The glitter of gold catches the eyes of investors for various reasons, including uncertain equities markets, threats of growing inflation, heightened global political tensions and weakness in the U.S. dollar.
Gold also turns heads when its price is on a steady ascent. One ounce of gold is currently trading at about US$550, more than double its price five years ago, when it was changing hands at about US$260 in March 2001.
Many of your clients may wish to invest in gold as a diversification strategy, to take advantage of rising bullion prices or to help insure their portfolios against a market decline.
The dilemma is how to best participate in gold and how much exposure clients should have to the sector — important decisions that will require your advice.
Typically, investors can either participate directly in gold by purchasing gold bullion and instruments that are linked to physical gold, or indirectly by obtaining exposure to movements in the price of gold and gold stocks through a variety of funds and structured products. There are varying degrees of risk, reward, cost, advantages and disadvantages associated with each strategy.
The risk-reward relationship differs between investing in physical gold and indirectly participating through stocks or mutual funds, says Nick Barisheff, president of Bullion Management Services Inc. in Markham, Ont.
“Mining stocks generally outperform bullion in the early stages of a bull market, but bullion tends to do better in the long run,” he says. “Bullion is negatively correlated to financial assets,” he adds, making it ideal for portfolio diversification.
It is therefore important that your clients set clear objectives before deciding on how they wish to leverage the advantages offered by gold investing.
Here’s a look at some popular ways of investing in gold:
> Specialty precious metals mutual funds. These hold diversified baskets of gold and other precious metals stocks, and are the most convenient way for the average investor to participate in gold.
The funds require minimum investment as low as $500 and are fully liquid. Usually, most of the funds are not pure gold plays and their net asset values fluctuate with the performance of the total portfolio, which will not necessarily reflect the true rise or fall in the market price of gold. The management expense ratio of Canadian precious metals funds averages about 2.5%.
One example of a solid performer is Toronto-based Sprott Asset Management Inc. ’s Sprott Gold and Precious Minerals Fund, the largest Canadian fund in this category. It has posted an average annual compound rate of return over three years of 24.9%, compared with 19.5% for other funds in its category.
Unlike traditional precious metals funds, investing in products such as Millennium Bullion Fund and Central Fund of Canada Ltd. offers direct exposure to gold bullion, but neither is a pure gold play. Millennium Bullion is an open-end fund trust that holds physical gold, silver and platinum bullion, while Central Fund holds physical gold and silver bullion and is traded on the Toronto and American stock exchanges.
> Principal protected notes. PPNs, such as Toronto-based One Financial Corp. ’s Gold Price Class, are linked to the price of bullion rather than to stocks in gold companies. Investors benefit from principal protection plus a full or capped portion of the returns. In general, PPNs have expenses that average 5% to 8% built into their structures.
In the case of Gold Price Class, the principal guarantee is provided by Paris-based BNP Paribas SA and the investment promises to pay 100% of the returns of the underlying investment, net of fees.
> Exchange traded funds. ETFs, such as iUnits S&P/TSX Capped Gold Index offered by Barclays Global Investors Canada Ltd. , seek to replicate the performance of Canada’s largest gold companies. Barclays’ iShares Comex Gold Trust reflects the market price of gold and offers a relatively low-cost method of participating in the metal. The MERs of ETFs are about one-fifth the average MER of precious metals mutual funds. Investors must pay a brokerage commission to acquire ETFs.
> Gold funds. Funds, such as Central Gold-Trust, invest in gold bullion and are traded on the Toronto Stock Exchange. The MER of the trust is roughly comparable to that of ETFs, and investors must pay a brokerage commission.
@page_break@> Gold mining stocks. They let clients who don’t want to invest in baskets of shares put their money directly into gold companies. The price of each stock generally reflects the performance of the company, its management expertise, gold reserves, etc. Shares of Barrick Gold Corp., Canada’s largest gold company, were trading in early February at about $33 each, up almost 16% from a year earlier.
> Gold bullion wafers and bars. They can be bought directly from most large financial institutions in weights ranging from one ounce to 400 ounces (11.3 kilos), for a small premium over the spot price of gold. For example, the premium on a one-ounce wafer is about US$10, while on a 400-ounce bar it is US$1 an ounce. Investors are responsible for storage and security of their bullion holdings.
> Gold coins. Coins, such as the Canadian Maple Leaf and the American Eagle, can be acquired at a small premium above the spot price of bullion. Although they are a convenient way to acquire bullion, as coins are issued in weights ranging from 1/20th of an ounce to one ounce, the cost of storage and insurance can be a disadvantage.
Investing in gold bullion coins should not be confused with collector gold coins, whose values are based on other factors such as design and scarcity.
> Gold certificates. These provide investors with the ability to hold gold without taking physical delivery. The certificates are normally issued by chartered banks and confirm ownership of gold that is held by the bank on the client’s behalf. A brokerage commission plus a premium over the spot price of gold, as well as a small safekeeping charge, are payable by investors. Safekeeping fees are in the range of 10¢ an ounce of gold represented by the certificate and are payable annually.
> Gold futures and options. These are traded on many exchanges, and are generally used to take leveraged positions on gold. They facilitate both risk management and speculation in gold.
How much gold-related investment your clients should hold in their portfolios depends on their risk profile.
Kevin Chong, a financial advisor at RGI Financial Services Inc. in Markham, Ont., recommends between 5% to 10% of the total portfolio and favours precious metals mutual funds. “Mutual funds are easily accessible, liquid and offer good diversification,” he says.
Barisheff and J.C. Stefan Spicer, president and CEO of Central Gold-Trust and Central Fund of Canada, both favour funds that are directly linked to pure bullion plays instead of stocks or mutual funds, largely because the factors that affect the price of bullion are different from those that impact the stock market.
For instance, the bullion price may rise when market conditions are weak. Spicer also cautions that currency risk is often ignored when gold bullion is purchased. “People tend to forget that gold is priced in US$s,” he says.
A report on portfolio diversification that was prepared for Barisheff’s company in June 2005 by Chicago-based Ibbotson Associates says that investors can potentially improve the reward/risk ratio in conservative, moderate and aggressive asset allocations by including precious metals with allocations of 7.1%, 12.5% and 15.7%, respectively. IE
Lofty gold prices turn investors’ heads
There is a wide variety of ways your clients can hold gold in their portfolios, ranging from the actual metal to stocks and fun
- By: Dwarka Lakhan
- February 16, 2006 October 30, 2019
- 13:56