With Gold valued at $1,700+ it is becoming a hot topic again in fall 2012, I’ve decided to bring this post from 2010 back to the front page.  Enjoy!

With extremely volatile markets since 2007, Gold has been a favorite safe haven for investors to wait out the storm which is evident in the run up in price.  There are a large number of Gold advocates that promote gold as an essential piece of any portfolio.   As gold has gotten a lot of press lately, I decided to do a little digging on how a regular investor can get some (or more) exposure to the shiny yellow metal.  Note that the only portion of gold in my portfolio is from my position in the Canadian Index.

Physical Gold

There are people that do not believe in the markets and hold physical gold for their gold exposure.  While this strategy may avoid management fees that occur with ETFs or mutual funds, there are limitiations.  Two of which are that with physical gold, like gold bars, require physical space and liquidity can be an issue.  Imagine trying to sell gold bars on kijiji!

Claymore Gold Bullion Trust (TSE:CGL)

This is perhaps one of the easiest ways for Canadians to purchase and hold gold bullion.  This ETF holds physical gold bullion and tracks the price in Canadian dollars. CGL charges a Management Expense Ratio (MER) of 0.50%.

SPDR Gold Shares (NYSE: GLD)

This ETF is in USD, and also holds and tracks the price of gold bullion.  The pricing is set to approximately 1/10 the price of one ounce of gold and charges a 0.40% MER.

Horizon Beta Pro Leveraged Gold (TSE: HGU/HGD)

The pair of ETFs are from horizon beta pro and are leveraged 2x on a daily basis.  Leveraged ETFs are specifically tailored for traders and not for long term buy and hold investors.  The reason being is that the leverage is calculated on a daily basis, so even if the underlying index is trading relatively flat (or basing), the leveraged ETF can potentially go down in price.  As well, the MER is fairly high for an ETF where it charges 1.2% annually.  Trading this security is not for the weak.

iShares Global Gold Index (TSE: XGD)

This is an iShares ETF that tracks the Global Gold index.   As with any index, this ETF will move in price depending on the performance of the underlying securities.  The top 3 holdings, which make up over 40% of this ETF, are Barrick Gold, Goldcorp, and Newmont Mining.  This is a Canadian product, thus traded in Canadian dollars with  a MER in the amount of 0.55%.

Common Stock

If you don’t like the idea of paying a management expense ratio to purchase the index, then consider purchasing the individual stocks instead.  As mentioned for the iShare Gold Index XGD, owning the top 3 positions is a fairly close proxy for owning the index.

As I’m fairly new to the gold game, I’m sure that there are many other ways to invest in gold.  If you have gold in your portfolio, what is your strategy?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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9 years ago

@David: Nice to own but high speculative investment with no secure ROI”

Please read #29 and #34.
You should also inform yourself on the definitions of ‘investment’ and ‘speculation’, as you cannot do both at the same time — “speculative investment”.

@Thomas: “I use the BMG Bullion Fund”

From their Q&A webpage:
“Front-end commissions of up to 5 percent are negotiated with your financial advisor.

Bullion Management Services Inc. charges an annual management fee for Class A units of BMG BullionFund and BMG Gold BullionFund of 2.25 percent.”
(Class A MER is 3%; Class F MER is 2%)

Right out of the gate you are paying a premium of 7.25+% just to buy. There is also a fee to sell.

And again, by investing in paper “gold” instead of buying real physical gold you loosing a ton of money. See #34.

Since inception, 2002, BMG has gained 7% per year average (Class A); the price of physical gold has increased 18% per year average — you are loosing 11% per year profit by holding paper and thinking it’s gold. Not a great road to wealth.

Sprott is just as bad as all the other precious metal paper funds.
You need a minimum of ~400 ozt in order to redeem physical gold — that’s ~$700,000. If you don’t have that then you are just wasting your money paying for management/storage fees on something you don’t actually own and will never own.

9 years ago

I’m glad that your revive this old post, because Gold is come alsways when you talk about investments.

I like and own some physical Gold, but sincerely I do not trust it too much as a valuable investment.

You can trade “Gold stock” like any stocks and try to make money with them, but physical gold is not so secure like it was in the past.
Even if it has a great value i compare it with silver and diamonds.
Nice to own but high speculative investment with no secure ROI

9 years ago

I use the BMG Bullion Fund (holds 1/3rd each of physical gold, silver and platinum) for myself and some of my clients.

“BMG BullionFund* provides investors with a convenient way of holding physical gold, silver and platinum in bullion form. BMG BullionFund’s fixed investment policy requires it to purchase equal dollar amounts of each metal and to hold minimum of 95 percent of its assets in bullion. No derivatives, futures contracts, options or certificates are used, and BMG BullionFund does not rebalance its holdings or attempt to time the market. As a result, BMG BullionFund’s assets are not dependent on anyone’s promise, representation or ability to perform. BMG BullionFund’s assets are not someone else’s liability.”

Sprott also has closed end trusts that hold physical gold and silver, held by third party and exchangeable for actual the metal.

9 years ago

Just read an article from Lloyds TSB stating silver was the best performing commodity of the past decade — up 572% or 21% per year average.
Gold was second with a 428% total gain; 18%/yr average.

The S&P did what, 5% annually?
During the “greatest bull market ever” the S&P only returned 12% annually.
The best money manager in the world for the last decade could only manage something like a 13% annual return.

Good thing I jumped on board in 1998.

Sorry to the clients of those astute fund managers who failed to see a raging twenty year bull market in the making.

