Buying and investing in gold

Article sections:

There are 8 different ways to buy and invest in gold:
1- Bullion coins and small bars,
2- Big bars,
3- Mining shares,
4- E-gold,
5- Futures,
6- Gold Backed Securities,
7- Gold Pool Accounts,
8- Jewellery.

This article looks into the respective advantages and disadvantages of each type of gold investment.

Bullion coins and small bars

Gold coins come in two general classifications (i) numismatic coins and (ii) bullion coins. A numismatic coin has a price which doesn't relate to its bullion value so much as rarity and desirability for collectors. A bullion coin, on the other hand fairly accurately shadows the bullion price. Small bars behave similarly to bullion coins.

Advantages of bullion coins and small bars:

Disadvantages of bullion coins and small bars:

Coins and small bars can be an appropriate gold investment method for sums from $100 to $10,000 especially for people whose view is long term and for whom physical possession is all. In this range it would be typical to suppose dealing costs, delivery and ownership costs in the 10-15% range overall.

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Big bars

The world's professional gold market trades 400 toz bars, equivalent to about 12 kilograms a piece. Big bar trading is reserved for big companies and institutions. It is competitively priced but inaccessible to the private investor.

Advantages of buying big bars:

Disadvantages of big bars:

Gold mining shares

Shares in gold mines are a popular way of investing in gold.

Advantages of gold mining shares:

Disadvantages of gold mining shares:

Gold shares are potentially risky but simultaneously an exciting investment. They tend to be reasonably correlated to gold prices but typically much more volatile, and subject to many variations which are independent of bullion market forces.

Mining shares might be considered an appropriate gold vehicle investment for sums from $5,000 range upwards, but investors should remember the gearing and invest appropriately less than they would in bullion. Buying and selling costs vary from market to market. Not uncommon is a spread of 2% (lower for the bigger mining companies) and transaction costs of 1-1.5% each way. Combined, the trading costs would amount to up to 4-5% of the capital cost for each investment undertaken.


The internet spawned e-gold. The basis of e-gold is that international debts, and even some domestic debts, can be paid more efficiently in gold than in foreign currencies, which have to be converted back into host currency through the bank. So wherever a supplier and a customer both have an e-gold account they can transfer ownership of gold between themselves across the internet, and this constitutes payment.

To get started you use your own currency to buy grams of gold. The gold is delivered into a depository, and is credited to your own e-gold account. You then get a secure internet identity, and thereafter you can instruct your e-gold provider to debit your e-gold account in favour of your supplier - another account holder in the system. Whatever you have bought from them is delivered to you independently. It is primarily a payments system, but it doubles as a route for owning and storing gold.

Advantages of e-gold:

Disadvantages of e-gold

This is a useful internet way of owning real gold. Although the up-front costs are significant they may pay themselves back - particularly if you are going to hold gold for a considerable period. Through the custody charging policy alone it makes for a cost-effective long term reserve against calamity. Some of the providers allow you to freeze an account. This is a useful extra facility which allows you to be a bit more relaxed about the internet access issue.

Gold Futures

Gold futures are a sophisticated financial product and have been described in some detail in the gold futures section of this site. This small section summarises what was said there.

Advantages of gold futures:

Disadvantages of gold futures:

Seeing where the costs are in futures trading is not easy to do. A $10,000 margin down-payment could probably finance a notional $500,000 gold future purchase, and transaction costs would be very small. But the position would be very thin on margin, and even a touch of weakness in the gold price would see the $10,000 lost.

A more conservative approach would allow some tolerance of a market moving the wrong way. If a $10,000 down-payment financed a $100,000 position successfully for a year the costs assimilated over the period would include the commissions (four sales and four purchases) 4 trading spreads on a notional $100,000 position, and the loss of interest on the margin. On the most generous interpretation this will cost about $1,000, i.e. about 1% of the notional principal but a high 10% of the down-payment. After adding the marked effects of predictable volatility as the contracts are rolled forward, and the depleting differential between the spot and futures prices, the trading costs could be significantly higher. Above all do not be fooled into thinking you are saving the cost of financing the trade. It's in that depleting price.

For investors who are prepared to underwrite for a short period the systemic risks of derivatives gold futures remain a sensible and cost effective way of executing a short term gold punt.

Gold Backed Securities

These are a relatively new innovation. They aim to combine the benefits of physical gold bullion with the liquidity and infrastructure of traditional securities market. Currently they are available in Australia, London and Canada, in slightly different forms.

To create a gold backed security a company is set up which has the right to issue a paper instrument which can only be issued in direct proportion to gold deposited in a vault. The securities are then traded on a normal stock exchange, or by a broadly equivalent market mechanism.

The price of those securities actually reflects only supply and demand for the shares themselves in the relevant market for the securities, but this will tend to shadow bullion because there is usually a right of redemption, allowing them to be surrendered in return for the gold which backs them. There will be a fee for redemption which is fixed, and relatively high to prevent lots of nuisance redemptions, but it allows market professionals to leave a bid on the exchange consistently near the value of the gold. In the absence of other bidders they will pick up securities which can eventually be redeemed profitably. This tends to hold the security price at or near bullion value.

Advantages of gold backed securities:

Disadvantages of gold backed shares:

Gold backed securities have a lot to recommend them. The security of gold seems more solid than the margin based security which underpins futures. They do not incur the periodic volatility inherent in futures. The custody charges, although still quite high, are generally lower than other forms of custody available to medium sized investors and the transaction costs are consistent with stock exchanges (which could be improved). On balance these are innovations which appear to encourage private gold ownership at manageable cost and with a good degree of security.

Gold Pool Accounts

Gold pool accounts allow the customer to buy a gold liability from the account provider. Effectively the customer pays cash, and the supplier treats him as a creditor for bullion which may or may not have been actually bought. Pool accounts are synonymous with unallocated gold.

The advantages of gold accounts are:

The disadvantages of gold accounts are:

In spite of the apparent attractions of unallocated gold [pool] accounts it is extremely hard for any serious investor to recommend them - because of the unquantifiable risks. The customer's investment rests as a liability on the provider's balance sheet and there is no obligation whatsoever on the provider to buy the gold. If there were unscrupulous individuals in the gold industry (and nothing here would suggest that there are) their natural service would be offering gold pool accounts. That way they can take customers' money and put it to work for their own profit, without even paying interest. If they make a lending mistake the gold liability will be unpayable, but probably no-one will have broken the law.


Jewellery is a profitable business for those who buy at wholesale and sell at retail. It also works for people who have a good feel for fashion, and the time to trawl through catalogues finding stuff which maybe they can re-sell. But it's a poor way of investing in gold.

Froom a gold investment viewpoint, jewellery has two main advantages and many disadvantages.

The advantages are:

The disadvantages are:

If you choose to invest in gold through jewellery the best advice must be to avoid the retail mark-ups as far as possible by buying at auction, where buying premiums (the fee paid to the auction room) is typically 10 - 15%. Alternatively seek out parts of the world like Dubai where it is possible to buy gold not too far from its bullion value. There, machine made chains are sometimes sold as little as 20% above bullion content. Take care though, you might find it difficult to transport in any serious quantity without tax and security implications.

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