The pros and cons of investing in gold

  PHYSICAL GOLD

Bars and coins

All products of precious metals are traded at a premium or discount to the market price of the precious metal in question, Baird said. After the strong gold demand in the past two years, demand for coins raised the coins awards to high levels, he added.

"In contrast, there was no shortage of physical gold in London, and the evil awards changed for several years.

"In a weight-by-weight basis, premiums bars are lower than for coins, and this makes bars more attractive proposition for investors. As a rule, larger bars have lower premiums (reflecting production costs and refining) than smaller bars, although larger bars offer less flexibility on the settlement of an investment. "

Coins Bullion are legal tender in the country of issue. The market value of gold coins is determined by the value of their fine gold content, plus a premium that varies between retailers. Do not confuse gold coins with commemorative or numismatic coins (collectors), whose value depends on their rarity, design and finish rather than just their fine gold content.

Small gold bars can be bought in a variety of sizes and weights up to 1 kg. As gold coins, they contain one gold minimum 99.5pc. Bars are likely to carry less of a premium than coins.

Pros: perfect correlation with the market price of gold (but remember the exchange rate risk). Bars and coins are accessible to the private investor, and you can invest in relatively small amounts of gold (one 2.5 g bar costs about £ 60, for example). When you own physical gold yourself no "counterparty risk" - your investment does not depend on anyone to keep their promises or stay in business.

Cons: Production costs can add 15pc to the cost of gold itself. You may need to visit a dealer and arrange safe transportation, and you will need a secure location to store your gold, as well as insurance, all that may involve extra cost. Transaction costs for some coins can be high, while the settlement only part of their participation may be impossible - you can not sell half a bar or coin

Jewels

Buy gold jewelry for investment purposes is common in the Middle East and much of Asia. Jewelry mainly used for investment purposes is usually quite simple and high caratage (21-24 karats).

Pros: good correlation with the price of gold (although not as close as with bars and coins); Easy to buy and sell.

Cons: Jewelry can be more linked to fashion trends than investment value. If jewelry has to be paid, investors lose the craft value as the final value is based purely on the value of gold. In some countries, it may be difficult to verify the gold content. Insurance costs and secure storage.

Gold has allocated

Another way of having bars or coins. A vault holds gold on your behalf, with specific bars belonging to you - your bars or coins are numbered and identified by brand, weight, and fineness. Effectively keeping your gold in a safe.

Pros: perfect correlation; Suitable for relatively large quantities of gold; professional levels of security and insurance; Low counterparty risk as gold belongs to you, even if the company that owns the vault goes bust (but check that the contract does not allow the custodian to lend their gold out).

Cons: storage and insurance costs.



GOLD NOT PHYSICAL

Gold has not allocated

As in assigned accounts, you have a set amount of gold stored in the vault of a depositary. The difference is that you do not have specific bars - it's like the difference between having money in the deposit box of a bank and have money in a bank account. The custodian can borrow "your" gold, so you usually do not pay for storage or insurance. You can request physical delivery if desired.

Pros: perfect correlation, flexibility, lower costs. "An account not allocated to a member of the LBMA is the cheapest way to own gold, and one that offers the investor the flexibility to perform all or part of the investment," Baird said. There is a minimum initial investment requirement of £ 5,000, he said.

Cons: counterparty risk - if the custodian goes bust you will not be able to recover your gold and will simply be a creditor of the company. "Unallocated metal account holders have a general right to metal and, in fact, are unsecured creditors," Baird said. Less suitable for small farms.

Exchange-traded funds

These are securities traded on the stock market whose price reflects closely the physical gold. You buy and sell them just like you would a piece.

Pros: Excellent correlation with the gold price. One of the simplest way to get non-geared exposure to gold. Small counterparty risk because the fund is a custodian of the assets that legally belong to investors. They can protect against currency risk, although not all do. There are no storage costs or insurance. Flexible, as you can buy and sell units of a single action. Low "spreads" between buying and selling prices.

Cons: The manager will deduct charges typically 0.3pc to 0.4pc a year, the value of the fund. You will have to pay the broker's commission every time you return. "Long term investors will look more to the management fee, while those who trade frequently will focus on the spread and commission," said Daniel Draper, director of ETF division of Societe Generale.

Other units and investment funds

Some funds specialize in assets related to gold; The most famous is Gold & General BlackRock. They have full discretion on the underlying assets they buy, so correlation to the price of gold is variable.

Pros: Low counterparty risk, since the asset manager is a custodian of the property; Easy purchasing (through a bottom supermarket, for example). There are no storage costs or insurance.

Cons: Worst was tracking the price of gold since most of the funds have approaches of mixed assets; The returns reflect the manager's ability as much as movements in the gold price. You pay an annual management fee and sometimes an initial fee as well.

source : http://www.telegraph.co.uk