Investing in gold in Australia has historically been 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 a clandestine store of wealth to negate political activity.
This article covers information you should know about gold and investing in gold in Australia, which I think is well worth reading if you are considering investing in gold or not. Ultimately though, this article is just information and is not a recommendation either way.
“Gold has historically been the purest form of money and acts like a government bond that doesn’t pay interest and protects against inflation (this is known as a zero-coupon inflation protected bond). Throughout the centuries, has been able to maintain its purchasing power and provide portfolio insurance in times of need.”Chris Brycki
Summary of investing in Gold in Australia
I would encourage you to read the full article below for the most information, but just in case you want the Bottom line up front on investing in Gold in Australia, here it is. Just realize this is not financial advice, however just information I have collated online from multiple sources. This should not be taken as a recommendation to either buy or sell gold, or to invest in gold, or to avoid investing in gold. You need to make that decision for yourself, or talk to a licenced advisor for a statement of advice.
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 and holding 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 Metal Securities Australia Ltd (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, I don’t have any individual investments in gold as I have chosen to be fully invested in tangible businesses such as Shares, Real Estate, and Websites.
However, if I was going to invest directly in gold, the way I would own gold would probably be through a gold ETF. There are a few options for gold ETFs as discussed above, but I was looking closely into the Perth Mint gold ETF ‘ASX:PMGOLD’ or ETFs Metal Securities Australia Ltd ‘ASX:GOLD’. This is not a recommendation for those two stocks.
Technically speaking though, I have invested in managed funds that did hold a portion of gold. For example, Stockspot invests passionately into gold (using ETFs Metal Securities Australia Ltd ‘ASX:GOLD’) as part of their defensive assets, and I previously have had money invested through that roboadvisor.
The two most popular gold ETFs in Australia
Two of the most popular ways to invest into gold in Australia using gold ETFs are
- Perth Mint gold ETF ‘ASX:PMGOLD’, and
- ETFs Metal Securities Australia Ltd ‘ASX:GOLD’
I will go into a brief discussion of each below.
Perth Mint Gold ETF: ‘ASX: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.
However, when choosing a Gold ETF, Chris Brycki has some interesting points regarding PMGOLD;
PMGOLD is an example of unallocated gold as the Perth Mint holds the gold on your behalf. Despite being backed by the WA government, if there was a default of the custodian bank, you would have to get in line with other angry investors to get your gold back. This means you have no ownership over it. Additionally, the bars can also be lent to third parties without consent of the individual investor. This is why PMGOLD has a lower management fee [Than other gold ETFs] – they have smaller running costs given they don’t have to pay for physical storage.Chris Brycki
ETFs Metal Securities Australia Ltd ‘ASX:GOLD’
ETFs Metal Securities Australia Ltd ‘ASX:GOLD’ is a Gold ETF traded on the Australian Securities Exchange. It has a market cap of over $2.4 Billion dollars which is physically backed by allocated bullion held at JP Mortgan Chase Bank in London, England. ETFs Metal Securities Australia Ltd charge a management fee of 0.40% per annum, which is nearly triple the cost of their competitor PMGOLD.
GOLD offers investors a simple, cost-efficient and secure way to access gold by providing a return equivalent to the movements in the Australian dollar price of gold less a daily management fee.ETF securities, GOLD
Physical holdings conform to the London Bullion Market Associations requirements – each bullion is segregated, individually market and allocated, and investors can redeem units in the ETF for physical bullion if they want to either pick it up or have it sent to an authorized bullion dealer (however this comes with a $1000 redemption fee).
Australian based RoboAdvisor investing firm Stockspot choose to invest in gold via the Metal Securities Australia Ltd ‘ASX:GOLD’, saying that they picked it because “The GOLD ETF is physically backed by gold bullion which is stored in a vault in London” and that “It’s unhedged so investors are also protected from a falling Australian dollar.” Chris explains further in their article ‘The best Gold ETFs’ about his choice of ‘GOLD’ over other gold ETFs, citing ownership and custodian concerns, slippage and buy-sell spreads of other options meaning even though ‘GOLD’ has a higher MER, he still prefers it.
Investing in gold in Australia has historically been a defensive asset 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 a clandestine store of wealth to negate political activity. Gold doesn’t earn or pay interest (it just sits there) meaning it is often thought of as a zero-coupon inflation-protected bond, and people may choose to invest in it hoping that it grows in value and can be sold for more in the future.
Gold can be invested into in many ways – physical bullion or jewelry can be kept at home, in vaults or safety deposit boxes, you could invest in gold mining companies or ETFs, or you can buy ETFs which represent physical gold storage such as the Perth Mint gold ETF ‘ASX:PMGOLD’ or ETFs Metal Securities Australia Ltd ‘ASX:GOLD’. Each method has its own unique benefits and risks.
Gold has historically been seen to move according to things like uncertainty in the share market and inflation – for example, if the share market drops or there are fears that it may drop, gold tends to go up in value as investors and fund managers try to move across to the safety of gold. Similarly, if inflation is expected to rise, investors and fund managers may try to move from fixed interest across to gold which then puts upwards pressure on the price of gold.
The Long term performance of gold to stocks is quite interesting and its something you should familiarise yourself with. Depending on the time period you choose to look over gold can be shown to outperform stocks – be mindful of this when reading information online – but in the long term (20+ years), stocks (and bonds) have always outperformed gold.
