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Gold has historically been an attractive investment due to its value as a store of wealth and medium of trade. Gold is known for its resilience as a stable and defensive asset, used primarily as a hedge against currency inflation, and as clandestine store of wealth to negate political activity. This article covers everything you need to know about gold as an investor, and investing in gold in Australia, which is well worth reading if you are considering investing in gold in Australia as a way to protect your hard earned wealth.
Summary of investing in Gold in Australia
I would encourage you to read the article below, but just in case you want the Bottom line up front on investing in Gold in Australia, here it is
Benefits to investing in Gold in Australia
- Store of wealth: Gold has been a long term store of wealth (defensive asset) for thousands of years.
- Non-correlated asset: Gold typically moves independently to other assets such as stocks and bonds, so in the short term may outperform other asset classes
- Diversification: Many people include gold in their portfolio as a defensive asset for increased diversification
- Liquid: Gold is easily sold and converted into cash when needed
- Franglible: Gold can be broken down into chunks or coins and can be sold.
- Tangible asset: Gold is a physical asset and thus can be physically held and stored with you
- Tough: Gold is a noble metal with a high melting point, so it generally wont be damaged by fire, floors or corrosion
- Easy to buy: Modern financial instruments like the stock exchange make it very easy to buy in the form of ETFs or gold stocks, but there are also countless physical dealers, brokers and shops which can facilitate buying and selling gold.
Negatives to investing in Gold in Australia
- Long term results: Gold may have lower volatility and be a hedge against inflation, but historically it has not performed as well as other asset classes like shares over the long term
- Fees: Investing in gold can attract significant fees and costs, including dealer fees, delivery costs, storage costs, insurance costs or other management fees.
- Does not produce an income: Gold does not produce an income and ties up significant capital as a non-productive asset. Investments into other asset classes like shares, rent or businesses typically provide an income (such as rent, dividends or profits).
- Works on the greater fool principle: For you to make money investing in gold, it relies on you finding someone to buy it for more than you originally paid
Investing in Gold in Australia
Gold has historically been an attractive investments due to its value as a store of wealth and medium of trade. It has strong cultural associations with wealth and power due to its rarity, and as such has been used as jewellery and in decorating luxury items. As a currency, gold has many attractive attributes – scarcity, frangibility, compactness, durability and store of value. Gold is difficult to counterfeit, and historically it has been difficult to mine new sources. These factors give gold a resilience as a defensive asset and a hedge against currency inflation, and also as a potential clandestine store of wealth to negate political activity.
Modern advances in technology have made gold easier and cheaper to extract, and mining technology, however there is a finite amount of gold, and the majority of the worlds gold has already been mined. Current estimates are that there is 20% left as ‘below ground’ stock left to be extracted. This means the majority of the worlds gold is already either in circulation (or storage), but thanks to record rising populations, this gold is spread out more and more – with significant demand for gold for high end technological applications (such as inside iPhones and Sound systems), personal jewellery and even as for gold fillings in dentistry. Furthermore, with rising populations the demand for gold as an investment has never been higher, causing the price of gold to increase faster than the rate of inflation – fulfilling its prophecy as a store of wealth.
There are a number of ways to invest in gold in Australia – ranging from physically holding the gold yourself, to buying bullion, bars, ingots or coins to be held in storage, by purchasing gold mining stocks or ETFs, or even by entering in risky Contracts for Difference (CFDs) or options contracts.
Where does Gold come from?
Gold is a noble metal (like copper and silver), and naturally occurs in the ground in deposits of its metallic state
How to invest in Gold in Australia
There are a number of ways you can invest into gold in Australia, including;
- Owning physical gold
- Owning shares in gold mining companies
- Owning shares in Gold-themed ETFs
Owning physical gold
Owning physical gold is just like it sounds – you purchase physical gold coins, ingots, jewellery or bars – or if you are very wealthy, gold bullion. Some of the most trusted and oldest gold dealers in Australia include;
- The Perth Mint
- Gold Stackers
- ABC Bullion
- Guardian Gold
- Ainslie Bullion
The Commonwealth Bank of Australia advertises secure storage in the form of safety deposit boxdes for gold ranging up to $1500 per year, however you would also need to have your gold tracked (ID number) and insured. An alternative solution for larger investments is secure bullion or vault storage with ABC bullion or The Perth mint who insure your gold for you as part of your storage contract (underwritten by Lloyds of London and the Western Australia government respectively), with a price of around 1 to 1.5% of the stored value.
Owning physical gold can be messy – time consuming, risky and expensive to store and insure. Although lots of people do it, and consider it to be the ‘ultimate emergency fund’. Just make sure if you are going to physically hold gold at home that you update your home and contents insurance
Investing in gold in Australia with gold bars
Gold bars or ingots can be mould casted or minted (pressed), and can range in size and shape. Large gold reserves may stack cast bullion which is what you might see in movies (because it is cheaper to cast than press), whereas most investors would be familiar with smaller, pressed bars or ingots which have that characteristically attractive polished gold look and are easier to sell. A 1kg bar of 99.9% Gold goes for around AUD $76,000 at the time of writing – and if you buy it you had better have somewhere secure to store it! Gold is quite a dense material, so a 1kg bar is actually quite physically small.
