Gold has always been of interest to investors and traders. It is one of the most widely traded CFDs or spread bets on most broker platforms, and also enjoys a busy and liquid futures market. Gold ETFs (like SPDR Gold Shares and iShares Gold Trust ETF) have also proved popular, and invest either in physical gold (like ETFS Physical Gold), in the shares of gold miners, or in gold futures. But what about investing in gold bullion? Is it possible to actually own the precious metal itself?
“Paper gold may be backed by physical gold, but connections can be tenuous,” says Ross Norman, CEO of Sharps Pixley. “There is the issue of nominees and co-ownership. Do banks borrow against co-owned gold? What if a broker fails? It’s a bit of a grey area.”
Sharps Pixley is a gold bullion dealer located at the top of St James’s Street, in the heart of London’s West End. It has its own show room, allowing buyers to literally walk in off the street to peruse the bullion on offer.
Gold is actually quite easy to buy and the case for long term investments in gold looks solid, if you forgive the pun. In the UK, gold ingots can be purchased over the counter. A range of different-sized ingots are on offer, as well as gold coins like sovereigns and Britannias. Many bullion dealers will also provide secure storage of bullion on-premises for a competitive fee.
“We see a lot of people come in here who have a deficit in trust in the financial system,” explains Norman. “They realise that if they have cash on deposit with a bank these days, they are no longer a depositor, they are a lender. Having a bank account is a charter for a bail-in. Look what happened in Cyprus.”
Say what you like about Bitcoin, gold is one of those assets of last resort. Many cultures still place a premium on gold jewellery as part of a dowry, purely because it represents portable wealth that will hold its value in times of crisis.
How does gold bullion measure up against the other options?
It is possible to actively buy and sell physical gold on margin, but margins will tend to be higher than for derivatives like CFDs. Trades on the gold price will be more efficient than buying bullion, but like other Contracts for Difference, you are not owning actual gold. You are simply trading the price of gold quoted by a CFD broker.
“There is counterparty risk, meaning what if the CFD provider cannot meet its obligations?” Steve Fenerty, financial director at H&T, a UK-based gold buyer, told The Armchair Trader. “But these must be offset against the risk of losing physical gold. It is important to use a reputable provider.”
Exchange Traded Funds still represent an efficient way to trade the gold price. Fees are at an all-time low, and many ETFs are backed by physical gold. However, this does not mean that you can simply walk into a vault and take your share, should you want to. ETFs are collective investments. An ETF that is backed by bullion, however, is more likely to hold its value if dislocations occur in the global financial system.
The Armchair Trader says:
“We are entering choppy waters geopolitically – there is a lot of economic uncertainty around as well. The security blanket which Europeans have traditionally wrapped themselves in for the last 70 years may not be there for much longer. Hence, until things get sorted out, and we return to a more stable climate, it may be worth having a bit of a physical gold reserve, ideally where you can get to it relatively easily.”