Gold: transaction costs affected by level of investment safety

News Arnulf Hinkel, Financial journalist – 13.06.2018

There are numerous ways to participate in the performance of gold, ranging from the direct purchase of gold bars to structured products. In addition to important criteria such as price transparency and fungibility of a gold-based product, transaction costs and safety play an important role in the investment decision. In the recently published "Transaction and Distribution Cost Analysis Gold" provided by the Research Center for Financial Services of Steinbeis University Berlin on behalf of Deutsche Börse Commodities, the costs of the purchase and ownership of gold via various investment forms were compared against each other. In the study, the average costs of the respective product groups were compared rather than those of specific products. 

Purchase of physical gold is usually the most expensive option

The acquisition of gold-based securities is significantly cheaper than a physical purchase, even for an amount as small as 10 grams of gold. With an investment of €1000, the purchase of gold bars incurs transaction costs of 6.71 per cent. For gold-based, physically-backed ETCs or ETFs offering physical redemption, however, the transaction costs amount to only 2.76 and 3.48 per cent, respectively.

Protection against total investment loss comes at a price

The transaction costs for the purchase of physically backed ETCs or ETFs including the option of bullion delivery are significantly lower than those for the purchase of physical gold, but they are higher than those of other gold-based securities: physically backed ETCs or ETFs excluding the redemption option have somewhat lower transaction costs with 2.42 and 2.48 per cent, respectively, and the transaction costs for the purchase of securities sans physical back-up are even lower: with gold certificates, they only amount to 2.28 per cent of the security’s value. However, in case of an issuer’s default, the potential outcome is a total investment loss. Bearing this in mind, physically backed gold-based ETCs with investor entitlement to redemption represent the happy medium since they offer the highest possible investment safety at favourable transaction costs.

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