In our last blog, we explained why we think that you should own (some) gold. Let’s say you agree with us, now comes the big question, how do I best buy it? Unfortunately, this is not necessarily an easy question to answer. In fact, there are several different options that we’ll go through below.
Physical Gold
Of course, the most standard option would be to buy physical gold. Like all other options mentioned below, there are several advantages and disadvantages to doing this.
Advantages:
- Tangible asset – Unlike other alternatives mentioned below, gold is a tangible asset, meaning you can hold it. In case of any sort of emergency, it is probably better to hold the real asset as opposed to an alternative.
- Liquid – Gold is recognised worldwide and you should be able to sell this wherever you are. Although, some options later in the list might be even more liquid.
Disadvantages:
- Storage cost – Of course you have to store your gold in a secure place, which often accrues some sort of cost with it. Especially if you want to store large quantities.
- Capital Gains Tax (CGT) / Wealth Tax– In several countries, you have to pay tax on any gains you might have made from buying and selling physical gold. Do look into your specific country though because there might be ‘loopholes’, like buying gold coins, which are usually not taxed. In other countries, you also have a wealth tax of around 1% for owning gold.
ETF (Exchange Traded Fund)
These are funds that invest in gold and attempt to generally track the price of gold. Hence, if you want to invest in gold, this might be a good alternative.
Advantages:
- Easy to start investing since there’s no need to store physical gold anywhere. Instead, you have to open an account with a broker and start trading.
- High granularity – Some ETFs allow you to start investing from 1 gram.
- Liquidity – It is easy to sell your investment on an exchange. There’s no need to go to a shop.
- Tax – Usually ETFs are tax efficient, as there is no capital gains tax.
Disadvantages:
- Some ETFs are not backed by physical gold. Instead they rely on derivatives, which we’ll talk about later, or other ways to track the gold price.
- No ability to redeem physical – For most ETFs, it is actually impossible to ever see any physical gold. Most people don’t consider this fact enough. In case of an economic crash, physical gold will always keep it’s value. But an ETF might crash and not protect you at all.
- Fees – You do have to pay a management fee to own an ETF. Although this would only run up to about 1% a year, it does add up.
Crypto
As an alternative to ETFs, there are some companies that buy gold, and ‘tokenise’ it. By this we mean that they create a decentralised token on the blockchain. Therefore, every token you buy, is supposedly backed by physical gold, which is why the price should be similar.
Advantages:
- Stored on a blockchain – By definition, these coins or tokens are stored on a distributed blockchain, meaning that they have all the same advantages of other cryptos.
- Easy to store – You can easily store the tokens on an USB stick and you can rely on the security of the blockchain.
Disadvantages:
- High fees for redemption – Almost all gold backed cryptos have extremely high fees if you do want to redeem the physical gold. On top of that, their gold is often stored in a single vault, meaning that you would have to travel to that specific country to get the gold, and you are also dependant on the regulations of the country where that gold is stored, meaning you might not even be able to export it.
- Liquidity – Because of limited issuance, there is often very low liquidity in these coins. So, selling them might be difficult if nobody else is buying. This makes them less stable than owning physical gold.
- Reliability – Unfortunately, there are a lot of projects out there that simply cannot be trusted because you have to rely on the token issuer and scams are common.
Derivatives
Instead of buying gold, you can buy a contract that derives its value from gold. One way that could work is find someone who thinks gold is going to go down. You make a contract with him that if gold goes up by $100 in 1 month, then that person pays you $100. But vice versa, if gold goes down for example $56, then you pay him.
This is almost what a future contract does. These are standardised contracts that are commonly traded, which is basically saying you will buy or sell gold in x amount of time. But, you can sell your contract before expiry, meaning you’ll only pay the difference. Going ‘long’ a future means you’re betting on the price to go up and going ‘short’ means you think the price will go down.
Advantages:
- Liquidity – These sort of contracts are highly liquid and commonly traded.
- Margin Trading – You’re not actually buying gold, but only going into a contract. The contract often requires you to put up some sort of ‘collateral’, also called margin. But, this collateral is much less than making the full investment. For example, let’s say you want to make a bet on 100kg of gold. If you buy the physical, you have to put up the full amount. But if you’re buying contracts, you only have to give 5kg (or 5%) as collateral.
Disadvantages:
- Standard contract size is 100 oz, which is a lot of money to most people. At the current price of around $1,800, one contract is worth about $180,000, so even with the margin, you still have to deposit a significant amount.
- Physical – Access to physical is also more difficult. You could wait until your contract expires, but even then, it is a difficult process and most contracts are rolled over and therefore never settled.
- Different price behavior – You are not actually betting on gold, but instead on what its value will be in x amount of time. Therefore, the price behavior could be slightly different.
- Complexity – Dealing with derivatives is more complex than all above options. You have the leverage factor, rolling over contracts, different price behavior, …
New, Improved Alternatives?
Hopefully the above helped you to get a sense of some of the different possibilities. As you can see, not a single option is perfect. Like everything in life, it is a compromise.
However, at 24Gold, we are working hard at making sure we can provide you with the best option necessary. Therefore, keep an eye out on our website for our vaulting product, which will be coming to you soon and gives you the flexibility to manage your precious metals investments.
Where do I take it from here?
But, how do you take it forward and actually start making your first investments?
First of all, you have to identify what exactly you want to achieve. Do you want to diversify your investments? Do you want to keep some money aside for a rainy day? Do you want to speculate on the gold price? Do you want to … ?
Once you have done that, do reach out to our team, who will get you up and running in no time with the best suited strategy for you.
