While this guide was written with the physical buyer of Gold and Silver in mind, I am not oblivious to the alternatives (I have used some of them myself short term at times) and it's a good idea to take these into consideration when looking at exposure to Gold and Silver.
Depending on your particular circumstances & reasons for investing in Gold, exposure to the price of Gold or Silver via external storage with a company or in electronic form may be more convenient and safer.
Below is a brief description of some alternatives to physical metals:
ASX Listed AUD Gold/Silver Alternatives
PMGOLD: The Perth Mint security listed on the ASX is PMGOLD. You can read more about the product here. It can be redeemed for physical Gold, but ideally it is suited to traders who want exposure to the price of AUD Gold or those who don't want the hassle of buying, storing and then selling physical. There is a low management fee, make sure you read the PDS and are comfortable with the costs, terms and conditions.
GOLD: The other AUD Gold proxy on the ASX is GOLD. You can view the fact sheet and more information about this product here.
ETPMAG: This is the Silver equivalent of the above listed GOLD, it tracks the AUD price of Silver. Further information is here.
ETPMAG: This is the Silver equivalent of the above listed GOLD, it tracks the AUD price of Silver. Further information is here.
ETPMPM: This ETF is a basket of precious metals exposure which includes Gold, Silver, Platinum and Palladium with the largest component being Gold. You can view the break down and further information here.
ASX Listed USD Gold Alternative
QAU: This security is relatively new only having been launched earlier this year. It hedges the AUD/USD exchange rate in an attempt to bring Australians exposure to the movements of the USD price of Gold. You can read about it's launch here.
QAU: This security is relatively new only having been launched earlier this year. It hedges the AUD/USD exchange rate in an attempt to bring Australians exposure to the movements of the USD price of Gold. You can read about it's launch here.
I like the idea of this product (although I haven't yet used it myself). The US price of Gold has outperformed the AUD price of Gold over the past 10 years, this product provides the option to be exposed to US$ Gold price movements without the difficulty of hedging the A$ exposure yourself.
Allocated and Unallocated Accounts
I'm not going to go into detail on either of these products. Terms, conditions and your rights will vary between providers of Allocated or Unallocated accounts.
Generally speaking an allocated account would be where the service provider stores Gold or Silver on your behalf in their vault. The bars should be set aside and not leased or changed, it should operate simply as a storage facility.
Unallocated accounts are where you have a claim to Gold, but it is not specifically set aside. It might be leased/loaned out (depending on the company providing, Perth Mint doesn't do this) and if the company providing the service goes into administration you may end up an unsecured creditor.
I would steer clear of unallocated accounts personally and if you decide to open an allocated account ensure it is with a reputable business and familiarise yourself with their product offering before doing so.
You can learn more about Perth Mint depository programs here.
Other Forms of "Electronic Gold/Silver"
Allocated and Unallocated Accounts
I'm not going to go into detail on either of these products. Terms, conditions and your rights will vary between providers of Allocated or Unallocated accounts.
Generally speaking an allocated account would be where the service provider stores Gold or Silver on your behalf in their vault. The bars should be set aside and not leased or changed, it should operate simply as a storage facility.
Unallocated accounts are where you have a claim to Gold, but it is not specifically set aside. It might be leased/loaned out (depending on the company providing, Perth Mint doesn't do this) and if the company providing the service goes into administration you may end up an unsecured creditor.
I would steer clear of unallocated accounts personally and if you decide to open an allocated account ensure it is with a reputable business and familiarise yourself with their product offering before doing so.
You can learn more about Perth Mint depository programs here.
Other Forms of "Electronic Gold/Silver"
There are quite a few other forms of Gold or Silver that can be purchased and stored in an online account. For example Digital Gold Currencies such as Bullion Vault or GoldMoney, founded by well known industry player James Turk. Many of these digital Gold or Silver accounts are reputable, but they do not hedge the A$ currency exposure, so from an Australian perspective (which this guide is about) you are probably best to stick with the ASX listed products or go with physical. Gold Money does allow you to trade in AUD, however Bullion Vault only allows trade in EUR, GBP or USD.
Mining Companies
Those of you who are familiar with my blog at www.bullionbaron.com will know that I hold mining companies as part of my exposure to the Gold/Silver bull market. They are more speculative than holding the physical metal, but they are potentially highly leveraged to a rising Gold price which means if the price of Gold increases then the profitability and in turn market cap of the related miners should increase by an even higher percentage. How does that figure?
Consider a Gold miner who has a cash cost of $1000oz to pull an ounce of Gold out of the ground. Further to the $1000 they also have admin and other development costs ($250oz) which increase the total cost per ounce to $1250. With Gold at $1750 that leaves them with a profit margin of $500 per ounce. If Gold was to increase by $500 to $2250, it's only an increase of 28.5% in the spot price of Gold, but it should result in a 100% increase in profitability for the company (profit increase from $500 to $1000 per ounce).
There are many things that can wrong with a miner though. Their costs might increase, such as energy and labor. The project might be poorly managed. Grades of the resource might not meet expectations. They may need to raise capital in an unstable market, causing the share price to fall resulting in more dilution that would have otherwise occurred. The list is basically endless.
An ounce of Gold in the hand is an ounce of Gold in the hand. There is a couple of old sayings that come to mind:
"A gold mine is a hole in the ground with a liar at the top."
"A bird in the hand is worth two in the bush."
I wouldn't suggest avoiding Gold or Silver miners all together, but I would definitely place them as secondary to physical metal exposure. I would consider the physical metals a wealth preserver and buying mining stocks a speculative way to take advantage of any rises in the price of the metals (as long as you pick the right ones and buy/sell them at the right time, which is certainly a challenge!).
Mining Companies
Those of you who are familiar with my blog at www.bullionbaron.com will know that I hold mining companies as part of my exposure to the Gold/Silver bull market. They are more speculative than holding the physical metal, but they are potentially highly leveraged to a rising Gold price which means if the price of Gold increases then the profitability and in turn market cap of the related miners should increase by an even higher percentage. How does that figure?
Consider a Gold miner who has a cash cost of $1000oz to pull an ounce of Gold out of the ground. Further to the $1000 they also have admin and other development costs ($250oz) which increase the total cost per ounce to $1250. With Gold at $1750 that leaves them with a profit margin of $500 per ounce. If Gold was to increase by $500 to $2250, it's only an increase of 28.5% in the spot price of Gold, but it should result in a 100% increase in profitability for the company (profit increase from $500 to $1000 per ounce).
There are many things that can wrong with a miner though. Their costs might increase, such as energy and labor. The project might be poorly managed. Grades of the resource might not meet expectations. They may need to raise capital in an unstable market, causing the share price to fall resulting in more dilution that would have otherwise occurred. The list is basically endless.
An ounce of Gold in the hand is an ounce of Gold in the hand. There is a couple of old sayings that come to mind:
"A gold mine is a hole in the ground with a liar at the top."
"A bird in the hand is worth two in the bush."
I wouldn't suggest avoiding Gold or Silver miners all together, but I would definitely place them as secondary to physical metal exposure. I would consider the physical metals a wealth preserver and buying mining stocks a speculative way to take advantage of any rises in the price of the metals (as long as you pick the right ones and buy/sell them at the right time, which is certainly a challenge!).