Investing in gold in Australia with coins
The majority of individual gold investors do so with physical coins, because they are easily divisible and each coin is worth much less than a large ingot or bar. This makes them much more convenient, as typically each coin contains between 1/10 to 1 ounce (3-28 grams) of gold. Depending on the minting of the coin can also introduce additional value due to rarity of the minted coins (they may have a rare stamped face or design). Most gold coins are minted with a notional currency value and are legal tender, but you would have to have rocks in your head to ever use them. Examples include the Australian Kangaroo, American Gold Eagle, the United Kingdoms Gold Sovereign and the Canadian Maple Leaf.
Investing in gold in Australia with jewellery
I have many friends that think they are investing by owning gold jewellery. This is a terrible idea because the actual amount of physical gold is very little in jewellery pieces. A significant amount of the value of the jewellery is in the artistic creation of the pieces and its design – not the actual value of the materials itself. Because fashion and art changes over time, this can have a negative effect on the value of your jewellery. The addition of precious gems like diamonds, rubies and sapphires complicate the matter and can make it difficult to value.
Expensive jewellery is also an insurance companies wet dream. They love it because they can very easily manipulate owners into believing the jewellery is worth much more than it is by getting inflated valuations, which allow insurance underwriters to charge more on the contract – knowing full well that statistically speaking, the item is at very low risk of being stolen or claimed for. This complicates the holding and storage cost of jewellery. Jewellery is also easier to damage, lose or have stolen than bullion or coin stored in a vault.
Nonetheless, Many people continue to buy jewellery and consider their jewellery a solid investment. Unless you are the Queen of England I beg to differ.
Another way to invest in gold in Australia and get gold exposure is to own share in gold mining companies. You can do this by researching some of Australias top gold sub industry related stocks on the ASX, but did you know that by owning a broad index fund ETF (such as the Betashares ASX200 fund or the Vanguard ASX300 fund), that you actually have decent gold mining company exposure already?
This is because by owning the index you actually own shares in mining and resource companies which are exposed to gold prices through their mining, refining and selling of gold. Australian companies like BHP billiton, Rio Tinto, Fortescue metals all derive significant income from mining and selling gold (amongst other materials such as Copper, Coal, Iron and Uranium) and are major players in the Australian total stock market index. Furthermore, the following mining and resource companies are listed as the top 12 in the ‘Gold sub-industry’ on the ASX, and are also featured in the index.
|Rank||ASX code||Company name||Market Capital|
|2.||ASX:NST||Northern Star Resources||8.99B|
|4.||ASX:SAR||Saracen Mineral Holdings||5.27B|
|6.||ASX:SBM||St Barbara Limited||1.54B|
|8.||ASX:CHN||Chalice Mining Limited||1.4B|
|9.||ASX:SLR||Silver Lake Resources||1.35B|
|10.||ASX:DEG||De Grey Mining||1.19B|
|12.||ASX:GOR||Gold Road Resources||1.03B|
It is difficult to quantify, but generally speaking the ASX300 (and closely the ASX200) index has about a 20% exposure to the materials sector. This is broadly considered the discovery, development and processing of raw materials such as mining and metal refining, chemical products and forestry. In Australia, this is dominated by the mining and refining sector, with gold and other precious metal related activities accounting for approximately one tenth of this sector. As a rough guide or ‘napkin mathematics’, you might say that an average index fund investor has 20% * 10% = 2% exposure to gold and precious metals.
Similarly, international total stock market funds do have gold exposure, but not as much as Australian stock market index funds, due to the higher percentage presence of big mining and resource companies in Australia. I think it is reasonable to assume that global stock market index funds provide below 1% exposure to precious metals.
Owning a gold ETF
As we know from general investing, owning an ETF is a significant advantage over holding individual companies due to the massive benefits of diversification and ease of management. ETFs allow you to buy large parcels of shares, and spread your risk evenly throughout a sector or index. However, when it comes to trying to specifically target gold exposure in a gold ETF, there are three broad choices you will need to make;
- Physical gold ETFs
- Gold futures ETFs
- Gold mining (or company) ETFs
Physical gold ETFs
Physical gold ETFs generally seek to track the price of gold by as a commodity by physically holding the precious metal on your behalf. For example PMGOLD is a gold ETF provided by the perth mint, and each share of PMGOLD is redeemable for 1/100th of a Troy Ounce of gold (1 Troy Ounce = 31 grams). These ETFs are often redeemable for physical gold, and are backed by physical gold bullion or coin. Examples include;
- ETFS Physical Gold (ASX:GOLD)
- Perth Mint Gold (ASX:PMGOLD)
- BetaShares Gold Bullion ETF (ASX:QAU)
Gold future ETFs
Gold futures ETFs are made by buying options (futures) or derivatives on gold as a commodity itself. This can be very risky and depends on analysts trying to predict the market to stock pick and actively time the market. The price of gold can move depending on many external factors, such as the ‘fear’ factor, so often if analysts believe stock markets will go down, or a country may have a recession, they may predict the price of gold to rise. I would personally avoid this style of gold ETF.