This got me thinking about other comments:

1. Gold trades on speculation – not fundamentals.

2. It can also completely collapse. The only prior time when gold shot way up in price was in the late 70s. It ended with an 50% collapse in 2 months and took more nearly 30 years to recover.

First thing’s first, this is incorrect. Gold price spiked in 1980 for an incredibly brief time period — hours. It took about four years (not 2 months) to “collapse” by 50% from it’s yearly average (or 17 months from that spike peak).

Secondly, let’s track back 30 years from today:

Gold: +5.9% per year average
S&P 500: +7.55% per year average

Damn good returns for a market operating on pure speculation and without the trillions of dollars of government backing and decades of industry manipulation.

Just think, if FT had poured his $200,000 net worth into gold from the beginning (January 2007?), he would have cleared a 19% annual return compared to his current asset appreciation of 11% (his current debt reduction clocks in at almost exactly the same rate), resulting in a current NW of $625,000 — only 4% less than what he has now…on gold alone. Worth much more once the dual incomes etc. were accounted for.

Hope you got yours.

9 years ago

I forgot about the most heinous paper product fee of all — TAX!

Nothing like the feeling of selling physical gold legally tax free. :)

9 years ago

Even more damning evidence against MNT and ALL paper products claiming to be substitutes for physical bullion:

1. if you ever do redeem your $200,000 of ETRs for physical, you also have to pay for armoured car pick-up and delivery. How much that will cost you, I have no idea, but it’s probably a lot more than the shipping and insurance costs I pay to order gold online.

2. MNT stock is down 2% since its inception, yet the spot price for gold has actually risen 3% over that same time. By holding a paper “gold” product you are 5% less wealthy than someone who bought the real thing.

Not only that, but you most likely had to pay a broker to buy that stock for you. Even more fees associated with non-physical gold.

I guess I just don’t understand people who want gold, yet do everything possible to buy things which are not gold.

9 years ago

@leeder: when you buy MNT, you are not “playing the bullion”, you are playing paper which is, as you stated, also tied to the TSX market. Two strikes right there.

Strike three would be all the fees and conditions:
0.35% annually;
$100 per redemption request;
5% of the Gold Price for Gold Maple Leaf coins.

I can easily find lower premiums from online dealers. And if I was buying 100 ounces of gold I’m pretty sure I could talk my way into an even lower premium with a brick-and-mortar bullion dealer.

Not only that, but if a minimum of 10,000 units are required before redemption, this requires a ~$200,000 minimum investment — obviously something well out of the reach of the the majority of investors. So why are you paying a 0.35% annual fee for them to store something for you which you do not own and will never own?
Anything below 10,000 ETRs and all you have ownership to is fees.

If you redeem your ETRs for cash instead of gold bullion, you will be charged a 5% fee. WHY?!?

It’s an out-right rip off.

To continue the uselessness of MNT, the redemption price is set once a month (the 15th). So screw you if gold happens to plummet or sky rocket — you have zero control over the price at which you buy the actual physical bullion.

Did you read the prospectus before buying this thing?

Personally, I’ve quit buying RCM bullion product after discovering multiple acts of marketing fraud on their behalf. But then again, shame on me for expecting anything more from a government institute.

9 years ago

Currently, I’ve put about 5% weight (no more, no less… and will rebalance every year to maintain that weight) on the Royal Canadian Mint ETR, which invests based on the bullion. I did consider putting into GTU.UN.

I don’t like the gold equities like Goldcorp or Barrick because they seem to disappoint investors every year. I find many of these stocks require success with their gold mines. But from time to time, these gold companies run into operational issues. That’s why I would rather than play the bullion, which I feel is a little safer.

In terms of the Royal Canadian Mint (TSE:MNT), its management expense ratio is less than the Claymore Gold Bullion. Not to mention, it trades on the TSX, so I don’t have to convert money to USD just so that I can invest in GLD or IAU. Only downside is that it’s a light volume stock.

9 years ago

@Ed (#21): “In the securities industry, gold is considered a very high risk investment.”

This statement shows a fundamental lack of knowledge of the financial industry at large.

The US Fed/FDIC have proposed a merging of their bank regulations and BASEL III for banks “that have under $50 billion in total assets” (which constitutes ~$13 trillion of FDIC-backed institutes).

The new rulings include:

“A. Zero Percent Risk-Weighted Items

The following exposures would receive a zero percent risk weight under the proposal:

Gold bullion;”

That is: cash = gold = 0% risk.

So…you can heed the advice of a group of paper fund managers who don’t understand the product on which they are advising, or you can do your own homework to become wiser and wealthier.

9 years ago

Here’s a couple interesting insights:

Ibbotson conducted a 30+ year portfolio study which showed a precious metals allocation of 7-15% would increase returns and decrease risk.

In 2011, according to some reports, almost 50% of high net worth investors ($25+ million in investable assets) increased their gold holdings.
During the same time frame, nearly 80% of those investors reduced their holdings of stock market and paper products.

There are members of TIGER21 (average investable net worth of $90 million) who identify their investment strategy as “very risk adverse”, yet have devoted 10-20% of their portfolio to gold since 2010 — and have enjoyed a 40+% return on their investment which some run-of-the-mill fund managers consider “high risk” and speculative.

On a whole, the members of T21 have increased their cash and equivalent (aka gold) holdings by 45% since 2008; their stock market holdings (that includes ALL public paper products) dropped by 25%.

Remember, these are people worth many, many multiples of what your average fund manager is worth — and probably worth just as much as the entire fund he/she is managing!

I know who I would (and do) listen to when it comes to gold.