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Last update : January 2010
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Gold
Where to buy it - How to buy it
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| The first point to understand when thinking about buying physical Gold is what's called the 'premium over spot'.
The spot price, or cash price, is the price you'll see quoted on the internet on such sites as www.kitco.com or in the financial section of a newspaper. The spot price trades 24 hours a day, 5 days a week and follows the sun, opening in New Zealand and Australia before moving on to the Far East, Europe and finally to the US before starting all over again.
However, if you want to buy physical gold you'll have to pay a 'premium over spot'.
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For example at the time of writing the price of Gold is $995.50 but Kitco, one of the larger US dealers, is quoting the following for a selection of different 1 Ounce coins -
- Gold Eagle (American coin) : $1,085.09
- Gold Maple Leaf (Canadian) : $1,075.14
- Gold Krugerrand (South African) : $1,065.18
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| UK Prices |
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I've just phoned a Gold dealer to get the latest prices for a Krugerrand and a Britannia (the UK ounce coin) and they quoted -
- Spot Gold price : £606.15
- Krugerrand : £594 (if selling to the dealer) and £649 (the buying price)
- Britannia : £600 - £673
As you can see the dealing spread is large, at nearly 9% for the Krugerrand, and this should be noted as it makes buying and selling physical Gold expensive.
As a rule of thumb expect a premium of about 8% when buying Krugerrands in the UK. And if a dealer wanted to charge more you should look to buy elsewhere.
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| How much of a premium to pay |
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How much of a premium depends on many factors, including -
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- The company selling - some might charge 9%, others only 5%
- The quantity - don't expect a deal if you buy a single ounce, but 10+ and I'd advise asking for a discount
- How tight the Gold market is - Gold dealers won't stock their vaults full of the metal so if their stocks go down the premium can rise, as it can do when the market gets speculative
- What you're actually buying - not all 1 Ounce Gold coins are the same, although they'll have similar amounts of Gold content. As a general rule the 1 Ounce Krugerrands have the cheapest premium over spot
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Summary - the premium over spot can move higher and lower depending on many different factors. Therefore don't buy or sell gold until you have researched what is the current premium. Failure to do this could mean you might either overpay or sell your gold too cheaply.
Sadly, there's a reverse premium when selling Gold
Reverse premium is another word for discount over spot. Theoretically the difference between a gold dealer's buying and selling price is his profit, and this difference is usually referred to as the spread.
As an example a UK dealer will buy a Krugerrand from you at £594 and sell it at £649. So you can see this spread makes the buying and selling of Gold coins extremely expensive. Or if you look at it another way, buy a gold coin today and the price of the metal has to rise by about 9% just to break even. And with Gold at the time of writing nearly $1,000 a 9% move is obviously $90 which is a significant move.
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| How to buy physical Gold |
| Gold Coins |
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For UK investors I'd advise you stick with South African Krugerrands as they traditionally have the cheapest premium plus they're the most common Gold coins on the planet - for more in-depth information on Krugerrands see this Wikipedia link.
Yes, it's possible to buy fancier and more expensive one ounce coins but I would only advise you to do this if you have a specific reason, perhaps a special edition or a reminder of a trip abroad (Chinese Panda coins for example).
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However if your sole reason for buying gold coins is for the gold content, then buying the cheapest is the best strategy. This is why the majority of Gold investors in the UK, including myself, stick with Krugerrands.
Note - Mail order for coins is fine
The majority of Gold dealers offer a fully insured mail order service so don't be worried about buying from a Scottish dealer if you live in London. I've bought Gold via mail order before and had no problems.
You can also sell your coins by sending them in the Post to the dealer. Use the Post Office's special delivery option where packages can be insured for up to £2,500.
Gold Coins Dealers
Summary - 1 ounce Gold coins for the majority are the best way to invest in the metal.
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| Gold Bars |
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Gold bars are usually sold in 50 gram (1.76 ounces), 100 gram and 1 kilo weights. However, many Gold investors prefer to buy the 1 ounce coins because buying and selling them is easier.
For example, if you buy a Krugerrand in Japan you won't have any problem selling it in the UK. But should you purchase a 100 gram bar some Gold dealers might be apprehensive about buying it until they've carried out further checks as to its provenance, its purity, and of course whether it's a fake.
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Summary - Unless you've got big bucks, and I mean in excess of £1million I think it's better to invest via one ounce coins.
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| Pooled Gold Accounts |
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There are a number of firms around the world that offer what's called 'pooled accounts'. This is where you can buy Gold that's held within a vault, ie you own it but never see it. Three of the largest are -
Note that all of them offer the ability to pay in different currencies.
