Best ways to obtain gold exposure

The purpose of this article is to go over the various ways one increases exposure to the gold commodity. Clearly while investing in gold producers is another method, I will leave that for other smarter individuals.

The hypothetical investment is a CAD$10,000 or US$7,400 investment in gold. With institutional levels of capital, there are other facilities to expose oneself to gold. For the purposes of this article I am assuming a US$1,220/Oz price and a 0.74 USD/CAD exchange rate.

The largest gold ETF is (NYSE: GLD) and they are massively liquid. The MER is 0.40%. The next largest gold ETF is (NYSE: IAU) and they charge an MER of 0.25%. I would recommend IAU strictly on cost differentials – both have volumes that are well above retail levels. In terms of security, the custodian of GLD is HSBC, while the custodian of IAU is JP Morgan Chase. My very unprofessional ranking would put the two level in terms of security, hence IAU is the winner on costs. At today’s gold prices, you would be able to purchase 6.06 troy ounces and pay about CAD$25/year for the warm and snuggly feeling of it being safe. Purchase and disposal costs the price of a trading commission. GLD and IAU are denominated in US currency.

In Canadian currency, the best bet (and indeed, the only bet) is (TSX: MNT) which carries the unique feature of being backed by the Government of Canada and at an MER of 0.35% (thus a yearly maintenance of CAD$35/year). Its only apparent drawback is liquidity – bid-ask spreads typically are between 10 to 20 cents so this is not a product where you would want to place market orders. Each unit is currently equivalent to 0.0107125 troy ounces of gold. Purchase and disposal costs the price of a trading commission. MNT is legally an exchange-traded receipt (ETR) and they do trade above and below net asset value like ETFs.

Another option is purchasing the physical product. These suffer from three issues – divisibility of the product, transport, and storage. Looking at online vendors such as Kitco, you can purchase a 100 gram gold product for CAD$5,430. Pretending you can buy CAD$10,000 of product would result in 184 grams of gold or 5.92 troy ounces, which is a significant spread off market pricing. Getting it in one ounce gold coins results in a net gold mass of 5.86 troy ounces. Also, once you buy the product, you also have to pay to have it shipped (CAD$30) and insured (CAD$40 for a $10,000 purchase), which also adds to costs. Finally, it has to be stored somewhere securely – a bank safety deposit box is CAD$65/year at RBC, but these boxes are not covered by any insurance if there were circumstances that would cause them to be stolen or destroyed. Also, if the gold is to be subsequently liquidated, there will likely be additional frictional costs.

As a result, I do not believe that physical storage of gold is feasible on the retail level beyond trinket sums of capital.

The last option is using financial derivatives to emulate the price of gold. The best option is to use gold futures on CME. These are extremely cheap to trade and are liquid products, but suffer from the primary drawback of being in lots of 100 troy ounces. Margin requirements to hold a gold contract (US$122,000 notional value) overnight is US$5,400, so from a capital maintenance perspective, if your desire is to hold 100 troy ounces of gold, I would prefer utilizing futures. Clearly this is not a viable option if one’s intention is to invest CAD$10,000 in gold.

10 thoughts on “Best ways to obtain gold exposure”

  1. I like CEF : http://www.gold-trust.com/Nav%20Form.htm

    It’s 60% gold, 40% silver and it’s a closed end fund. The fees are only 0.3%.

    I like to buy when the discount is more than 10%.

    What I find disturbing is that when gold peak in price, it trade at a premium to NAV, meaning that if you buy at discount you will profit from not only an increase in gold/silver price but also from the closing of the discount to NAV.

  2. Interesting ETF. I’m guessing the large discount is that they are not necessarily restricted to gold and silver bullion (i.e. they can invest in gold stocks) and the management/board majority ownership of the voting stake (the common shares), plus the retraction feature only being at 80% of NAV.

  3. Sacha…the new subscribe without comment (thanks for that btw)…does not seem to be working.
    I get “You may not access this page without a valid key.” after entering my email and clicking on the Subscribe button.

  4. I just got an email from Divestor…Double Opt In. Clicked on the link and got

    Divestor Comment Subscription Manager
    Plugin by Webmaster and Security Blog – sjmp.de
    Error! Wrong security token submitted, please use the same browser and allow cookies!

  5. Marc – there’s something obviously wrong with the plug-in that I’m using. I’ll probably search around for something better since I don’t think I’ve changed that one in years. I believe the email function still works so I will put it in the low priority bucket for a future enhancement.

    Thanks.

  6. Alright, thanks…. meanwhile I guess I’ll just post a period so I can follow your different posts that interest me, if that’s OK?

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