Last Thursday, Switzer Super Report expert Charlie Aitken presented a pretty compelling case to buy gold. In case you missed his report, please click on this link [1].
I have to be honest and say that I don’t own any gold. While I have dabbled in gold shares, I have generally steered away from the glittering metal because it doesn’t pay any income. However, as interest rates continue to get crunched, this argument becomes less relevant and I have been thinking about buying gold now for some months.
Two obvious questions are: how do you buy it, and how much? Dealing with the second question first, there is no right or wrong answer to this question, particularly for retail investors who have access to government guaranteed term deposits and aren’t directly impacted by negative interest rates. However, to put a stab on an answer, several portfolio models suggest that an exposure of around 4% to 5% in precious metals is about the mark.
Now, let’s turn to the first question – how do you buy it?
Buying gold
You can buy gold or get exposure to gold:
a) directly, from the Perth Mint;
b) synthetically, via an exchange trade fund (ETF) backed by physical gold; or
c) indirectly, through an Australian gold miner.
With the Perth Mint (www.perthmint.com/storage [2]), you can buy gold coins or gold bars, and elect to take physical delivery of the bullion or have them store your gold securely under a custodial arrangement. The Perth Mint is backed by the WA Government.
You will need to open an account and undergo a mandatory ID check. If you open an account, you will probably want to open their Depository Online account. This allows you to trade gold online (potentially 24 hours a day), and generally has a tighter bid/offer spread than the phone or email service (known as their Depository Program).
In addition to the bid/offer spread on the bullion, there are also transaction fees. For the Depository Online account, this is typically 0.75% on each buy and sell transaction. If you want the bullion specifically allocated to you (rather than unallocated), then the Mint charges a storage fee of 1% pa. Alternatively, you can elect to take physical delivery, in which case you will need to pay freight and insurance costs.
Before you buy physical gold, Trustees should ensure that their SMSF Investment Strategy permits this. And if storing physical bullion outside a secure environment such as the Mint, the gold must be insured.
Exchange Traded Funds
An easier option for most investors will be buying an exchange traded fund (ETF). There are four exchange traded gold funds quoted on the ASX.
Gold Exchange Traded Funds
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All of the ETFs are backed by physical gold and have a strong record in tracking the gold price. Betashares hedges the currency exposure into Australian dollars, which means that it effectively provides exposure to the US dollar price of gold. The other three ETFs are unhedged, providing exposure to the price of gold in Australian dollars.
With the Australian dollar falling over the last few years and the price of gold quoted in US dollars, the equivalent Australian dollar price of gold has risen by more than the US dollar price of gold. Accordingly, returns for the unhedged ETFs (as measured in the appreciation of the traded unit price) have been higher than for the hedged ETF. Going forward, investors will need to consider just how much more downside they see with the Australian dollar.
For those investors who prefer an unhedged currency position, PMGOLD with its lower management fee and medium level of market liquidity is probably the pick.
Listed Gold Shares
Listed gold shares are highly leveraged to the Australian dollar gold price. Although they hedge some of their output and have some US dollar borrowings, most of their costs are in Australian dollars and tend to be relatively fixed. A small change in the equivalent Australian dollar gold price can have a huge impact on profitability and their share price. For example, the largest miner, Newcrest, has traded from a low of $10.55 last August to Friday’s close of $26.15.
While there are scores of gold companies to choose from, many of them are gold explorers, and the sage old advice for investors is to look at high quality producers, particularly those with low production costs and strong reserves. Charlie nominated three stocks that his fund had invested in: Newcrest Ming (NCM), Northern Star Resources (NST) and Regis Resources (RRL).
Listed below are the five largest gold miners by market capitalisation with their broker forecasts from FN Arena. Two important notes of caution. Firstly, target prices are highly sensitive to the brokers’ long-term gold price forecasts. Most brokers currently have a forecast well below the current spot price of USD 1368. Secondly, they are not all pure gold miners. Newcrest, for example, also mines copper and silver.
Leading Gold Miners – Broker Forecasts
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Using sentiment, which is quoted on a scale of -1.0 being the most negative to +1.0 being the most positive, the brokers currently rate Evolution Mining as their number one pick.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.