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 specfically taylored 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 relately 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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Buying physical gold can be a major ripoff with markups in the range of 20 – 30% if you aren’t careful. For US investors, GLD or IAU are the cheapest choices.

Regarding physical gold, you can buy mint certificate or mint safeguarded gold. Kitco.com for example offers plenty of products for investing in gold. The bid/ask spread is also very tight at about USD$10. This is the real way to be investing in real gold for large amounts over long periods. All other products are mere mimics with their own fine prints.

In particular, the leveraged ETF should not even be considered as a form of investment. They suffer from a well known deteriorating price phenomenon because of the leveraging (just look at the chart of spot gold price vs. HGU over a long period). These should not be held for more than a few days at most.

However, I agree that the regular unleveraged ETFs are better for the regular investors.

I’ve always heard that investing in gold is a terrible idea and only really paranoid people generally do it. I think that’s because most people who invest assume that all currency is going to tank and gold will be the only wealth left. I’ve personally never considered investing in it, and you did point out two of its big flaws. I would hate storing that gold and then trying to sell and ship it to its new owner.

HGU/HGD are both pretty decent plays if you’re into Technical Analysis as the tend to behave in consistent chart patterns fairly well. As has been noted though are not long term investment products whatsoever.

I would personally look at an ETF although Gold companies would become increasingly interesting as most of them are now removing their hedges making themselves more pure gold plays.

The first question one has to ask is why invest in gold
As a hedge against inflation?
A source of funds if the apocalypse happens?
As an equity investment like any other?
If you believe in option 1 then owing physical gold or a gold bullion ETF are viable choices
If you believe in option 2 then physical gold is your only choice.
If you are option3 then all the ordinary issues of purchasing company shares apply. Strikes, operating costs, reserves, selling prices, etc.
Buying gold mining companies either directly or through an ETF is only indirectly speculating on the price of gold. There are also gold bullion closed end mutual funds but the premium is usually too high to consider a purchase.
I think that increased inflation has a high potential and therefore I own CGL and GLD. I believe that this is the easiest most cost efficient way to invest in gold.
Curiously although but CGL & GLD hold gold bullion the performance of CGL is about 10% less than GLD even correcting for the Cdn $ and the higher MER. CGL is hedged against the Cdn $ which has a cost and a drag on the performance.

I don’t invest in gold for the long term as I don’t think the world economy will crash and burn anytime soon.
For bear markets, I think a better investment is trading the short side than being long in gold.
At this particular moment, if I’d trade gold, I’d be short, as I expect a 30-40% drop over the next couple of years.

I think a great way to invest in gold is either CEF.A on the TSX (http://www.centralfund.com) or GTU.UN on the TSX (http://www.gold-trust.com). The administrative fees for these funds range between 0.15% and 0.3% depending on net asset values (higher values = lower fees). Currently both funds are at around 0.18%.

CEF maintains a roughly 1:50 gold:silver ratio by weight (this currently works out to roughly 1:1 ratio by value).

GTU on the other hand focuses entirely on gold.

There are also $US versions that trade on the TSX (CEF.U and GTU.U). They also trade on the NYSE Amex (CEF & GTU).

You forgot about gold futures and options. :)

You can walk into any bank and purchase “Precious Metal” leaf, bullion or certificate.

The downfall is that it is purchased in US funds.

You can also go to the Canadian Mint, but that’s more of the collectors road.

Does anyone have any experiences selling bullion? I randomly have 70 oz of silver sitting in my closet that my parents bought in the 60s or 70s!

What is the most cost effective way of selling this?

Black market…

Seriously though, shop around. Banks will do it, but it has to be traceable. Reputable exchange houses (not money mart) or a silver smith might take them off your hands (seller beware).

You can also buy a gold stock. I wanted gold exposure while it was on the way up (and did well) so I bought Newmont Mining. Barrick Gold is another option.

In the current economy, with deflation more of a threat than deflation, I would be careful about investing too much in gold. Still, it is good to have a little bit in your portfolio from a diversification perspective.

Perth Federal Reserve Bank – Australia

I agree that purchasing mint safeguarded gold is the most cost effective rout, however owning a small amount of gold you physically possess is a very comforting feeling.

Beware where you buy your precious metals from. There are plenty of CONpanies ready to take advantage of the current rise in awareness in Gold and Silver.

I have written about one of these less than honest programs here http://su.pr/2yOAqw that promises free Silver!

For those looking to sell some bullion your local coin shop would be your first stop. Do some research at Apmex.com or Kitco.com to get the current ‘buy’ price before you go. Expect your coin dealer to give you a little less than the big boys as they can’t really compete but you do save on the postage! Also try to look like you know what you are doing……;)

One, don’t do it…to invest & make a lving requires more than being Canadian. You’d be best with a low-interest savings account. There is no guide to “sudden riches” other than hard work!

I have a smal amount of gold and silver coins… Not a significant part of the portfolio, but a little just in case. I have physical gold as it is a small amount it takes little to store, but certificates are anouther simple option backed by actual gold not a promisary note… I have a half decent portfolio of mutual funds mainly. It is a nice diversification out of the paper money system that you don’t get without physical gold or certificates…

The botton of the economy could fail out, it is have from secure(ie recent housing and debt crisis).