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The advantage to buying Gold in a pooled account are cost and ease of trading -
- Cost - At the time of writing Gold priced in Sterling is £606.15 per ounce and the cost of buying a 1 ounce Krugerrand is £649 (£594 to sell). But the Bullion Vault quotes a tiny dealing spread in comparison - £605.30 - £606.52 per ounce
- Ease of trading - All business is done online 24 hours a day and buying or selling will probably take less than a minute
The disadvantages to a pooled account is that you'll never see the Gold you own. Often the reason people buy Gold is the security that the physical metal provides. For example, would you rather have 10 ounces hidden somewhere in your home or held in a bank vault in New York?
However, I do admit that for short term holding of Gold, perhaps less than 1 year pooled accounts are probably a better way to invest that buying one ounce coins, just because the buying and selling costs are so much cheaper via the tiny bid-offer spreads.
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| Mining Shares |
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Buying Gold mining shares is possibly the worst way to invest in Gold. This is because there's often little correlation between the stock's price and the price of Gold.
It's therefore possible for the price of Gold to rise by $50 or $100 but the price of a stock falls. And yes, the opposite is also true, a stock can climb in value if the gold price falls.
A far better way is to use Exchange Traded Funds (ETFs), discussed below.
Having said this, if you are comfortable operating in the stockmarket take a look at Gold Royalty stocks as possible investments.
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| Gold ETFs |
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ETF stands for Exchange Traded Fund. An ETF is a fund that trades like a share. The majority of ETFs track an index such as the FTSE 100 or a commodity like Gold. For example -
- If the price of Gold is currently $992 a Gold ETF will be priced around 99.20 (not, it's not a typo the decimal point where it is makes the share cheaper)
- If Gold rises to $1015.5 the ETF will also rise to around 101.55
ETFs can be bought and sold like any regular share. Buying £1,000 of Vodafone is no different to buying £1,000 of a Gold ETF.
ETFs have taken the investment world by storm over the last 10 years because they're liquid, offer traders different investment strategies and above all are cheap to own and run with total yearly management charges anywhere from 0.1% - 0.75%.
2 types of Gold ETF
- Invests in the physical metal - These ETFs buy and hold the physical metal in a bank vault so if the ETF capitalisation is $101million it will own $101million of physical gold
- Matches the Gold price via derivatives - No gold is bought instead the price of the ETF mirrors the price of Gold and this is done via investing in derivatives
So which ETF is better
My advice is simple, if you want to use ETFs then only use those ETFs that invest in the physical metal because they offer complete security in that their capitalisation is backed by Gold and you really can't get a better guarantee than that.
In the UK look into the following Gold ETFs -
So which ETF to buy? If it was me I'd look at two important points -
- The liquidity, ie how much is the average daily volume, and
- The bid-offer spread, the difference between the buying and selling prices
Both points are related as liquidity usually translates into tight prices. And after checking today's prices/volumes it looks like PHAU is the most liquid.
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| Buy/sell coins via eBay and other internet auction sites |
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I've heard good things about people buying Gold and other precious metals via eBay. But of course there is always a risk involved. If I were going to buy from an online auction I'd make sure I was buying from somebody living in the UK as well as reading very carefully the seller's past feedback.
Also, make sure the coin(s) are posted via insured mail.
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| From Friends and family |
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Often the cheapest way to buy Gold as theoretically the deal should be done at the spot price. But how many family/friends do we know who want to sell Gold when we want to buy?
Still, if you know of some family/relatives that own gold why not ask them for first refusal if they want to sell.
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| Coin fairs |
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Often far cheaper to buy coins at a Coin Fair than from a High Street dealer but I would think it's a good idea to really know what you're buying and how to spot any potential problems, ie fakes, see below.
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| How to spot fake coins |
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I'm not an expert on the matter but I would think one of three ways -
- Become an expert - obviously not practical for most people
- Buy from reputable dealers - common sense really
- Use 'The Fisch' - This is a simple tool that' can easily spot fake bullion coins - more details on their website. Note however, there is a twist in this tale as there are people selling fake Fisch tools! So beware and only buy from the company's site
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| Summary |
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As you have seen there are many options for buying physical Gold, from the physical metal itself to pooled accounts to stockmarket instruments like ETFs. And they all have their associated advantages and disadvantages.
So how do I buy my Gold? As I tend to buy it for investment and security reasons, ie holding on to the metal for many years, I choose Krugerrands. But if I wanted to trade Gold, perhaps thinking it's going to rise by $50 - $100 over the next few months, then I'd use either pooled accounts or ETFs.
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Postscript - Spread Betting can also be used to trade Gold
Spread betting is not for everyone, in fact I'd advise any one from getting involved unless they really know what they're doing. But I do know some people that have used spread bets to buy Gold for the long term, ie 1-2 years.
All they do is keep rolling the bet over 3-4 times a year. And the advantage to using spread bets is all the profits are 100% tax-free. However, take note of this fact - because spread bets are classed as gambling, if you lose then the losses are not offsettable against tax - a point which many miss.
For more information on Spread Betting, what it is, how it can be used as well as its advantages/disadvantages see the LearnMoney.co.uk guide to Spread Betting.
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