Business | Investment
Investing in precious metal
Before you decide to park your money, here is a lowdown on the different ways to invest in gold.
- By Rolf Schneebeli, Special to Gulf News
- Published: 23:39 June 12, 2009
Before you decide to park your money, here is a lowdown on the different ways to invest in gold.
Small pieces of gold provide ultimate insurance against a major meltdown of the economy. In the absolute worst case scenario imaginable, the banks are no longer here and the paper money is not worth anything anymore. In such times, small pieces of gold will allow the owner to buy daily necessities. In such times it's not about certificates or futures, it's just about small bars or little coins. All these pieces should be in a safe place and preferably not in a bank account and should be from well-known issuers. Examples would be Kruegerrand, Maple Leaf, small bars from reputed refineries etc. The cost of such pieces are anywhere from 2 to 10 per cent above the gold price, depending on the current situation in the physical market.
The money invested in such exchange traded funds (ETFs) is exchanged into gold ounces and stored in a vault. There is no active management involved and hence, there is no out-performance of the gold market.
At the same token, there is no big risk of massive underperformance of the manager either, as there is no room for wrong bets. As in all investments and funds, one needs to verify what the fund really is and where it is stored and administered. Besides storage places New York, London, Zurich there is now also a fund in Dubai available and traded on Nasdaq Dubai.
Besides the ETFs, quite a few gold funds are available. It is important to select the proper one which fits one's own investment philosophy.
All funds and ETFs are available through banks in the UAE and abroad. They are great investments for rough times in terms of inflation and uncertainty but not for times of meltdown, as they rely on a functioning financial system to liquidate them.
Gold stocks usually refer to stocks of gold mining companies. It is quite clear that their price development is essentially driven by the gold price as mines sit on gold they have in their ground to which one can attribute a value.
Within the gold stock sector, one needs to select the proper companies. You can choose the big ones which are unhedged (conservative investment within the sector) if you expect the gold price to go up; the big companies which are hedged (ie., have sold some or most of their future production) if you think the price of gold is stable.
The smaller mines (juniors) or even exploration companies can add some spice (risk) to the portfolio as they would benefit most if the price of gold goes through the roof.
In addition, an investor should also look at the location of the mines he is investing in. In times of doubts on certain countries, it might be better to invest in mines in America, Canada or Australia. Same as with the oil, one always has to remember that mines cannot be moved and hence can be taken over by governments.
The investment in such stocks will yield price increases and/or dividends and should be quite liquid investments if one concentrates on bigger companies. Given the fact that gold mining stocks have suffered over the last few months as all other stocks, one would expect a superior profit potential for a typical gold mining stock.
Derivatives are typically non-physical transaction done by professional investors or speculators. They are all contracts being done now against payment of certain amounts and (conditional) execution at maturity of the contract.
In the case of a forward transaction, the price is fixed today based on current spot price and adjusted for the interest rate differential until maturity. At maturity of the transaction, the deal is booked at the agreed rate for all counterparties.
A futures transaction is similar to a forward transaction but can be traded on an exchange like the Dubai Gold and Commodities Exchange. At the time of entering the transaction, a certain premium is debited or credited to the account of the investor and at maturity, the deal is booked at the strike price of the transaction.
The broker will evaluate the margin on a daily basis and call for higher margins if the price moves against the investor. With futures, an investor tends to get more leverage than with forwards and the liquidity of the markets is higher, resulting in lower cost per transaction.
Options are very diverse instruments which allow the investor to achieve different goals with different approaches: Call options give the right to the buyer of such an option to buy at a certain price up to or at a certain expiry date. Put options give the right to the owner of such an option to sell at a certain price up to (or at) a certain expiry date.
Both of the option types can be bought or sold (written) which will give distinctly different risk and profit potential dynamics. Option prices are determined by strike price, volatility of the underlying asset, interest rate differentials and remaining time till expiry date.
All of these derivatives can be used as insurance type of investment or pure speculation but have all in common that they are quite complicated and should not be done without proper counselling. They are probably only suited for the professional and experienced investor.
- Rolf Schneebeli is the former head of the World Gold Council.
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