In recent weeks we have had an increasing number of enquiries about how people can invest in gold. Traditionally, many investors would obtain exposure to gold assets by buying shares in gold producing companies. The shares in these companies fluctuate in line with changes in the price of physical gold and so these companies have been used as a proxy for physical gold.
More recently we have seen that people are not looking to invest in gold as part of their portfolio, they are looking to obtain physical gold – preferably gold bars I think – something they can touch and feel. This is despite the fact that markets are rising, a fact I wrote about here
How Much Does Gold Cost?
I’m not sure whether you have done the arithmetic on how much it costs to invest in gold bars. A standard gold bar (the kind you might find in Fort Knox) weights 400 ounces (11.5 kg), so one, just one, would be worth just over $1,000,000 Australian Dollars at today’s prices. You can buy smaller bars, but it seems to me that when most people think of gold bars it is the big ones they imagine keeping as a paperweight at home.
How Can I Invest in Gold?
There are ways in which you can obtain exposure to physical gold without buying gold bars. There are a number of gold funds for example which allow you to buy a share in a pile of physical gold. These funds will buy physical gold, and then create an investment vehicle which allows for a fractional share of the gold that they hold. Not really a gold bar though is it?
Why is Gold so Valuable?
The question really is why are people so enamoured with the stuff, particularly in times of volatility in other markets. Recent times have seen the price of gold go from $1,800 in early 2019 to nearly $2,600 as I write this. What has happened? Is there all of a sudden less of the stuff available? Has a cartel restricted the supply? Have miners stopped producing? In fact, the opposite is true. As gold prices rise, more mines become viable, and so the supply naturally increases. Increased supply usually leads to a decrease in the price of any commodity, we could expect this to be true of gold as well.
Why Would You Want to Invest in Gold?
There are several reasons why we value and want to invest in gold, but scarcity is not one of them. It is by no means the rarest metal found on our planet, nor is it all that difficult to extract. It has been estimated that if all of the gold ever produced was melted down it could form a cube 20 metres on a side and weigh about 170,000 metric tons. This world extracted gold stock rises by about 2% per year. The real value of gold, and why it has been prized for millennia is that it is inert (i.e. it does not rust or tarnish) and it is extremely malleable (it can be bent and stretched to make just about anything). Great for jewellery or coins or even gold bars, but not much else. (I know I know, electrical contacts and dentistry are other uses). It is so soft that even in jewellery it usually has to be mixed with something else to have any kind of durability
What Alternatives Are There?
So why does no one ask us about investing in platinum? The global supply of platinum is estimated to be about 1/10th that of gold, and it is cheaper – less than half the price of gold currently. A 400g bar of platinum would be (only) half a million dollars. Platinum is much more durable, in fact it is thought of as one of the strongest natural materials on earth. Platinum jewellery is typically about 95% pure platinum metal, 18 carat gold jewellery is typically about 75% gold. Platinum also has a wide range of industrial as well as decorative uses. It is used widely in the catalytic converter fitted to nearly all motor vehicles for example.
Can I Lose Money If I Invest In Gold?
You might believe that gold will protect you from the ups and downs in other markets, but Gold has price volatility as well. In late 2011, for example, Gold was priced at around $1,800, and by 2015 it was $1,400 in Australian dollar terms. That’s a 22% fall in value, and let’s remember that gold produces no income, capital preservation is really all it has to offer. Were you to invest in gold at today’s prices, and the prices reverted to the price of only one year ago, you would experience a negative 30% return. That is pretty serious volatility.
In the end, the thing that is special about gold is that everyone says that gold is special. With gold prices at record highs right now, who can tell whether it is going to achieve what investors want from it, other than maybe making them feel better. Like so many investment related things emotion drives thought processes, and interest in gold is certainly an emotional response to uncertain times.