The 3 Step Guide to Investing in Gold
Step one
Why are you doing this?
Ok — that sounds a bit odd, but it’s a very sensible question.
Are you looking to protect or make money?
I can assure you that there are a lot of people out there who are looking to protect what they already have rather than make a lot of money.
If you are looking to make money then please go to step two. But if you’re looking to protect it, then read on.
Protect my money?
You’re probably concerned about a market correction…..even a crash. Should that happen you want the link between you and your gold to be as short as possible — which means as little counterparty risk as possible.
You don’t want to ask someone, who has to ask someone else about your gold. You’ve gotta have a direct route.
For protection I can think of nothing better than physical gold that’s stored by a reputable dealer.
The word “reputable” is important here because you need to think of your gold as if it’s a fine bottle of wine. If it’s acquired from and stored by a well-known name, it’ll be much easier to sell. There’s fewer questions to ask.
I’d also say that you want to hold your gold in a format that is both portable and divisible. I recently did a show on IG Index where the CEO of Sharps Pixley produced a 1Kg bar of gold. Although it was pretty small, even at today’s gold price it was worth over £30,000. Not very practical if you need to “spend it” in an emergency. Something worth thinking about.
Do your own research and go with someone who is clearly highly regarded. Yes, it may be more expensive. But you pay for what you get in life.
The last thing you need is someone questioning the integrity of your gold.
Step two
Lets assume you want to make money.
It’s now down to how much risk you want to take.
If the answer is not much, then acquiring either physical coins (which can be capital gains tax free) or an ETF are common routes. But again, do your own due diligence and only go with reputable names.
Although ETF’s have fees, these are typically lower than storage costs, so depending on your rationale for going down this route, they may make sense. But please bear in mind that they may not be backed by physical gold but derivatives that track the gold price.
So if the market crashes and one of these counterparties blows up, you could be in a spot of bother.
Both ETF’s and Physical gold can be volatile — please bear that in mind.
Physical funds are also available, but go with a large one to ensure liquidity.
If you want more risk….see step three
Step three
We’re now talking the miners. But I’ve broken this down into two groups. The lower risk producers who are already mining, processing and selling gold and the explorers which can be very high risk.
Let me talk you through a producer.
Production costs vary enormously, but let’s run with an All in Sustainable Cost (AISC) of US$1100 per ounce, which is reasonably common. At the current gold price of say US$1220 per ounce that gives you a profit margin of US$120 per ounce. But if the gold price goes up by 10% to US$1342 then as your costs are unlikely to change that much, your profit margin is now US$242 per ounce. An increase of over 100%.
Which is why these shares are so volatile relative to the gold price.
Please remember, if the gold price falls below the AISC then your margin is wiped out. Many producers have different mines, so that may not be the end of your investment. But it’s something you need to think about.
I should add that you also need to think about political risk, as it’s not unheard of for some countries to nationalise a particularly attractive asset. One reason why I prefer mines in what I consider to be safer jurisdictions, such as Australia and Canada.
If you love risk and want to have a real punt at something, you may want to look at the explorers. Although these can generate some stunning returns — several have multiplied in value by 10 and even 100 times.
They can also go to zero.
So if you’re going to play in this pond you need to get some advice as well as build a broad portfolio, so if one goes “Pop” — you don’t have all your eggs in one basket.
Investing in Funds can be one way of mitigating this risk, but please bear in mind the performance fees and ongoing costs of running these. Make sure you’re ok with them before committing any capital.
The important thing to remember is this market is all about timing.
The gold has been there for thousands of years. During which there have been good and bad times to own it.
Personally, I think now is a good time.
