Friday, March 27, 2009
Investing in Gold Certificates
What are gold certificates? They are certificates that indicate you are the owner of gold that you do not physically possess. Normally, these certificates are issued by financial institutions from whom you buy gold, and those financial institutions physically store the gold for you. At least that's how it's supposed to work.
Possessing certificates of ownership is like having your money in a gold pool account. You give your money to the company who runs the program, and when you cash out they pay you whatever returns you may have accrued according to the current gold price. But they may not store any physical gold for you. Rather, they are thought to take your money, and invest in whatever they expect to get the highest returns rather than in gold, pay you the returns on gold, and keep the rest of their gains for themselves. That begs the question of what happens if they make some poor investment decisions and lose your money, and are unable to pay you your returns on the gold price? I don't know. What happens if the institution goes bankrupt what happens to your investment? If it's not a physical asset, I suspect it would vanish.
There are some positive aspects of gold certificate programs. One is that you can essentially invest in gold at the official spot price without having to pay any premiums for physical metal or pay any storage fees. Those premiums and storage fees can cut into your profits quite a bit, so gold certificates represent
an alternative that gives you the most efficient returns.
One option for gold certificates is the Perth Mint's gold certificate program. The Perth Mint's program is full backed by the government of Western Australia, which affords somewhat more of a sense of security than possessing gold certificates from a private institution that could go bankrupt and watch your non-physical gold vanish. The Perth Mint's gold certificate program charges 1.75% fees on all purchases plus a $10 certificate fee, plus a 0.75% fee when you sell. This is much lower than the current premiums on physical bullion which have skyrocketed during the current bullion and coin shortage. There are no storage fees. There is a minimum initial investment of $5000 Australian dollars. The Mint claims that every ounce you buy remains on the premises of the mint that can not be removed. Your investment is both government backed and insured by Lloyds of London. This is for basic unallocated storage (though again they do claim to have gold on premises for you, in some form).
The Perth Mint also offers allocated gold storage accounts, though this requires both storage fees and a fabrication fee (to mold the gold into whatever form
you choose to have set aside for you).
You can find more information on the Perth Mint Certificate Program here
Whether or not you invest in gold certificates will depend on how much faith you are willing to place in an institution to store your purchased commodity for you. I am personally someone who is prepared for the worst while simultaneously not paranoid, and seeking the best returns possible. That has lead me to the conclusion that holding a stack of physical bullion as the base of your portfolio is important, but that on top of that base it is fine to diversify and hold certificates or other kinds of gold accounts that do not have allocated storage. I personally do not take part in the Perth Mint program or similar ones, but I do have an e-gold account. I think those are fine as long as you know that there is some degree of risk, and watch the markets with the willingness to sell your certificates or digital gold if gold market demand really heats up. I would personally feel very little stress in investing in the Perth Mint's program, though I would probably avoid a financial institution's certificate program.