Investing in gold: bullions vs. securities

News Arnulf Hinkel, financial journalist – 05.04.2018

According to a survey conducted by the market research company GfK in 2017 on behalf of Deutsche Börse Commodities on the investment behaviour of Germans, the answer to the question of how investors prefer to invest in gold is clearly linked to the respondents’ age. At the time of the survey, investors aged up to 44 years were almost three times as likely to be interested in gold-based securities than those 70 or older, who stated a preference for gold coins or bullions. Ultimately, there are three factors that determine which gold product is suitable for an individual investor: safety, cost efficiency and flexibility.

Safety should always come first

Whether physical or in the form of securities, gold can be a crisis-proof and long-term investment – provided that certain rules are observed. For example, investors with little knowledge of physical gold should limit their purchase to internationally recognized products and manufacturers. When opting for gold bullions, they should choose products certified by the London Bullion Market (LBMA), by manufacturers such as Umicore, Degussa or Heraeus. For gold coins, safe choices are Maple Leaf or Krugerrand.

Gold-based securities tradable on stock exchanges in Germany are generally bearer bonds – ETCs (exchange-traded commodities) or structured products in the form of certificates. Unlike ETFs (exchange-traded funds), they are not considered special assets, and holders of bearer bonds therefore are not protected against a potential total loss of their investment in the event of an issuer defaulting. For a fail-safe investment in gold-based securities, investors must look closely at how the instrument in question is hedged. While certificates are usually constructed using forward market products, and in many cases are only partially backed with physical gold, the level of hedging with physical gold is usually much higher when it comes to ETCs – up to their complete backing with bullions, as is the case with Xetra-Gold: for each Xetra-Gold security sold, the corresponding quantity of physical gold is deposited in the central vault for securities in Frankfurt.

Physical gold and cost efficiency do not mix

When it comes to the cost of buying, depositing and re-selling gold, gold-based securities are clearly the best choice. In addition to the customary transaction costs, only custody account fees are incurred. 

In the case of physical gold, the purchase price and the cost of storing the gold bars or coins safely should not be underestimated. A safe-deposit box at a bank is one option, and investors who keep their gold at home need a special insurance, as standard householder's insurance does not provide sufficient coverage. Also, transaction costs are higher than for gold-based securities, since the market transparency for physical gold is significantly lower than in stock exchange trading.

Flexibility is vital when it comes to short holding periods

Although it does not agree with the philosophy of this asset class, a number of investors also use gold for speculative purposes, e.g. to profit from possible gold price increases in times of crisis, and for short-term profits. Due to its relatively high transaction costs, however, physical gold is much less suitable for this purpose than gold-based ETCs or certificates, since they have a much higher fungibility than gold bars and coins due to superior cost efficiency.

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