HOW TO INVEST IN GOLD
You can invest in gold by physical ownership, or by using shares, accounts, certificates or spreadbetting.
I would personally adivse to own physical as this method of investment can not be held / defaulted on by any company etc.
Gold can be stored in safety deposit box at a bank or stored at home etc Gold can also be stored in allocated (also known as non-fungible), or unallocated (fungible or pooled) storage with a dealer or a bank. In the case of the dealer going bankrupt, the client would be unable to claim the gold & would become a general creditor, whereas the gold held in allocated storage, should be returned to the client in full.
BarsThe most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold "over the counter" of the major banks. Alternatively, there are bullion dealers that provide the same service. Bars are available in various sizes, for example in Europe these would typically be in 12.5kg or 1kg bars (1kg = 32.15072 Troy ounces), although many other weights exist, such as the Tael, 10oz, 1oz bar, 10g, or 1 Tola. Gold bars can be held either directly (i.e. held directly by you or in your own safe) or indirectly (held in a vault on your behalf). Because of the many difficulties of transporting, storing and verifying pure gold bars, an increasingly popular method of investing in gold bars for the small investor is via allocated holdings using a gold account - see 'Accounts' below.
Buying gold coins is a popular way of holding gold. Typically bullion coins are priced according to their weight, with little or no premium above the gold price. Among the most popular bullion gold coins are the South African Krugerrand, the Canadian Gold Maple Leaf, the American Gold Eagle, the American Gold Buffalo, and the Australian Gold Nugget, all of which contain exactly one troy ounce of gold each. Other popular one ounce bullion coins include the Chinese Panda, and the Austrian Philharmonic. Gold coins used as bullion coins include the British gold sovereign and the Swiss Vreneli, but these are much lighter than one ounce. Again, the large Swiss and Liechtenstein banks buy and sell these coins over the counter. Also available is the gold dinar, which has Islamic significance.
Exchange-traded fundsGold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London, New York and Sydney. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold. Due to costs, the amount of gold in each certificate is now slightly less. They are fully backed by gold that is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market
Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT, which would apply to physical gold coins and bars. economies of scale, liquidity, and ease of purchase and sale make ETFs an increasingly popular method of investing in gold.
CertificatesA certificate of ownership can be held by gold investors, instead of storing the actual gold bullion. Gold certificates allow investors to buy and sell the security without the inconvenience associated with the transfer of actual physical gold. Some argue that it is not the same as owning the real thing, as a certificate is just a piece of paper, especially in a war, crisis, or credit collapse. Others counter that, due to the difficulties of owning and storing a significant amount of gold, a government backed and guaranteed product is the most convenient and cost effective route to take.
AccountsMost Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Digital gold currency accounts and the BullionVault gold exchange work on a similar principle. GoldMoney is a digital gold currency provider, who has been in business since 2001. Gold accounts are typically backed through unallocated or allocated gold storage. Different accounts impose varying levels of intermediation between the client and their gold, for example through bailment or within a trust. Bailment is the legal action of a client entrusting their physical property to another party for safekeeping, and paying for the service.
DerivativesDerivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX), and Chicago Board of Trade (CBOT). In November 2006, the National Commodity and Derivatives Exchange (NCDEX) in India introduced 100 gram gold futures.
Mining companiesMining companies do not represent gold at all, but rather are shares in gold mining company itself. If the gold price rises, the profits of the gold mining company could be expected to rise and as a result the share price may rise. However, there are many factors to take into account and it is not always the case that a share price will rise when the gold price increases.
Unlike gold bullion, which is regarded as a safe haven asset, unhedged gold shares or funds are regarded as high risk and extremely volatile. This volatility is due to the inherent leverage in the mining sector. For example, if you own a share in a gold mine where the costs of production are $300 per ounce and the price of gold is $600, the mine's profit margin will be $300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360, which actually represents a 20% increase in the mine's profitability, and potentially a 20% increase in the share price. Conversely, a 10% fall in the gold price to $540 will decrease that margin to $240, which actually represents a 20% fall in the mine's profitability, and potentially a 20% decrease in the share price. The amplification of gold mining profits during periods of rising prices can cause a gold rush in mining exploration.
To reduce this volatility, many gold mining companies hedge the gold price up to 18 months in advance. This provides the mining company and investor with less exposure to short term gold price fluctuations, but reduces potential returns when the gold price is rising.
TaxationGold maintains a special position in the market with many tax regimes. For example, in the European Union the trading of recognised gold coins and bullion products are free of VAT. Silver, and other precious metals or commodities, do not have the same allowance. Other taxes such as capital gains tax may also apply for individuals depending on their tax residency. U.S. citizens may be taxed on their gold profits at 15, 23, 28 or 35 percent, depending on the investment vehicle used.
Scams and fraudsGold attracts its fair share of fraudulent activity. Some of the most common to be aware of are:
- High-yield investment programs - HYIPs are usually just pyramid schemes dressed up with no real value underneath. Using gold in their prospectus makes them seem more solid and trustworthy.
- Advance fee fraud - Various emails circulate on the Internet for buyers or sellers of up to 10,000 metric tonnes of gold. This is more gold than the US Federal Reserve owns. Often naive middlemen are drafted in as hopeful brokers, and usually mention mythical terms like 'Swiss Procedure' or 'FCO' (Full Corporate Offer). The end-game of these scams is unknown, but they probably just attempt to extract a small 'validation' sum out of the innocent buyer/seller from their hope of getting the big deal.
- Gold dust sellers - This scam persuades an investor there is real gold with a trial quantity, then eventually delivers brass filings or similar.
- Counterfeit gold coins.
- Shares in fraudulent mining companies with no gold reserves, or potential of finding gold, as per the American saying, attributed to Mark Twain but unsourced, that "A gold mine is a hole in the ground with a liar on top."