You might have thought – if bonds, gold, and fixed interest are defensive assets that underperform growth assets in the long term, why would you bother?
“Here is a link to Vanguard portfolio allocation models showing data from 1926 – 2017 and you can see that a 100% stock portfolio returned 10.3% compared to a 80/20 portfolio that returned 9.6%, a reduced average return of 7% for a portfolio with 20% of the assets in bonds. For 10% in bonds we can expect around a 3.5% lower return relative to 100% stock portfolio. Not nothing, but not far from nothing, and it does provide a benefit of diversification between asset classes and improved risk-adjusted returns.“Passive Investing Australia
This is what I thought for a long time – that defensive asset would proportionately lower the total return of a portfolio. However, due to the effect of periodic re-balancing in Modern Portfolio Theory – that is having a target balance and then selling growth and buying defensive assets or vice versa due to changes in the market to get back to your ideal splits, you can actually end up somewhat ‘buying low and selling high’ over the long term. The effect of this is not linear, but rather drags the Risk (volatility) vs Return curve ‘up and to the left’. This means that yes, defensive assets like Gold do still lower the total return of the portfolio somewhat, but improve the risk-adjusted return and smooth the ride – which as some put it – improves the quality of the portfolio.
In a perfect world, you could theoretically time this perfectly and sell gold at a high to buy stocks at their lows, and repeat ad infinitum. Alas, no one has a crystal ball so this is not a valid strategy in the short term, however, you can benefit from this in the long term from a regular portfolio rebalancing (i.e. the routine rebalancing every 6-12 months) if you choose this strategy. Overall the inclusion of defensive assets like gold in a portfolio is likely to reduce volatility (similar to the use of bonds) with a small long-term performance penalty.
However, it is not that common to see defensive assets like Gold being used in a higher risk ‘FIRE’ style portfolio, which often focuses on 100% growth assets like stocks, and property (and even now crypto – digital gold?) which trades off higher day-to-day volatility for higher long-term yields.
Chris Brycki, a bloke much smarter and more experienced than I (who is a professional fund manager that manages millions of dollars) is quite keen on investing in Gold in Australia, his take home message is that
Gold should be a key part of every diversified portfolio regardless of your investment horizon or risk capacity. It’s absolutely vital today for conservative, balanced and growth focused investors since shares and bonds are dancing to the same tune.
While gold doesn’t have a yield, it’s still a more positive yielding asset than negative yielding government bonds which penalise owners. As the amount of negative yielding government debt increases, so too does the attractiveness of gold.
It’s the part of your portfolio you’ll be glad you have when the rest of the investment world isn’t shining.Chris Brycki
In summary, like with any investment, it all depends on your time horizon and risk tolerance. You should educate yourself on the performance of gold, monetary policy, how market cycles work, and what effect different economic factors have on the price of gold. There are no free lunches when it comes to investing (only trade-offs to manage risk) and every asset class has its unique risks and benefits. Whilst modern portfolio theory shows that defensive assets like gold can help diversify and reduce volatility in a portfolio (typically when the share market falls the price of gold increases) which improves the ‘quality’ of the portfolio, there is typically a small sacrifice in long term total performance of a few percent.
But if having this reduced volatility stops you from panicking and selling your entire portfolio? Well then it’s probably worth it.
Gold Key Takeaways:
– Gold has long been considered a durable store of value and a hedge against inflation.
– Over the long run, however, both stocks and bonds have outperformed the price increase in gold, on average.
– Nevertheless, over certain shorter time spans, gold may come out ahead.
– Gold tends to rise during periods of high inflation and geopolitical uncertainty.
– Gold reached an all-time high of nearly $2,075 in 2020 as the COVID-19 pandemic spread, and it spiked again above $2,000 per ounce during the Russia-Ukraine conflict.Investopedia , Performance of Gold
- 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
Financial Disclaimer: CaptainFI is NOT a financial advisor and does not hold an AFSL. This is not financial Advice!
I am not a financial adviser and I do not hold an Australian Financial Services Licence (AFSL). In this article, I am giving you factual, balanced information without judgment or bias, to the best of my ability. I am not giving you any general or personal financial advice about what you should do with your investments. Just because I do something with my money (or use a particular service or platform) doesn’t mean it is automatically appropriate for your personal circumstances. I do not recommend nor endorse any financial or investment product, and my usage or opinion of any product should not be interpreted as an endorsement, advertisement, or intent to influence.
I can only provide factual information based on my journey to Financial Independence, and that is provided for general informational and entertainment purposes only. I make no guarantee about the performance of any product, and although I strive to keep the information accurate and updated as it changes, I make no guarantee about the correctness of reviews or information posted.
Remember – you always need to do your own independent research and due diligence before making any transaction. This includes reading and analysing Product Disclosure Statements, Terms and Conditions, Service Arrangement and Fee Structures. It is always smart to compare products and discuss them, but ultimately you need to take responsibility for your use of any particular product and make sure it suits your personal circumstances. If you need help and would like to obtain personal financial advice about which investment options or platforms may be right for you, please talk to a licensed financial adviser or AFSL holder – you can take the first steps to find a financial advisor by reading this interview, or by visiting the ASIC financial adviser register and searching in your area.