is that you have a monetary guarantee always around (think of it as cash under your mattress). Just make sure gold is stored in a safe and secure location and is always insured.

Bottom Line

The Brexit vote has created a surge in the market price of gold, but physical gold will keep its value longer and truer to the actual value of gold than either ETFs or futures. It’s risky if it’s lost or stolen, and you can’t really “get anything” from it as with other investments, but to own physical gold is a smart thing to do long-term, especially during the kind of economic times we are in now. Just consider the set-up of how gold is traded.

There are six major bullion banks that handle gold bullion transactions: Barclays Bank PLC, ScotiaMocatta, Deutsche Bank AG, HSBC Bank, JPMorgan Chase Bank, and UBS AG. These banks differ from depositories in that they “handle transactions in gold and the depositories store and protect the actual bullion.” They conduct the financial transactions and ownership transfers of gold once purchased, which are placed in the records of the depository. These are called “contracts” since no physical gold changes hands in this case.

The problem is that “as a measure of controlling the paper prices of gold and silver, The Bullion Banks that operate on The Comex act as de facto market makers of the paper derivative, Comex futures contract.” This means that there’s concern over the ability of the bullion banks to put up actual collateral of physical gold when issuing contracts. There’s even criticism that these banks create contracts from thin air to move the market in their favor.

All of this means that you are more secure by owning your own physical gold. You aren’t subject to market fluctuations as if you were trading shares in gold mining stocks, and if a worst-case scenario occurs, you don’t have to worry about your investments turning up short. Thus, it’s very probable that increased interest in owning physical gold is just ahead.

About Alyssa Sellors

Alyssa Sellors was an English and Journalism educator for eight years and now works as a freelance writer and journalist. She is a regular contributor to a number of publications. In her spare time, she enjoys traveling, reading, and spending time with her husband, baby boy, and two chihuahuas.

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