Investing in gold

21:55, Jun 23 2013

A price slump is often a signal that investors are deserting a market but a sharp fall in the gold price has had the opposite effect.

The international gold price peaked at US$1791.75 in October last year before dropping sharply in April and has since traded as low as US$1292.50 (yesterday).

But rather than sell their holdings or sit on the sidelines in the hope that the price will recover, mum and dad investors in gold and other precious metals such as silver have been buying up large.

"As the price has come down, demand has gone up. So we are selling more at a lower price than we were at a higher price," NZ Gold Merchants managing director Tony Coleman said.

New Zealand Gold Merchants is one of the country's largest precious metal refiners and bullion dealers. The Auckland-based company processes much of the alluvial gold dredged up as nuggets or gold dust or from the bottom of South Island rivers and also recovers precious metals such as silver, gold, platinum, palladium and iridium from industrial waste.

It also buys and sells bullion products such as gold and silver coins and bars.

"We've had a few buy-backs," Coleman said.

"There were a few [gold investors] that didn't like the stress of watching the price fall. So they've cut their losses and gone.

"But most, even those that bought at a high price, have held."

And many are buying more gold at the current price to lower the overall cost of their holdings, a strategy called 'dollar cost averaging' in portfolio management parlance.

But Coleman is also seeing more novice investors entering the market.

"We are selling to new people who see an opportunity to get in at what's now considered to be a fairly reasonable entry point," he said.

Many people who buy gold appear to be looking to protect themselves if there is a financial Apocalypse.

"Their bottom line is preserving wealth. Preserving money they already have," Coleman said.

So if world property and sharemarkets collapse and governments stop people withdrawing money from banks, that stash of gold or silver could come in handy.

The main drawback of using gold or silver as a safety net is that they don't produce any income. So anyone buying them would need to factor in what they might earn if they put their money into other types of investments such as shares or bank deposits.

For novice investors there are several other factors to consider.

Because they are international commodities, precious metals are priced in US dollars, so their value to New Zealand investors is affected by movements in the exchange rate as well as by movements in the US dollar price of the metals.

This complicates trying to pick what they might be worth in the future, although investors who buy other types of overseas investments face the same problem.

They will also need to factor in the effect of the bullion trader's margin on their investment.

At any given time the price dealers would pay you for gold or silver is less than they would sell it to you for, giving them a margin to operate their business.

On smaller orders, the buy price can be 10-20 per cent lower than the sell price, which means the price would need to have risen by that much when an investor cashes up, if they are to break even.

The precious metals market is competitive and margins can vary between dealers. Some dealers will also offer better prices on some products than others, depending on how much stock they may be sitting on, so it can be a good idea to shop around for the best deal.

Investors also need to decide whether to buy gold or silver (the main investment metals) and whether to buy it as coins or bars.

Coleman said most investors were buying a mix of both.

"Silver is quite speculative, it's quite volatile, so a little less money is going into silver. But they [investors] want to have a bit of a play and silver is the one you can really make some money on because of movements in price," he said.

However, investors also need to be aware that volatile prices can also lead to losses.

Coleman said major investors mainly bought 1-5kg bars, but 1oz bullion coins had become extremely popular with smaller investors.

As well as being more affordable (at last week's prices, a 1oz gold coin cost $1800-$1850 while a 1oz silver coin was in the low $30s) coins also have the advantage of being relatively easy to store and transport.

However, coins cost more per ounce of gold or silver than bars do, because of their higher manufacturing costs. So in purely financial terms, a bar is usually better value than a coin.

There are several types of bullion coins which are recognised by dealers around the world and for which there is a well developed international market.

The main ones are the Maple Leaf produced by the Royal Canadian Mint, the Eagle produced by the US Mint, the Nugget or Kangaroo produced by the Perth Mint, the Philharmonic produced by the Austrian Mint and the Chinese Panda.

Sovereigns produced by the Royal Mint in the UK and South African Krugerrands are also very well known, but are not such good investments in this country because they are not pure gold, which means they have GST added to their price.

There is no GST on gold with a purity greater than 99.5 per cent, although modern refining techniques are so efficient that most bullion bars and coins produced today have 99.99 per cent purity.

Investors will also need to consider how they will store their precious metals.

Some dealers such as NZ Mint, offer safe storage facilities in their vaults for an annual fee.

And some banks and various private vaults also offer secure storage facilities and a small safety deposit box can typically be rented for about $200 a year.


The standard unit of measurement for pricing precious metals is US dollars per troy ounce. A troy ounce is 31.1034768 grams which means there are approximately 32.15 troy ounces in a kilogram. A troy ounce is slightly heavier than the imperial ounces (16 to the pound) that were used as the official weights and measures of this country prior to the adoption of the metric system in 1976.

The most commonly traded gold and silver bullion coins weigh one troy ounce.

The heaviest gold coin ever produced was manufactured by the Perth Mint and weighs one tonne (1000kg). It measures 80cm across and 12cm deep and is worth more than $60m, but it was produced purely for promotional purposes and has never been offered for sale.

In 2007 the Royal Canadian Mint produced a 100kg pure gold coin which was 50cm in diameter and 3cm thick and it is understood that several of these were sold to private investors.

There are no import duties or GST on fine gold (defined by law as having a purity of more than 99.5 per cent) and there are no restrictions on taking it in or out of the country.

Minting is the process of pressing a piece of metal between two dies under great pressure to create a coin or medallion.

Forgeries of gold bullion coins or bars are rare, but there have been instances where gold bars have been hollowed out and the interior replaced with tungsten, which has a similar weight to gold but in small quantities is virtually worthless. Such forgeries can be readily detected by ultrasonic testing.

Many overseas mints and bullion dealers trade over the internet and will courier gold bullion to their New Zealand customers.


Sunday Star Times