Gold investments, a comparison
There are various products with which the saver can invest in gold. They differ in terms of provider, price and, most importantly, how gold is invested in.
For consumers, the wide range of investment options can seem intimidating.
This article is intended to give people interested in gold some guidance on the many products available on the market. However, it in no way constitutes advice or investment recommendations.
Here is a list of the products, the order reflecting how directly the investor is so invested in gold. The higher, the more direct, or the further down the list, the more indirect. The various products are explained in the following article.
Physical gold (bars, coins)
Gold deposit with a precious metal dealer
Gold deposit with a bank
Physically replicated gold ETF
Non-physically replicated gold ETC
Gold account with a bank
Gold shares (mines, refineries, dealers)
Physical gold
Gold bars and gold coins that you buy yourself and sometimes store yourself are often referred to in the investment sector as physical gold or investment gold. It does not matter whether you store this gold in a stash, safe, safe deposit box or with a specialised provider. Savers have a wide range of options for buying gold, both in terms of products and trading partners.
Coins from various countries are offered, gold Vreneli, Krugerrand, Maple Leaf and Vienna Philharmonic, are just a few examples. The classic bullion coins such as Krugerrand, Maple Leaf and Philharmoniker are offered in many sizes and price ranges, from 3.1 grams to several hundred grams, of which the one-ounce coin (31.103 g) is certainly the most common.
Gold bars offer an even greater choice in terms of denomination and manufacturer. Almost anything is available from 0.5 g to 12 kg. You should make sure to buy bars from an LBMA-certified refinery, in Switzerland these are Argor-Heraeus, Metalor, Pamp, Px Precinox and Valcambi.
Gold coins and bars can be traded with banks, precious metal dealers, private individuals or on PreMeSec.ch.
Advantages of physical gold:
Direct ownership of gold
High availability
Many possible trading partners (private individuals, banks, dealers)
Internationally recognised
Easy to transport
Independent of government intervention
Disadvantages of physical gold:
Storage must be organised by investors themselves.
Higher surcharges have to be paid for small coins and bars.
Gold deposit with a precious metal dealer
Some precious metal dealers offer precious metal deposits in addition to trading in physical precious metals. Here the customer buys physical precious metals such as certain bars or coins of his choice, but does not have them delivered, but stores them in a depot at the dealer. Usually, these are so-called collective deposits. The dealer stores the correct quantity of precious metals in his vaults, but without assigning the individual pieces to a customer. Only when the customer requests delivery does the dealer remove the pieces from his storage and hand them over to the customer.
With such precious metal deposits, the customer already buys a certain commodity such as bars of a certain size or coins of a certain weight from a certain manufacturer.
Since the customer cannot control the dealer's precious metal holdings, this type of investment requires a high degree of trust in the dealer. Furthermore, one should make sure that the stored values do not count towards the trader's balance sheet and that he is not allowed to use them as a short-term buffer.
The advantage is that one does not have to worry about the storage of the precious metals and that the mark-ups for the purchase of the individual products are fixed and do not change over the storage period.
Of course, these advantages have a price and this has to be paid in the form of custody fees. The differences in prices can be great, both with regard to the custody fees and the precious metal prices of the dealer, so it is worth comparing.
Advantages of a gold deposit with a precious metal dealer:
Storage of gold by dealer
Possibility to invest regularly in gold and directly determine the denomination.
Gold trading with a specialist
Disadvantages gold deposit with a precious metal dealer:
Usually gold dealers are somewhat more expensive than banks.
Annual custody fee
No possibility to check the holdings.
Gold deposit with a bank
Banks also offer gold deposits. Here, the customer does not buy any specific products, but only acquires a share in a standard bar (approx. 12 kg) stored at the bank. The customer is contractually assured that he can also have other products such as smaller bars or coins delivered if he wishes to purchase them in physical form. In this case, surcharges for the products will still apply and, of course, this is only possible if the bank also offers the products at the desired time.
Advantages of a gold deposit with a bank:
Storage of the gold by the bank
Possibility to invest in gold on a regular basis without directly determining the denomination.
Gold trading directly with one's house bank
physically replicated
Disadvantages gold deposit with a bank:
Possibility that the bank massively reduces the range of available gold products during the investment period.
Over time, the surcharges for a physical purchase may become much less attractive.
The desired products may not be available at the time of purchase, even if the bank would in principle offer them.
Annual custody fee
No possibility to check the holdings.
Gold ETF, physically replicated
An ETF is an Exchange TradedD Fund, a fund traded on the stock exchange. In Switzerland in particular, there are two major banks that offer gold ETFs. A gold ETF is a fund whose entire capital is deposited in gold. ETFs are easy to trade, they are very liquid. The advantage of physically replicated ETFs is that there is no counterparty risk, the fund has actually bought and stored the gold. Physical delivery of the gold is usually not provided for and if it is, then only in standard bars, which are bars of 12 kg, equivalent to a value of around CHF 660,000. ETFs are securities and are therefore held in a custody account at the bank. In addition to the management fees of the fund itself, custody fees are also charged by the bank.
Advantages of ETFs:
Easy to trade
Storage in a bank custody account
Delivery of precious metals possible
Physical replication of precious metals
Disadvantages of ETFs
Too expensive for small quantities due to fixed fees
Delivery of precious metals only possible in standard bars (from approx. CHF 65,0000)
Costs for fund management and custody fees are incurred annually.
