Investing in Gold and Silver

A stated above gold exposure can be in the form of mining shares, ETFs or ETCs (Exchange Traded Funds or Commodities), mutual funds although at least some of it should be in the form of real physical gold, the ultimate safe haven. Buying mining shares, mutual funds (unit trust or investment trusts in the UK) and ETFs / ETCs can of course be done through a stock broker, but how do you buy physical gold?

Coins and gold bars can be bought from a specialist coin dealer, but with a significant premium over the value of the gold, typically more than 10% for small quantities of coins to perhaps as low as 5% for large quantities of low quality bullion coins. High quality or rare coins will be more expensive, but should also retain that extra value.

In the UK Sovereigns have a tax advantage over other coins, because they are legal tender and therefore capital gains tax does not need to be paid on any increase in value. They are however a little disappointing at just 0.22 ounces, so you need a big pile of them. South African Krugerands are popular as they exist in various sizes including a full 1 ounce coin, but tend to be a little cheaper than other coins because they are considered less attractive.

An alternative and cheaper way to buy gold coins is on eBay, which is very easy and quite low risk. There are always a lot of gold sovereigns and krugerands available on eBAY for a price close to the actual bullion value of the gold. This is how I have purchased all of my physical gold.

Another, riskier, method for gaining gold or silver exposure is through spread-trading. I have written a separate lens on how to use spread-trading to reduce portfolio risk:

Spread-trading

ETCs (or ETFs) which track precious metal prices are available from ETFS (ETF Securities) and are available both in long and short versions (i.e. if you think gold will drop in price, you can still profit from it) ETFS Silver (SLVR) is a dollar denominated silver price tracker. ETFS Metal PPSG (ticker symbol: PHPM) is a precious metal tracker (i.e. a "basket" of metals) There is also "Gold Bullion Securities" which tracks the price of gold and is available denominated in dollars (GBS) or in Pounds Sterling (GBSS)

Gold sounds too good to be true. When other markets and currencies get into trouble gold goes up in value, but there are a few reasons why gold should not make up too large a proportion of your portfolio.

Gold Does not pay a dividend

Shares, bonds and property investments often pay a dividend (or a "coupon" or rent), so even when markets go down you still get an income. Gold does not. It just sits there looking shiny.

Gold needs to be stored

Physical gold in the form of bars or coins needs to be stored safely somewhere. If it is just worth a few thousand dollars you can keep it under the bed and not worry too much, but for large amounts of gold you will need to pay a small premium for storage at a bank or insurance or of course you could buy a safe.

For large investments in gold an exchange traded fund (ETF) can make a sensible alternative (e.g. Lyxor Gold, GBS tracks the value of gold) without the storage hassles.

Investing in Physical Silver

Physical silver is also an interesting thing to buy for investing, but it is worth far less than gold, per ounce, so a significant investment in silver takes up a lot of space. Antique silver however is quite inexpensive compared to scrap silver and could be quite collectable.

Precious metals and especially gold are an important part of any investment portfolio, but it is perhaps more of an insurance or hedge than an investment; it pays no dividend, costs money to store or insure and is very volatile, but it does help protect against inflation. Gold may be purchased in the form of coins, bars or mutual funds or unit trusts (e.g. with a discount broker or "Fund Supermarket" such as Hargreaves Lansdown)

Central Banks and Governments around the world are buying gold in addition to reserve currencies: dollars, euros, yen etc. In the 2011 UK Budget George Osborne, the Chancellor of the Exchequer announced that he could not afford to replace the UK gold reserves that Gordon Brown (the former exchequer and previous U.K. Prime Minister, before David Cameron) sold at a record low price - a cruel, but amusing jibe at the expense of the opposition. At the time, gold was close to it's all time high of about $1,440