Finding real gold
There are many ways to access gold as an investment. You can buy jewellery, coins or gold bars and store them at home; you can buy the same coins and gold bars but store them in an official vault; you can buy unallocated gold (described in more detail later) or you can buy a fund that purchases gold bullion. All of these options can give your investment some form of return based on the price of gold, and each option has positives and negatives which investors should understand.
Let’s take a quick look into each option.
This option isn’t a pure gold play. You’ll often pay an excess over the gold price due to the craftsmanship involved in turning the pure gold into a wearable item. The gold is also unlikely to be pure gold as pure gold is too soft to mould and shape into jewellery, hence it will be mixed with another metal to create an alloy hard enough to be wearable. Selling the item for cash at the end will also involve a visit to a gold dealer who will take a sizeable cut. The final downside is that the item will need to be insured as part of your home and contents insurance and if it’s a named item it will add to your insurance premium. The benefit, however is that you have a jewellery item that you can wear!
Gold bars and coins
These are pure gold exposure of high-quality gold. Coins have a premium to the gold price for the minting cost or rarity of the coin but largely track the price of gold. LBMA accredited gold quality bars are the standard gold holding for many institutional investors and offer pure access to the price of gold. Both coins and bars are relatively liquid from an investment perspective, but you’d need to visit a gold dealer to sell your coin or bar if you wanted to cash out. The real costs come from the insurance on these items, or the risk involved in not insuring them. If you store them at home you need to assess whether you insure them and pay the excess cost to do so, which on large amounts of gold is expensive. The alternative option is to store the gold at an insured gold vault and pay for storage which includes insurance as part of the deal. This second option is cheaper but you won’t have the gold to admire at home.
Unallocated gold account
Many gold refineries or mints have an option to set up a gold trading account that has unallocated gold. This means that you can buy and sell gold ounces throughout the day, much like a share, and the net amount of gold ounces you hold is shown as a balance in your account. For example, you could buy 3 ounces of gold which is currently worth around AU$9,000. Your account would show that you hold 3 ounces of gold that you could sell at any time during the day either by phone or through your online trading account. This type of gold access is relatively cheap to administer with ongoing trading fees and potentially a regular account fee but it tracks the price of gold closely. The downside here is that you don’t actually own any gold. You have what’s called an ‘unallocated’ gold position. It means that for each ounce of gold you buy, the company that you buy from doesn’t need to own the gold, in fact it’s just an IOU of gold. So they owe you the gold, but they don’t have to back your gold with a real gold bar. It means that you wear credit risk against the company defaulting and not delivering your gold. The risk on this type of account is linked to the riskiness of the company you buy it from.
This is a very broad option as there are a plethora of options when you invest in a gold fund. However, the most popular by a considerable margin, is to buy a gold exchange traded fund (ETF). There are many of these ETFs available on stock exchanges around the world. In fact, these have become so popular that gold ETFs are now one of the largest holders of gold in the world. Certainly larger than the gold held by most countries. But, like other options, each of these ETFs are not the same and each carry different risks. It’s worth doing a deep dive into their structure and how they work.
From a high level perspective, the structure of a gold ETF is relatively simple. For every dollar that the fund receives, it buys gold bars, stores them in a vault, insures them and then issues units in the ETF which typically closely tracks the price of gold; those ETF units can then be easily bought and sold on an exchange. In exchange for this service, you pay a management fee to the fund but have an extremely liquid and easy-to-trade gold investment that is backed by real gold. This all sounds easy, and it is from the ETF manager’s perspective, but what goes on under the hood of the ETF is worth noting when considering to invest.
Gold ETFs in Australia have different operating structures. Some have deferred purchase agreements, with a third party holding the gold, which exposes the investor to credit risk. Others have a company structure which removes protections from a normal fund structure. Some buy units in another gold ETF listed somewhere else in the world. In the case of the VanEck Gold Bullion ETF (ASX: NUGG), we have simplified it completely and removed any external or foreign third parties so that the ETF buys gold from our gold wholesale fund. In this model we run (i.e. we manage, operate and are trustee for) both funds, the wholesale gold fund holds the gold and the ETF invests into it. This means no third-party credit risk, no company structure and everything is located and managed in Australia.
Most of the gold bars connected with other ETFs are held offshore in vaults in Europe or the USA and insured locally under their own agreements. NUGG’s gold is stored in Australia at The Perth Mint’s secure vaults and is insured by the AAA rated Western Australia Government. NUGG’s gold is backed by a sovereign entity and not an insurance company.
Now let’s talk about the actual gold. Not all gold is created equal!
There is a standard accreditation of gold bars that is set by the global organisation known as the LBMA (London Bullion Markets Association). They have a list of official refineries, and those refineries must produce gold bars of a standard of 9995 or above. That indicates that the gold is 99.95% pure gold. Each gold bar produced by a refinery is stamped by the refinery, it will show the quality and it will have a unique bar number. That way each gold bar is traceable back to its origins.
Every ETF issuer publishes a gold bar list on their website which details the refiner, gold bar number, ounces and each bar’s quality. These are the underlying assets of the fund. If you were able to visit the vault, you should find the actual gold bars listed.
Unlike NUGG, all other gold ETFs in Australia holds gold of varying quality and from a wide mix of refineries from all over the world. NUGG only hold gold that was mined in Australia from accredited mine sites and refined by The Perth Mint. In addition, every gold bar is of the highest quality: 9999.
Things gets more interesting if you peruse the gold bar lists of other gold ETFs and look at the origin. You may find that they hold Russian gold!
Yes, gold mined and refined in Russia forms part of their holdings. While global sanctions have decreed that funds are no longer able to trade Russian shares, it appears there is an exception for gold. Many funds that have Russian shares were blocked from trading them after the invasion of Ukraine in March 2022. As the shares couldn’t be sold due to the restrictions, they were written down to a zero price. Many of these Russian companies are still operating but are valued at zero in the fund. For example, Gazprom is Russian and one of the world’s largest energy companies. Any fund that held shares in this company has had to write down the price to zero even though the company is still operating and still has a price on the Moscow stock exchange.
At the present time, under LBMA guidance, Russian gold already in market prior to 7 March 2022 is still considered acceptable by the precious metals authority. Depending on how you feel about the Russia/Ukraine crisis, it may be worth checking if your gold-backed ETF owns Russian gold bars.
In this respect there is a big difference holding Australian mined, refined, insured and high-quality gold in your ETF. As I said, gold isn’t created equal.
The accessibility of the gold held by the ETF is the final aspect which investors should consider. NUGG also provides its investors with the option to convert your investment into gold and take physical delivery of gold bullion directly from The Perth Mint. You can even pick what type of gold you’d like to receive in terms of bars or coins. Although it does depend on how much money you have invested as one of the big 400-ounce gold bars costs well over a million Australian dollars.
I hope this has given some insight into gold funds and investing in gold. If you have more information please don’t hesitate to reach out to us.