Investing in gold: in addition to cost efficiency safety should come first

News 02.10.2015

Many investors are looking for alternatives to acquiring physical gold to avoid high costs for storage as well as safety measures. At the same time, they want to benefit from the flexible and cost-effective trading opportunities offered by the so-called paper gold. Also, they want to invest in the coveted precious metal accurately and without any divergence loss while enjoying the highest possible security of their assets. In most cases, the paper gold products tradable on the German stock market are bearer bonds, such as certificates and ETCs, i.e. Exchange Traded Commodities. Owners of bearer bonds are not covered per se against the default of issuers of certificates or ETCs, unlike ETFs which are legally regarded as special funds. As a consequence, investors wishing to invest in certificates or ETCs really should pay particular attention to how the instrument in question is constructed, or how far it is backed by physical gold. Being structured products, certificates are often constructed using derivatives, and only partially backed by physical gold. With ETCs, things generally look better, but the degree the bearer bonds’ backing by physical gold can vary, depending on the issuer. Also important is the question if or if not the issuer of an ETC may lend the gold meant for hedging the investment. Xetra-Gold, for example, is backed at any time to at least 95 per cent by physical gold in the central vault for securities in Frankfurt. The remaining 5 per cent are held as delivery entitlements in the London deposit vault for processing reasons, but can be retrieved as gold bullions and delivered to Frankfurt at any time. Also, none of the physical gold will be used for anything else than backing the Xetra-Gold bearer bonds. Therefore, this particular form of gold investment Xetra-Gold offers is not only extremely fail-safe, it also facilitates a further advantage: investors are entitled to a delivery of physical gold at any time.

Arnulf Hinkel
Financial journalist

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