Gold mining ETFs
Gold mining ETFs are funds which focus on the business aspect of gold by investing in gold companies themselves. This includes gold prospectors, financiers, miners and refineries. These may include holdings in large Australian mining companies such as Newcrest Mining or Northern Star Resources
- VanEck Vectors Gold Miners ETF (ASX:GDX)
- BetaShares Global Gold Miners ETF (ASX:MNRS)
Considerations to investing in gold in Australia
You need to think carefully before investing in gold in Australia. If you are looking for portfolio diversification, and in particular, a defensive asset to act as a hedge against inflation and diversify away from 100% stocks, then gold could be an attractive option as opposed to holding large amounts of cash (which corrodes with inflation), and may be a practical solution. Investing in gold does have some significant risk though.
You will need to carefully research your options and do your own research, in the context of your own personal financial situation. Don’t rush into any investments due to FOMO, and weigh up the total cost of the investments (including transaction costs and brokerage, certification costs, storage and insurance costs) and look at the returns of gold versus other asset classes.
Specifically with gold ETFs, the larger they are generally the cheaper the fees will be – because they benefit from the efficiency of scale. Smaller gold ETFs (with lower market cap) can have lower market depth (liquidity) and make it less profitable to trade or invest in. Further, the gold ETFs might not actually track the index you think they do – remember that Physical Gold ETFs, Gold future ETFs and Gold mining ETFs are all very different and actually do different things – you need to understand what the underlying holding or exposure is before buying.
For example, gold mining ETFs in addition to general exposure to gold price, are also subject to risks such as legislative, environmental and natural disasters. If a serious incident at a gold mining operation attracts attention, the mine could suffer a significant loss of investor confidence causing that companies share price to plummet, or the mine site could even be closed – affecting the gold ETF (but a good gold ETF would be broadly diversified so any one individual incident should ideally not have a huge impact).
Another interesting mechanic you need to know about gold mining shares is they are actually leveraged to the price of gold, even though they may not necessarily be traded with any margin on the share itself. This is due to the business model of the gold mining company itself, and the cost of gold production. Generally, there is a fixed price for gold production – with a margin between the gold production price and the gold market value. If gold cost $2500 per ounce to produce, and the company was able to sell gold for $2600, then their margin was $100 per ounce. If the gold price rose by 10% and they were able to sell an ounce of gold for $2860, the companies profit margin rises from $100 per ounce to $360 per ounce – more than tripling! This in turn makes the gold company itself much more valuable. Furthermore, gold (and other mining operations) are resource intensive, and are also subject to the prices of things like electricity, coal and gas and of course the cost of workers and machinery – which also fluctuates with market demand. These flow on effects essentially magnifies the volatility in the gold price, and makes gold mining ETFs more volatile than physical gold ETFs.
Lastly – you cannot simply ignore the counter party risk when it comes to physical gold ETFs. There is ALWAYS a risk that the physical gold is not actually there, and investors are being swindled – which is why some opt to physically hold their gold themselves.
Does CaptainFI invest in Gold in Australia?
Currently, No. I don’t have any gold as I have chosen to be fully invested into tangible businesses such as Shares, Real Estate and Websites. However, if I was going to invest in gold, the best way to own gold I could find was to invest into a gold ETF. Accordingly, the Perth Mint gold ETF ‘ASX:PMGOLD’ is the best solution I could find for a trustworthy gold ETF, and I nearly bought into this fund in 2020.
The best way to invest into gold in Australia – PMGOLD
The Perth mint is one of Australia’s oldest and largest resource companies, established in 1899, and is Australia’s largest precious metals company, turning over in excess of AUD $25 Billion per year by refining over 85% of Australian mined gold (over 10% of the worlds total gold supply). The Perth Mint vault stores over AUD $6 Billion worth of gold on behalf of over 40,000 investors – including for foreign governments, central banks and superannuation funds.
“PMGOLD is designed to track the international price of gold in Australian dollars and offers investors a simple, low cost way to access the returns on gold. PMGOLD trades like a regular share and is purchased via a stock broking account.The Perth Mint, Western Australia.
The PMGOLD ETF (ASX:PMGOLD) has over half a billion dollars of market capital, and each share of PMGOLD is backed by 1/100th of a troy ounce of gold, held at Perth Mint. Deposits in The Perth Mint vault are underwritten by the government of Western Australia, under the Gold corporation Act of 1987, and are fully backed by physical gold bullion.
The Perth Mint charges a small management fee of 0.15% which in effect is actually a very very low storage fee – you would be paying significantly more than this to store physical gold in a bank or secure vault.
If you were worried about the collapse of society (or aliens invading, or the tax man taking all your money) and really wanted to, you could ‘cash in’ your ETF holdings for physical gold (bars, ingots or coin) at the Perth Mint, and then go and hide it in your basement.
- Check out The Perth Mint for more information on PMGOLD
- Watch the following documentary series for free on YouTube – Hidden secrets of Money with Mike Maloney