Put it in the paper: For the second year in a row, investors believe that gold is the best long-term investment, according to a recent Gallup poll. Ranking higher than real estate, equities, bonds, and savings accounts, owning gold is viewed by American investors as the best place to place their money for the long-term. According to the poll, 34% of Americans believe that their dollars are better served allocated to gold than any other position.
Normally these positive polls, where a lot of Americans are agreeing, would make me anticipatory of a bubble or market top. However, investors are not acting on their good gut instincts. The United States Gold Bureau indicates that less than 5% of Americans actually have a position in gold, a far lower percentage than those owning Treasuries, stocks, and bonds. And, a much smaller percentage maintains their holdings in physical gold. It's no secret that I am an outright advocate of owning gold as part of a reasonable, well balanced position within your overall investable assets. However, the financial press rarely covers the way in which individuals should maintain their position in precious metals.
The options for participating in gold ownership are diverse, inclusive of buying an ETF or a gold mining stock, and the method most commonly overlooked, acquiring physical gold. ETFs are fairly easy to own, investors can easily acquire a position through their trading account; however, it is very difficult, if not impossible, to request a physical withdrawal of your actual position. And, as I have mentioned in the past, unless your interest is speculative in nature, you largely defeat the insurance aspect of owning gold if you don't personally control your position in the metal.
Essentially, owning a gold ETF is equivalent to allocating those same investable dollars to a paper asset - just like the stocks you currently own. With an ETF, you're trusting that the right oversight is in place to ensure the underlying asset actually exists, defeating the insurance benefit of having direct physical access to a portion of your wealth.
Taking a position in mining stocks is not necessarily "buying gold" as much as it is purchasing a position in a company - just as you would in any other publicly traded stock. In the case of a gold mining stock, your returns will largely be a function of two driving forces; the operational expenses of the mine itself and the premise that the price of gold is currently higher than, or will rise above, the operational cost per ounce to get the metal out of the ground and onto the open market.
Physical gold ownership can be accomplished through a number of sub-asset classes underneath the main asset itself, including bars and coins. However, all bars and coins are not created equal, as each contains varying levels of purity and amounts of gold. Additionally, the premiums, otherwise known as the spread, vary on each product - and for good reason. The spreads are partially a function of the cost to produce each product, but also a function of their purpose within the underlying asset class of precious metals.
Gold bars are the cheapest, but investors should stay with well-known brands, such as PAMP Suisse, Credit Suisse, Metalor, or Heraeus. Raw gold coins, or bullion, generally maintain slightly wider spreads than bars, but are almost always accepted for immediate liquidation without question; this is not always the case with gold bars, which sometimes need to be assayed prior to liquidation. The Gold American Eagle, produced by the United States Mint, is arguably the most easily liquidated gold coin in the world.
Investors wishing to lower their exposure to the volatility of their position in physical metals may want to consider a position in investment grade, certified coins, otherwise known as numismatic coins. However, just like gold bars and bullion coins, not all investment grade coins are equal. Numismatic coins often trade in manner that partially decouples it from the volatility of the underlying intrinsic asset, but investors have to know what they're getting into as the spreads on investment grade coins are generally wider for coins that are rarer.
In exchange for the wider spread paid when getting into this asset class, investors should expect to experience less volatility than they would if they owned all gold bars, for example. As a result, a balanced position between raw gold bars, bullion coins, and investment grade coins may be the best way for a non-speculative investor to own a physical position in gold.