ETC, physically not replicated / synthetically replicated
ETFs that focus only on a single commodity such as gold are not permitted in the EU, as funds must be broadly diversified. For this reason, ETCs are traded in the EU. ETCs do not have their investment capital invested in physical gold, but may have invested in gold in a variety of ways, usually as a debt security. One example is gold futures or swaps. The problem with these types of securities is that there is a counterparty that promises to deliver gold or its equivalent. If this counterparty goes bankrupt, the investor may lose his claims. With synthetically replicated ETCs, one has no claim to surrender of the gold.
Although the expense of physical replication does not exist, the ETC is generally no cheaper than an ETF.
ETCs are securities and are therefore held in a custody account at the bank, so in addition to the management fees of the fund itself, custody fees are also charged by the bank.
Advantages of ETCs:
Easy to trade
Storage in a bank custody account
Disadvantages of ETCs
Too expensive for small amounts due to fixed fees.
There is a counterparty risk.
Delivery of precious metals not possible.
Costs for fund management and custody account fees accrue annually.
Gold account with a bank
A gold account is the same as a private account in Swiss francs, except that it is not in Swiss francs but in grams of gold. When changing from Swiss francs into grams of gold, exchange fees and account maintenance fees are charged. The most important difference to physical gold or gold in a gold deposit is that it is a debt security of the bank, so you are not the owner of a certain amount of gold, but the bank owes you gold. Usually, the deposit can be obtained in standard bars or, for an additional charge, in smaller units. A special feature compared to private accounts in CHF is that precious metal accounts are not covered by the deposit guarantee. If the bank goes bankrupt, the balance is gone or the chances of getting anything out of the bankruptcy estate are very small. The advantage is, of course, that it is very convenient to buy gold this way and until delivery, the possibility to buy is not dependent on any physical delivery. In addition to the spread for buying and selling, the account management fees must also be included in the costs.
Advantages of a metal account at the bank:
Easy investment in precious metal.
No storage necessary
Possibility to invest regularly in gold without directly determining the denomination.
Gold trading directly with one's house bank
Disadvantages of a metal account at the bank
Not physically deposited.
There is a counterparty risk.
Delivery has cost implications.
Annual account maintenance fees
Not protected by deposit insurance.
Gold shares (mines, refineries, dealers)
Gold shares are shares in companies whose activities are strongly related to gold. However, this definition already shows part of the difficulty of this type of investment. There is no company that deals exclusively with gold, this has to do with the nature of the metal and the business. Mines, for example, mine ores, but gold-bearing rock usually also contains other metals such as silver or copper. As a result, these mines are not only gold mines, but also copper or silver mines. Their economic success therefore also depends on copper and silver production and the price of these metals. If an investor wants to participate exclusively in the development of the gold price through a mining share, this is not possible, since the share price always reflects the situation on the market for other metals. In addition to the risks of the foreign metals, the investor also bears the usual business risks such as poor management, wrong business decisions by the management, market risks, political risks depending on the geographical situation of the mining company.
Here are some of the largest mining stocks:
Agnico Eagle Mines (CAN)
Anglogold Ashanti (ZA)
Barrick (CAN)
Gold Fields (ZA)
Harmony Gold Mining (ZA)
Kinross (CAN)
Newcrest Mining (AUS)
Newmont Mining (USA)
Similarly with refineries, those who are technologically capable of refining gold can and do do so with other metals. Another problem with refineries is that only a few of the companies are traded on the stock exchange.
With gold traders, one has to distinguish between banks and precious metal dealers. Precious metal dealers are usually not quoted on the stock exchange and so there are hardly any shares to be bought there. In Switzerland, banks are the largest dealers in precious metals and most of them can be traded on the stock exchange. Unfortunately, gold trading is only a vanishingly small part of banks' business, which is why one cannot speak of gold shares in banks.
The performance and development opportunities of gold shares are the most difficult for investors to assess. The fact that the performance of a share depends not only on gold but also on industrial metals makes an assessment complex and can be a disadvantage or an advantage. In good economic times, industrial metals are often in high demand, which can lead to higher profits for companies, while the security of gold is not in high demand. Conversely, in bad economic times, the opposite can be true. Therefore, these stocks may be less volatile to the gold price.
Advantages of gold shares:
Investment always also in other metals
Disadvantages of gold shares:
In addition to normal price risks, there are also various entrepreneurial risks.
Investment only indirectly dependent on the gold price.
Price differences between the various options
The various options differ not only in how directly or indirectly they invest in gold or how directly investors have ownership of gold or not, but they also differ greatly in their costs.
Because of the costs, it is not possible to draw a general comparison between the different offers, as the banks have different pricing strategies. Transaction fees, spreads and custody and account fees as well as product-dependent management fees (only for ETFs and ETCs) are so different that the comparison must always be made per bank used.
Since custody/account management fees are often subject to a minimum of between CHF 50 and CHF 120 per year and transaction fees also often cost a fixed minimum, buying physical gold often seems more attractive for amounts below CHF 5,000, especially since there are no storage costs for small amounts if you store them at home.
When buying gold around CHF 50,000, the banks' offers of precious metal accounts, custody accounts and securities are usually more interesting, as storage is cheaper here. When buying physical precious metals, professional storage with insurance should be used.
If you invest in gold for several hundred thousand francs, you have various options, both in terms of trading and storage. The relatively high investment amount gives the investor a good negotiating position with precious metal traders and storage providers, but the banks' fees are also often significantly lower in this area.
Conclusion
In general, it can be said that price should not be the sole deciding factor. Investors should be aware of the advantages and disadvantages of each product and factor these into their decision.