Investor’s Guide to the Gold Market and Gold ETFs | Buying Gold (Part 2/5) | RMAU
There are many ways to buy gold. Different products can be used to achieve a variety of investment objectives.
There are many ways to buy gold, all of which have different risk and return profiles, liquidity characteristics and fees. Depending on the investment objective, an asset allocation strategy will consider long-term versus medium-term returns, and how gold investment products perform in positive or negative correlation with other assets. Some of the more popular ways of buying gold are explained below:
Buying physical gold (bars and coins)
Small bars and coins, such as those sold by The Royal Mint, accounted for approximately two-thirds of annual investment gold demand and around one quarter of global gold demand over the past decade. Demand for bars and coins has quadrupled since the early 2000s, and the trend covers both the East and the West. New markets, like China, have been established and old markets, like Europe, have re-emerged.
Bars and coins come in many denominations and measures of gold content (also called fineness). Fineness is either measured in carats (the highest being 24 carats) or in parts of gold per thousands (usually 995, 999, or 999.9 parts per thousand). Coins are commonly produced in denominations of 1/20, 1/10, ¼, ½, and one troy ounce.Bars can be purchased in 1, 10, 20, 50, 100, and 1,000 gram denominations as well as 1, 10, and 100 troy ounces.
The LGD bar
Central banks, many gold-backed ETCs and other large institutions rely instead on the ‘London Good Delivery’ (LGD) bar. The LGD bar is the standard gold bar used for clearing in London, and weighs approximately 400 troy ounces.
When buying gold in these forms, investors pay a premium over the spot gold price on bars and coins. Generally, the smaller the coin, bar or size of the investment, the larger the premium per ounce.
Owning physical bullion may involve additional costs beyond the expense of the gold, including insurance and storage. Care and diligence are necessary when purchasing physical gold and the authenticity of the gold should be verified by the assay mark. Gold should be purchased from a bank or reputable dealer.
Allocated Gold Accounts
Bullion banks offer their institutional or high net-worth customers allocated gold accounts consisting of gold deposits and resembling currency accounts. The holder of an allocated account is the legal owner of a specific quantity of gold. Bullion banks also offer unallocated accounts.
In an unallocated account, a customer does not own specific bars or coins, but has a general entitlement to a set amount of gold. The investor is not the legal owner of any physical gold, but rather is a creditor of the provider.
Internet Investment Gold
An increasingly common way of accessing the gold market is Internet Investment Gold (IIG). Internet Investment Gold allows investors to buy physical gold online, have it stored in professional vaults and take possession of it should the need arise. As such, Internet Investment Gold offers investors a highly convenient way to benefit from outright ownership of physical gold. The Royal Mint’s Signature Gold falls into this category and currently services thousands of customers around the world. These customers purchase fractional gold which is allocated against the physical gold bars stored securely within our Vault.
Buying Gold Mining Stocks
Investors can invest in shares of gold mining companies.Gold mining company stocks may correlate with the gold price. However, the growth and return in the stock depend on the expected future earnings of the company, not just on the value of gold.
Gold Billion Funds and ETFs
Physically-backed gold exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and similar funds account for approximately one-third of investment gold demand. These funds were first launched in 2003 and, As of 30th October, 2019, gold ETFs and ETCs have a combined AUM of $140.9 Billion, equivalent to ~2,900 tonnes of gold(1).
As the first sovereign mint to list a gold backed ETC in Europe, The Royal Mint’s ETC product is a competitively priced, secure ETC that is backed by real, tangible gold stored within our Vault.
Gold-backed ETCs and similar funds allow investors to generally track the price of gold, giving them access to the properties and security of owning physical gold without the need to arrange for storage and insurance separately. These gold backed funds seek to combine the flexibility and ease of stock-market trading with the benefits of physical gold ownership.
Exchange-traded gold-backed funds are regulated financial products, with each share corresponding to a specific amount of gold and a share price that generally reflects the underlying gold price, less expenses. Unlike gold derivative instruments, most of these funds are fully backed by physical gold. Generally, only authorised broker-dealers can exchange shares for physical gold. Some funds allow the exchange of shares for physical gold by retail investors, but require additional (often high) fees.
Growth of Gold ETFs & ETCs (1):
View part three of the Investor’s Guide to the Gold Market and Gold ETFs to find out about 'The Key Characteristics of Gold ETFs'.
Visit The Royal Mint Physical Gold ETC Fund Page to learn more about RMAU.