Buying Gold

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There is a lot of interest these days in buying into the rising price of gold, or as we say "gaining exposure",

The cost of an ounce of gold has risen from a low of US$260 (note that gold is valued in terms of the dollar, which has implications if you are based in another currency) in April 2001 to the current US$830 (Nov 2007). Since the 15th August this year it has risen from $650 to $830 or 27.28%  On breaking through the $750 barrier the pundits were predicting $1000 and now we have heard $1500 and even $2000 an ounce!! See UPDATE below.

This seems a bit like the practice of valuing a specky mining share by doubling its current price and then doubling it again for good measure!

So, if you believe that gold has still further to go, and the factors, such as turmoil in financial markets and currencies (US Dollar) are certainly around, what is the best way to gain exposure?

There are several ways:

• Physical gold
  
• Large, International mining companies
  
• Small, speculative, early stage mining companies
  
• Tracker funds, collective funds
  

Physical gold can be purchased as bullion or coins (we wont include jewellery). Bullion is sold by dealers in 1oz to 100oz bars. You obviously must buy from a reputable dealer and it should be kept secure. Gold coins include: Krugerrand, British sovereign/half-sovereign and the American Eagle. We are sure there is a Canadian gold coin and possibly others but the usual one for investment purposes is the Kruger. It is not pure gold, being 22k and the normal coin weighs 1oz. so you can easily calculate its gold value. There are other size Kruger coins but for investment we would stick to the full size, similarly a sovereign (22k, 0.2354 troy oz) is preferable to a half-sovereign. 22k is 91.7% pure gold. Be careful when buying sovereigns as the older coins will attract an amount of collecters premium. We are not sure of the current tax (VAT) situation in the UK or other countries and whether it helps to hold coins offshore and this is something you should check before buying. There is no income on physical gold, so you are relying on the appreciation in value.

Buying shares in the major mining companies gives you exposure but this is diluted by the other metals & minerals in that organisations mining portfolio. Companies include Rio Tinto Zinc (RIO.L), BHP Billiton (BLT.L) and Anglo American(AAL.L) and many more. These companies run mature gold and other mines, which means the majority of their gold assets are quantified, although, of course they are still exploring new areas. These companies are very profitable and will in the main distribute some of their profit to their shareholders in the form of dividends.

Next we come to the more speculative area of smaller mining companies which are predominantly at an earlier stage of exploration than those above. There is a potential for high reward if everything progresses to form but conversely very high risk of things going horribly wrong. This may be disappointing drilling results or grades, infrastructure or transportation problems and possibly political factors. These companies are unlikely to pay dividends for some years.

You must do as much research as you can or be able to rely on your adviser (try and talk to the companys principles if possible). There are several distinct stages in the life of a mining company, which include obtaining the mining permit, raising funds for initial exploratory work, producing a bankable feasibility report, raising funds on this report and finally raising money for infrastructure, mining, processing and transportation. It is important to know what stage the particular company has reached. There are a myriad of small mining companies and ones that spring to mind are EMED (EMED.L), Kryso (KYS.L), Aurum (AUR.L)

Finally, funds and Exchange Traded Funds (ETFs). Have a look at Merrill Lynch Gold & General Inc or their World Mining fund, and again, we are sure there are many others. On the ETF front a very popular one is Lyxor Gold Bullion (GBS.L) which tracks the gold price by buying physical gold. Again no income.

On a cautious note, it is a well known fact that when every man and his dog wants to buy something (in this case gold) the fun is nearly over and the price could be about to retrace.

If you have got this far, some light relief:

Which is the heavier, an ounce of gold or an ounce of coal?

30th April 2008 UPDATE

Today's gold price US$867 (Having peaked at just over $1000 around the 13th March this year).

21st May 2008 UPDATE

Gold price US$933

Updates

Stockbroker Directory - Find a stockbroker in your area!

Company information added for SERCO - 10 December 2008

New Book Review - Warren Buffet, The Snowball - 10 December 2008

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