During the last big gold bull market in the 1970s, buying gold was straightforward with only a few options to choose from. Today, investors are spoilt for choice, making the decision a lot more complex and confusing.
On the physical side, which used to be dominated by official legal tender coins, there are now many different private mints, wider range of sizes, minted bars and combi-bars in addition to cast bars, and semi-numismatic bullion coins. For those not wishing to store metal at home, choices include storage programs (with unallocated, pool and allocated options), safety deposit boxes at banks or private custodians, ETFs (with or without physical redemption options, non-leveraged or leveraged, currency hedged or not), futures, options, contracts for difference and FX trading platforms.
How to choose between the options?
Ask a question on any blog or discussion forum and you will get a lot of well-meaning advice on what, from whom and where to store, but often the helpers disagree between themselves – which isn’t very helpful. The reason for this is that the reason why people buy precious metals is unstated and these reasons differ.
So before you consider the what, who and where, think about the why.
Any purchase decision involves trade-offs and buying precious metals is no different. Everyone wants to minimise the price the pay (which may include trading, fabrication, storage and shipment) but price needs to be balanced against size of selling lot, speed of selling and risk of loss. Understanding your Why can help clarify the trade-offs and eliminate options, making the decision easier.
Four of the main “whys” driving precious metal investors.
Speculators in gold have a very short timeframe and are not interested in the bigger macro-economic picture, often buying and selling within a day but it can include trades that happen over a few days or weeks at a stretch. The focus is in making quick gains and usually there is an acceptance that one will lose money on many of the trades made. The focus on making quick profits means that low trading fees and buy/sell spreads matter and leverage is usually sought to magnify gains (but also losses).
Traditionally speculators use exchange traded futures contract or options, but 2x and 3x ETFs (long or short) are available. For those with a tolerance for high leverage consider online FX platforms and contracts for difference but discipline is required otherwise they end up as no more than gambling.
The focus for investors is to create or grow their wealth and the duration of the investment is in years, if not decades. There are two different approaches to including gold in a portfolio. The first looks to hold a permanent allocation to gold, with most analysts recommending between 2% on the conservative side up to 10% or more. Some investors will increase or decrease this allocation depending on their expected future economic environment. The second approach is to allocate to gold based on the business cycle, holding zero gold when the economic outlook is good and shifting into gold when a recession or depression is expected.
Investors, like speculators, look to minimise trading and holding costs. If risk adverse, then consider the larger cast bars in either allocated storage or safety deposit boxes, but most choose and unallocated or pool storage or ETFs.
The insurance motivation is all about protecting wealth or retaining value of one’s investment rather than trying to grow it and take on the associated risk of loss. For investors, buying gold is also about insuring their overall portfolio against poor economic conditions, but the difference with true “insurers” is that they expect a far more extreme economic environment with depression being the best case scenario.
For these buyers, the popular choice is medium sized bars or 1 ounce coins stored at home or in non-bank safety deposit boxes. Allocated accounts with reputable business may also be considered, including storage offshore in a country relatively close.
EOTWAWKI stands for End Of The World As We Know It, or the Mad Max scenario. This is also an insurance “why” looking to protect one’s wealth but instead of trying to protect against adverse business cycles, these people consider it will be the end of cycles. The popular conception of this type of buyer is that they want to use gold coins as money to facilitate barter type transactions or buy essentials. There are some, however, who consider flashing gold around will just draw attention and they are only looking to hide their excess wealth (after stocking up on essentials) in gold and bring it back out only when normality has returned so they can start over again.
This type of buyer usually focuses on 1 ounce gold and silver coins with storage at home and often including backyard burying or other hidey-holes.
READ OUR SERIES OF GOLD INVESTOR ARTICLES.