Investors often use gold as a hedge against stock market volatility, inflation, or currency weakness. While the jury is out on whether investing in gold in Canada actually provides any benefits against these calamities, investors have been piling into gold lately and driving prices near an all-time high.
In this article, we’ll look at how to invest in gold and whether you should include gold in a diversified portfolio.
While gold is known as a good store of value, it is also considered to be a speculative and highly volatile investment. Unlike stocks or real estate, gold doesn’t produce income. Its future value is tied to price speculation rather than earnings or dividends. Warren Buffett said this about gold:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”
Still, gold investors have made a mint over two decades, with an annual average return of 9.7% from 2000 to 2020. However, in the last year, due to high inflation and geopolitical uncertainty, analysts have been cautious about the outlook for the gold market. Still, gold is considered a safe investment and acts as a safety net when markets are volatile.
Let’s look at the history of gold as an investment.
There are several direct and indirect ways for investors to invest in gold in Canada. You can buy gold stocks – the companies that mine gold. You can buy a gold ETF that tracks the price of gold. Or, you can take physical ownership of gold through coins, bars, or bullion.
The best way to start investing in gold stocks or ETFs is to open a discount brokerage account because you can monitor your investments easily and save money on commission and trading fees. I recommend going with CIBC Investor’s Edge, Questrade, or Wealthsimple Trade.
Canada is rich in resources, so it’s no surprise that gold mining companies make up a large portion of the Canadian stock market. Here are the top gold stocks listed on the S&P/TSX 60:
In theory, it should be expected that the profits and stock prices of these individual gold mining companies should rise and fall with the price of gold. But that’s not always the case when picking individual stocks.
Despite a deep downturn earlier this year, Newmont Corp. has been able to hold on to a top spot in gold stocks. Similarly, for the past year, Barrick Gold Corp. has managed to remain a major dividend-paying stock. Keep that in mind as you make your gold stock picks.
Gold ETFs can be a better way to get broad exposure to gold without the risk of investing in individual companies. Some gold ETFs are backed by physical gold (bullion) stored in vaults, others track gold futures, and some invest directly in the companies that mine the precious metal.
The largest gold ETF is SPDR Gold Trust (GLD), with nearly $70 billion in assets under management. GLD holds physical gold bullion, and its price tends to move in lock step with the spot price of gold.
In Canada, iShares’ Gold Bullion ETF (CGL) also holds physical gold bullion and is designed to replicate the performance of the price of gold.
Horizon Gold ETF (HUG) looks for investment results with gold futures contracts or paper gold. Any U.S. dollar gains or losses will be hedged back to Canadian dollars, which is important because it offers no protection for Canadian investors against a falling U.S. currency.
iShares S&P/TSX Global Gold Index ETF (XGD) essentially tracks the S&P/TSX Global Gold Index. With an MER of 0.61%, XGD looks like a solid alternative to speculating on individual gold mining companies.
Investors should also know that by purchasing a Canadian index fund or ETF, they automatically get exposure to gold in their portfolios. Doing so reduces the risk of trying to pick a winning gold stock.
Investors can also get exposure to gold by purchasing and storing gold coins directly.
The Canadian Gold Maple Leaf is a gold coin produced annually by the Royal Canadian Mint. The gold coin is legal tender with a face value of $50 CAD.
The Mint produces several 99.99% pure gold coins ranging from one gram to one ounce. In 2007, the Mint produced the world’s first $1M coin, which weighed 100 kilograms and had a metal value of over $3.5M.
The most traditional way to invest in gold is by purchasing gold bullion, which can be either traditional gold bars or gold coins. You can get gold bars in various weights and sizes, ranging from one gram to 400 ounces. In Canada, investors can buy gold bars online through CIBC Precious Metals or in branches at CIBC.
As of the writing of this article, a one-ounce gold bar costs just over $2,000 CAD. Gold and other precious metals are exempt from GST and HST.
Aside from bullion, you can also buy gold in the form of jewellery. Unlike coins or bullion, jewellery can have artistic or sentimental value, so it isn’t only a financial investment but a personal one, too, with a more utilitarian value. Not only that, but gold jewellery that you have on hand can come in handy if you’re ever in a bind and need to sell it for some cash. But, when purchasing gold jewellery, make sure you do your research to know what karat gold you’re buying since that can affect the value and that you’re purchasing from a reputable vendor.
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