Investing in gold - Part 1

In many circles, gold is currently viewed as the hottest investment around. The price of an ounce of gold is up 30 per cent in the last year, or 400 per cent in the last 10 years, outperforming virtually every other asset class.

There are several ways to invest in gold which can be classified as physical, such as bars and coins, or non-physical gold.

Bars and Coins

At present, all precious-metal products trade at a premium or discount to the market price of the precious metal concerned. Following strong demand for gold over the last year or two, demand for coins had pushed coin premiums to high levels.

On a weight-for-weight basis, premiums on bars are generally lower than coins, and this makes bars the more attractive proposition for investors.

As a rule, bigger bars have lower premiums - reflecting manufacturing and refining costs - than smaller bars, although larger bars provide less flexibility in liquidating part of an investment.

Bullion coins are legal tender in the country of issue. The market value of bullion coins is determined by the value of their fine-gold content, plus a premium that varies between dealers.

Don't confuse bullion coins with commemorative or numismatic - collectors - coins, whose value depends on their rarity, design and finish rather than just their fine-gold content.

Small gold bars can be bought in a variety of sizes and weights up to 1kg.

Like bullion coins, they contain a minimum 99.5 per cent gold.

Bars are likely to carry less of a premium than coins - www.goldbarsworldwide.com has detailed descriptions of types and producers.

Pros: Perfect correlation to the market price of gold, but remember the currency risk. Bars and coins are accessible to the private investor and you can invest in relatively small amounts of gold - a 2.5g bar costs about US$120, for example. When you own physical gold yourself, there is no 'counterparty risk' - your investment does not rely on someone else keeping their promises or remaining in business.

Cons: Production costs can add 15 per cent to the cost of the gold itself. You may need to visit a dealer and arrange secure transport, and you will need somewhere safe to store your gold, as well as insurance, all of which may involve extra cost. Transaction costs for some coins can be high, while liquidating just part of your holding may be impossible - you can't sell half a bar or coin.

justin.robinson@cavehill.uwi.edu