My current goal is to eliminate debt and mortgage…

Hmmm…what should I say about this?
First, the article should perhaps be re-titled as ‘Two Ways…’ — physical and paper. Listed are five paper components and one physical.

The difference is something akin to buying a plot of land or buying a mortgage ETF.

As of today, I would say pretty much all the ‘easy money’ in gold (and silver) is gone. What is left is the intrinsic security feature.

My recommendation?
Instead of holding cash in your investment portfolio, exchange this portion for physical precious metals. They are just as liquid as cash but more importantly, inflation does not erode their purchasing power as it does with cash.

Peter Schiff (who was constantly laughed off the media stage for calling the housing bubble, and now gets summoned for talks with congress) recommends holding a MAXIMUM of 6% in gold and 3% in silver of your investment portfolio (and a minimum of half that).

This translates into FrugalTrader holding a min. of (approx.) 5 ounces of gold and 4,750 ounces of silver.

Precious metals ‘guru’ David Morgan recommends between 10-20% along with this caveat: “The older you are, the more you should favor gold over silver. The younger you are, the more you should favor silver over gold.”

Me? Yes, I own some of each. :)

While owning physical gold does have its appeal, I prefer Claymore Gold Bullion Trust as I have the exposure without the worry of storage costs and the possibility of theft.

Great post!

So…in the ~2 years since the original post, how many have bought gold?

And by gold I really do mean gold the metal, not a paper market product which can vanish faster than you can say MFGlobal. :)

Hi FT,

I don’t own any gold now, since none of my fund managers want to own it today. Their insight is always interesting. Here are their 5 most interesting comments:

1. Gold trades on speculation – not fundamentals. It is not like copper, which is heavily used for actual purposes. The price of copper cannot fall long below production cost and cannot rise too much or real users will stop buying it.

Gold, on the other hand, is essential dug out of the ground and stored in vaults. It could drop to $200 and stay there for 100 years. We will never be short of gold. It could also shoot up to $10,000, since the actual users of gold are a small portion of the demand.

2. The demand recently is almost exactly the same as the rise in holdings of the gold ETFs. In other words, nearly all the net buying of gold in the last few years is in the ETFs. If they start selling, who will buy it?

3. Gold is not actually a hedge against inflation. Despite what most people think, gold actually generally goes down on inflation. Morningstar shows gold as negatively correlated .3 vs. inflation, which means it generally moves the opposite of inflation.

Today, gold is high while inflation is low – which is the norm.

The critical point is that gold rises on SPECULATION of inflation – not on actual inflation. When inflation is very low, there is often speculation that it could rise sharply (like now), which creates a higher gold price. When inflation is actually high, there is usually not speculation of a spike in inflation, so gold goes down.

4. Our fund managers usually buy gold companies when they want gold, rather than gold itself. Companies can produce profits and dividends, which gold does not, so companies generally rise long term.

However, gold companies are a very difficult business. You have to dig through tons of rock to get an ounce of gold.

For example, you have to dig through rock about the size of a large 2-story house (including basement) to get gold about the size of a small marble. That would be considered a “rich” gold vein.

5. In the securities industry, gold is considered a very high risk investment. It is often sold as a “safe” investment, but to buy it you have to be a “high risk” investor. This is because it is a sector investment and not diversified.

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.

When you invest in gold, you need to realize it can be very risky.


There are some very strange comments under this article. There are a zillion reasons to own gold, particularly physical.

There’s advantage to keeping some wealth out of the “system”. Do you trust the electronic computer banking systems implicitly? I don’t. A good hacker, an electronic screw up of some kind could make our money disappear instantly. Has no one here noticed the world financial crisis going on? Is no one paying attention to the failing US empire? You think that won’t affect the world financial system? Ha. Fiat currencies fail after about 40 years. How old is the USD?

One of the great things about gold and silver is how uncomplicated it is. For someone like me, who finds investment talk confusing, and doesn’t trust the system at all (my mutual funds lost thousands of dollars TWICE), then physical metals are a great option. I go to the currency exchange or coin store and trade dollars for metal and take it home. It’s small and easy to hide. It can stay there for decades and be cashed in when old and frail.

People buy and sell gold and silver on Kijiji all the time! You meet in a public place and pay cash. It’s not that complicated. It’s a transaction between two people, no tax man or government or huge companies need be involved.

That comment about gold investors being paranoid is just big media bull. They lie all the time, and you always have to ask what it is they don’t want you to know.

To the guy who has silver coins from his parents, hang on to them!!!!!
They will very likely be worth much much more in the next few years, hang tight!

The forum on Kitco.com is a fantastic place to learn about gold and silver investing, physical as well as paper. There are many people of all kinds there, many are very intelligent. Please go learn, because this article did NOT cover the whole story!

Thanks Ed. This is a very interesting post (post #21). Made me think.

I love Ed’s anti-gold sentiment.

I’d rather follow the lead of the rich and wealthy than any fund manager.

I definitely prefer investing in ETF shares tracking physical gold. I invest in ETFS Physical Swiss Gold Shares (SGOL).

Hi Goldberg,

Thanks for the comments. I thought with your name you would have some interesting insights… :)


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.

@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.

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.

@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.

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.

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

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

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.

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.

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

@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.