Does GOLD glitter?

Gold has held its attraction for thousands of years, whether for adorning the human body, buildings, furniture, buying goods or storing for bad times.

The storing of gold as a means of stability was more important when currencies were on the gold standard but even today governments buy and store gold as part of their reserves. Talking to the experts it is clear that this continued investing in gold by governments is an underpinning to the value and tends to dampen volatility. That is not to say that gold does not fluctuate because it certainly does. It is considered a safe haven in bad times, when the value goes up, and tends to drop in the free market when the stock markets and world economic conditions look their best. Gold also does well when interest rates are low. That is not too surprising since the value of bank deposits is static and can yield little with only a marginal guarantee. So there are times when cash is king but that is also applicable to gold.  For those that can put aside monies that they do not immediately need and wish to have something to fall back on in the event of bad times, gold is still the ultimate hedge.

But how does the average investor get into gold, what form should it take, how much does it cost and how to store it? What to avoid and what are the best approaches to the market?

Eliminating the don’ts first all. There is a lot of paper chasing the gold market and its ancillary aspects. The paper is not all good and even in the highly respectable area of investment such as ETFs – Exchange Traded Funds – it is not clear how much bullion is actually held compared to paper purporting to be gold. Then there is gold mining. I once spoke to the Chairman of the Australian Investors Association who told me that over the years he had invested in gold mining and had just about broken even. The fact is that the gold mining industry may sound tempting but its assets are not in 99.99% pure bullion.

I was told that it is difficult for the average investor to enter into the gold bullion market. Well I think we have cracked that one and at reasonable costs. So an investor should not be put off by the idea that they cannot buy gold and come close to the bullion price. More of that later.

Then there is the 99.99% minted coin market compared to the 99.99% cast bar bullion market. 4 9s as they are called. Because the coins are minted, are attractive and can become collectors’ items they are at a premium compared to bullion. But they are in smaller denominations and so cost less per unit to collect. The popular and marketable mint coins are the ones to follow. The Australian Kangaroo is a good example.

Having acquired gold the next question that arises is how to store it? A home safe is not much security against professionals. Some investors keep a few coins nearby in case of emergency and it has even been known that a couple of 1kg cast bars are kept close by since they fit into shoes and can be walked across a border! So where is it safe to store gold? Switzerland and Lichtenstein have been popular because of their stability and flexibility but Switzerland is now less popular with Asian investors because of whistle blowing and pressure from the EU. The Asians have turned to Singapore and the Muslim investors to Dubai. A country of choice has to have a stable government, a friendly regime towards overseas investors, have no border disputes, lack of conflicts and above all no confiscation of assets. Europe is perhaps not a good example in this respect. After research I favour Australia. No border problems since it is surrounded by oceans and seas, has a stable democratic government, strong defences and powerful allies. Australia has a history and culture steeped in gold and it is still important. The mining, refining and development of the gold market in Australia is sophisticated and flexible. Quality, acceptance with the LBMA – the London Bullion Market Association - and storage are first class. The Central government and for example the Western Australian Government give guarantees as to quality and purity and regulate the industry, even getting into the business via the Royal Australian Mint and the Perth Mint. We find that the idea of storing bullion in a privately owned custodian vault facility underground in the centre of the City of Sydney, with full security, is appealing.

One should not buy gold on credit and it should be bought with spare funds and held for the medium to longer term, say 5 years. Over a 15 year period gold has returned an average of around 8% per annum which is much the same as the S & P 500, including dividends. Gold does not of course give interest and it has to be held for its intrinsic monetary value with a view to medium / longer term gain. In the Great Financial Crisis gold bullion jumped some 50% and on profit taking held onto a 24% gain. Although gold has fluctuated in price since that time it has never gone back to pre-2008 prices and has progressed steadily. That indicates how governments and investors view the precious metal these days.

It is best to be compliant in buying and apart from anything else it reassures in terms of title, purity, security and marketability. When it comes to title it is important that ownership is held directly and that it cannot be leased out, pledged or hedged.

So what does it cost? Take the example of a 10 ounce cast bar which at the moment would cost some USD 13,230. On a buy and then sale basis the total of dealing would be 5.2%. Not so different from mutual funds and there are no secret commissions with gold… With a 400 ounce cast bar the costs would be 4.2%. The latter would cost over half a million USD so it would definitely have to be securely stored.

The storage in the facilities mentioned above depend on the type chosen.

The first is a safe deposit box. These can hold up to 15 x 1kg bars and cost USD 186 p/a. On a single 10 ounce bar that is 1.4% p/a. So it is more suitable to hold, say, 10 x 10 ounce bars when the cost would come down to 0.14% p/a. That would entail an investment of USD 132,301 currently. For those who wish to visit their gold, have the pleasure to feel it and see it glitter this is perhaps the answer. Then there is the Pool Allocated storage which is free. The purchase is certified and suitable for buying and selling. If the investor physically wants their gold bar then they would have to pay a bar fee for it to be cast. That would cost some USD 23 on a small bar and up to USD 220 on a larger bar/bars.

Then there is the Secure storage which is cast bullion with a certificate although, on withdrawal it may not be the same bar as it comes from the group stock at vaults - but it will be identical. This costs 0.75% of value p/a. The Premium service costs 0.95% p/a and is the exact designated bar / bars. This cost can be reduced to 0.75% on volume holdings of 20kgs and above. All the above holdings are fully insured with Lloyds of London and subject to a 6 monthly audit.

There is much publicity these days about bitcoin and cryptocurrencies which is accompanied by some fairly aggressive marketing. The fact is that many people are not sure quite what they are and that includes several governments which have banned bitcoin as a currency and its trading. When one considers the volatility that bitcoin has had it is not too surprising. Bitcoin hit a peak of about USD 20,000 in late 2017 and is currently at USD 5,100. Meantime the gold bullion price has remained steady with little volatility. Some investors have taken a small position on bitcoin, probably so as not to “miss out” in the event that it really becomes something, but they also have positions on gold coins and bullion.

So in conclusion while bullion has its costs, it can be bought and securely stored at a reasonable cost and so it does glitter! In my view gold bullion can be an advantageous addition to a portfolio and to be held longer term as a counter risk investment. Contact me for details.

Geoff Heywood

Sydney Australia     May 2019