Gold

A gold mine is a hole in the ground with a liar on top.

- Unknown (attrib. to M. Twain).

Gold and Precious Metals

Why Buy Gold?

A small holding (no more than about 5%-10% of the portfolio) in gold or precious metals is recommended by some advisors for additional diversification. Gold is poorly correlated with many securities, so, although its volatility is high, a small holding may in fact act to reduce portfolio volatility. However, since gold returns in recent years have often been negative, gold holdings may also tend to reduce portfolio returns.

Two of the best online sources of gold information are at Kitco and the World Gold Council.

A chart showing the price of gold in Canadian dollars during the last 24 hours is shown below:

Gold or precious metals may be introduced into a portfolio in several ways:

As gold stocks, either directly or in an index fund or ETF.
In precious metals funds.
As gold certificates or precious metals certificates.
As physical holdings of the metal, either as bullion or as coins.

Not all these approaches are allowable in an RRSP. In some cases, it may depend upon the details of the financial structure of the product.

Gold Stocks

Several mining companies trade on the TSX, offering investors the opportunity to hold gold stocks directly. Canadian and international gold stocks are also available in a Barclays Canada ETF (stock symbol: XGD, MER 0.55%), which tracks the S&P/TSX Global Gold Index and thus includes US and international holdings.

Two major Canadian gold producers, Barrick Gold and Goldcorp, are included in the S&P/TSX 60 index, as well as other companies such as Cameco that have some gold production. Additional gold mining companies are included in the broader TSX Composite Index. Holders of index funds or ETFs based on these indexes therefore automatically have some gold exposure, and may feel that no additional exposure is required.

The main advantage to holding gold stocks is in the leverage the mining company profits have to gold prices. Suppose that the price of gold is US $300 per troy ounce and the cost of production is (arbitrarily) US $150. A $10 change in the gold price represents only a 3% change, but will cause profits to change by 6% - up or down. Higher-priced producers will have greater leverage to gold prices and therefore the stocks will have greater volatility. Some gold companies hedge their production by selling it forward (i.e. by selling futures contracts against their production). This hedging procedure reduces the effect of gold price variations on profits, but means that the company will not fully participate in the profits from a rise in the price of gold.

Prospective investors should remember that one of the largest scams in Canadian history involved a gold stock.

Precious Metals Funds and ETFs

Several dedicated precious metals funds are available. Like gold stocks, they can be held in an RRSP. They suffer from high MERs, in the 2-5% range (compared to 0.55% for XGD); some even charge a high MER for holding gold or silver certificates or bullion. In general, high-MER funds have a higher probability of enriching the fund manager than they do of enriching the investor - who is the one taking the risk. Unwise investors will often chase performance by buying these funds after the price has run up - just in time for a crash.

A gold ETF with a unit price representing 1/10 of an ounce of gold now trades on the New York Stock Exchange (stock symbol: GLD, MER 0.4%). The MER of this ETF is significantly lower than the MERs of many gold funds, but it does not appear to be RRSP eligible according to at least some brokers. The Barclays iShares COMEX Gold Trust, which also tracks the price of gold, trades on the American Stock Exchange (stock symbol: IAU, MER 0.4%), and in Canadian dollars on the Toronto Stock Exchange under a different stock symbol (IGT).

Investors wishing to purchase precious metals funds should read the prospectus carefully before buying, paying particular attention to costs and, if needed, RRSP eligibility. Caveat emptor.

Gold or Precious Metal Certificates

Gold and precious metals certificates can be purchased from brokerage houses. These certificates eliminate the need for the investor to physically hold and store the metal, with the associated costs. However, the dealer may levy a small ongoing fee for metal storage; prospective buyers should check with their dealers before purchase. These certificates are not subject to provincial sales taxes.

Bullion, Wafers, and Coins

Gold bullion, gold or silver wafers, and gold coins like the Maple Leaf can be purchased from gold dealers in major cities. The Bank of Nova Scotia is also a major gold dealer; counters where gold or gold or silver certificates can be purchased may be available at the main branch in major cities. The bid-ask spread in purchasing and selling small quantities may be considerable. Since wafers will require assay before they can be sold and the seller must pay for the analysis, gold coins are probably more suitable for small investors.

Gold of high purity (24 karat or >0.9950 fineness), such as the gold wafers and Maple Leaf made by the Royal Canadian Mint, is not subject to GST. Coins of 0.9950 fineness or better are exempt from PST in Alberta, BC, Quebec, NWT, and the Yukon; a tax of 6 to 8% is applicable in the remaining provinces. Gold coins such as the American Eagle and Krugerrand are alloyed and GST and PST are payable on the purchase. Amounts of gold in $1000 quantities or less are considered "personal use property" and can be sold without paying capital gains tax if the individual is not in the business of buying and selling gold.

Some investors consider physical gold holdings to be "catastrophe insurance", and keep some coins or wafers in a safe location. Silver coins, which have a lower unit price than gold coins, may be more useful for this purpose.