Images of individuals lining up at gold dealers all over the world have gotten commonplace again, and Canada isn’t any exception. Back in September 2023, Global News reported on a “gold rush” at Costco, with one-ounce gold bars selling out inside hours of being listed online.
But before you give in to the fear of missing out, it could be value considering some alternatives to physical gold. Investment arguments aside, there are several practical explanation why owning precious metals directly is probably not the very best approach for a lot of investors.
The case against gold bullion
This isn’t an argument against owning gold directly. I own a number of Maple Leaf gold coins myself and there’s something almost primal about holding them in my hand. The weight, the shine – it awakens an ancient fascination for the metal that no security can imitate.
But objectively speaking, purchasing and storing physical gold bars has never been the best or most effective solution to acquire gold.
The first problem is that this Bid-ask spread. If you purchase from a dealer, don’t trade on the spot price you discover online. Traders generate income on the spread between the value at which they sell and the value at which they buy back. For example, as of October 17, the Vancouver Bullion & Currency Exchange (VBCE) listed 1-ounce gold Maple Leaf coins as follows:
- VBCE Purchase: $5,893 CAD
- VBCE sale: $6,068 CAD
That equates to a ramification of $175, or about 3%. In other words, the value of gold must rise by not less than this amount to interrupt even.
Then there’s the matter of Security. I keep mine in a sturdy, screw-down, fireproof protected that won’t low cost. It isn’t advisable to cover it under a mattress or bury it within the backyard.
If you choose to maintain it on the bank, you pay annual fees for a protected deposit box and, more importantly, you reintroduce counterparty risk. The whole point of owning gold is to chop out the middlemen, but once it’s in a bank vault, it’s now not completely under your control.
The article continues below promoting
X
If your top priority is to physically hold your assets, to have them in your possession, then by all means buy gold bullion. There’s nothing fallacious with that. Just know that it is not as easy as clicking “buy” on a screen. You have to search out a good dealer, pay a premium, arrange protected storage, and handle logistics that digital gold owners never need to take into consideration. And since gold doesn’t produce income, all expenses – from dealer spreads to storage – are deducted directly out of your total return.
If your primary reason for owning gold is to diversify a portfolio or take part in its price appreciation – slightly than to create self-custody reserves as a final store of value – it’s value considering other instruments. Exchange traded funds (ETFs), closed-end funds (CEFs) and gold mining stocks can all provide exposure without the friction, cost and security problems with physical gold bullion.
Gold ETFs
Gold Exchange Traded Funds (ETFs) are open-ended funds that correspond to directly held, audited gold reserves. They profit from the identical asset creation and redemption structure that each one ETFs use, meaning authorized participants can convert shares into physical gold (and vice versa).
This arbitrage mechanism helps keep the ETF’s market price closely aligned with its net asset value (NAV), thereby reducing the danger of persistent premiums or discounts.
There is a big selection of Canadian issuers. The focus is on low management expense ratios (MERs) and tight bid-ask spreads, as each impact total returns over time. This is example BMO Gold Bullion ETF (ZGLD), which has a competitive MER of 0.23% and holds unencumbered 400oz gold bars in an area BMO vault that’s audited usually.
For investors on the lookout for a low-cost and liquid solution to track the spot price of gold, ETFs like this are typically the best and most accessible way.
Gold CEFs
Before ETFs dominated the market, closed-end funds were the primary alternative for gold exposure. Unlike ETFs, shares aren’t issued or redeemed upon request.
A CEF is issued with a set variety of shares upon its IPO, and thereafter trading occurs only between investors on the open market. Because of this, supply and demand may cause the market price to deviate from the web asset value, leading to either a reduction or a premium.
