How to navigate the gold-buying minefield

jheinzl@globeandmail.com

So you're convinced the global economy is heading over a cliff and gold prices are about to skyrocket. Or maybe you're just worried about inflation and want some gold as "insurance" for your portfolio.

If either of the above sounds familiar, you've got company.

Sales of gold "have increased dramatically over the past few years," says Richard Maskobi, managing director with precious metals dealer ScotiaMocatta, a unit of Bank of Nova Scotia. "People are worried about global financial institutions; people are worried about what governments are doing with the printing of money to finance deficits. So the general population is looking at gold as another store of value."

The good news is that as interest in gold has grown, so have the options for investors. The bad news is that the sheer number of choices can be overwhelming.

When investing in gold, it's important to keep a few things in mind. First, most advisers say putting 5 to 10 per cent of your portfolio in gold is plenty. Second, the price of gold can be volatile. Third, watch the fees - they can add up quickly.

That said, let's look at some of the most popular ways to invest in gold.

Gold Coins And Bars

If you like the idea of ogling and touching your gold, then this is the way to go. But you'll pay for the privilege - and not just for the safe you'll want to install behind that portrait in your living room.

Consider a one-ounce Gold Maple Leaf coin available at dealers such as ScotiaMocatta and Kitco. As I write this, gold's spot price in New York is $956.62 (U.S.). Scotia adds a 6-per-cent "coin premium" and a 0.25-per-cent "in-branch commission." Then there's provincial sales tax (the GST is waived as long as the metal is at least 99.5 per cent pure).

So if you live in Ontario, where the PST is 8 per cent, that one-ounce coin would end up costing you $1,093 (U.S.), or about $1,206 (Canadian). Oh, and if you want your coins delivered to a Scotia branch that isn't one of the nine designated locations across Canada that hold precious metals, you'll pay for that, too.

Coins come in smaller denominations, but beware: The smaller the coin, the larger the premium. The smallest Maple Leaf, at just one-twentieth of an ounce, has a hefty 30-per-cent markup. And it's best to avoid rare or collectible gold coins, unless you're an expert. Otherwise, you could get hosed when buying or selling.

You can avoid substantial markups on coins by opting for gold bars instead. The premium at Scotia is $14 (U.S.) per ounce - lower for purchases of five ounces or more - plus the 0.25-per-cent branch commission.

Gold Certificates

The downside of owning certificates for bullion is that you won't be able to touch your gold when you feel the urge. But at least you'll know your metal is safely locked away in a vault. At Scotiabank, the smallest certificate is for 10 ounces, and the only fees are brokerage commissions when you buy and sell (unless you take delivery of the gold, in which case additional charges apply). Certificates can also be held inside a registered account.

Gold mining stocks

These volatile beasts are best left to sophisticated investors. Sure, you can score big if everything works out, but the problem is that mining stocks can be dragged down in a market crash, even if the price of gold is holding steady or going up. It's worth noting that if you own an S&P/TSX index fund, you're already getting exposure to major producers such as Barrick Gold and Goldcorp.

Gold ETFS

These may be the simplest and most cost-effective way for investors to get their gold fix. Exchange-traded funds, such as SPDR Gold Trust, give investors exposure to gold bullion without having to worry about buying, storing or insuring the gold. The fund handles all the grunt work in exchange for a 0.4-per-cent expense ratio.

"The single greatest creation for small to mid-sized retail investors for exposure to gold have been the gold ETFs," says Peter Grandich, a metals expert and chief market commentator for Agoracom.com.

For Canadians, he likes the new Claymore Gold Bullion Trust, a closed-end fund that aims to hedge out currency risks. That's a plus if you believe, like Mr. Grandich does, that the Canadian dollar will continue soaring against the wounded U.S. greenback.

Given the ease of investing in ETFs, he says it makes little sense for people to hold gold coins or bars directly.

"The only reason I see people wanting to own physical bullion is because they're convinced the coins are going to protect them in some way. If things get really bad they'll be able to buy food and log cabins in the woods ... they'll be able to get out of the country, yada yada yada."

bullion funds

ETFs and certificates are great for short-term trading, says Nick Barisheff, president of Bullion Management Group.

"But if there's a disastrous systemic financial problem, you want to make sure the gold's going to be there at the end of the day," he says. "Last year, we got some shocking lessons that no one thought could happen - all the bankruptcies at AIG, Bear Stearns, Lehman, the list goes on."

Aimed at investors concerned with long-term wealth preservation, the BMG BullionFund is a mutual fund that invests directly in gold, silver and platinum. Since the fund was launched in 2002, its assets have grown to $265-million (Canadian).

Few people are as bullish on gold as Mr. Barisheff. Apart from his house and some cash, he has 100 per cent of his savings in bullion. You don't have to go that far, but if you're determined to get some gold into your portfolio, there are lots of options to choose from.