The 4 Factors to Evaluate a Gold Investment Strategy

Gold is a simple asset to understand, but the process of purchasing gold products is fraught with unique challenges. When compared to equities markets, gold represents a relatively unregulated frontier. Today, cutting-edge financial technology delivers the advantages of this 3 billion-year-old asset with the convenience and security modern investors expect.

Most investors utilize one of the following seven traditional methods for gold investment:

1. Gold IRA
2. Bullion
3. Collectible Coins
4. Jewelry
5. Gold Mining Company Stock
6. Gold-backed ETFs and Mutual Funds
7. Futures and Options

To take a deeper look into each method, refer to the article How to Invest in Gold: 7 Methods You Should Know About.

But how do investors differentiate between these strategies? Traditional methods always come down to trade-offs. Each strategy exposes the investor to different risks and rewards.

The 4 Factors to Evaluate a Gold Investment Strategy

Here are the 4 factors you should consider when investing in gold: ownership, exposure, transparency, and security.

Ownership

Do you actually own any physical assets? Is there any real metal allocated under your name?

One of the greatest advantages of gold is that you are investing in something tangible, real, and independent of the banking system. Companies can fail or go bankrupt, stocks can plummet, currency can rapidly depreciate, and bonds can default – but gold holds value forever. Gold has been the lifeblood of monetary exchange in nearly every human culture for centuries, giving it an intrinsic value that cannot be replicated in any other asset.

However, you only get the benefits of gold allocation if you actually own the metal. Deliverablility is best litmus test for physical ownership. Can you take delivery of your holdings?

If not, you are dealing with “counterparty risk.” Counterparty risk is the probability that the party on the other side of the transaction will fail to uphold their side of the deal. For example, gold-backed ETFs may give you exposure to the metal’s price movements, but in the end you do not own anything physical. ETFs simply allow you to buy shares of a fund that owns gold. If that fund makes bad management decisions or fails to uphold their contract, you risk losing your investment. When you pay someone to own gold on your behalf, you also trust them to effectively manage liquidity risk and any black swan event that challanges their business model.

The only options that offer true allocation in the list above are a gold IRA, physical bullion, collectible coins, and jewelry. These strategies qualify for direct ownership, but all require a large upfront investment. Plus, the investor often pays high commission fees, spreads, and premiums depending on the product.

The tradeoff: Indirect methods of gold investing introduce counterparty risk. Direct gold ownership can be very expensive.

Exposure

Does the price of your asset follow the price of gold exactly, or is it impacted by other factors as well? What kind of risks are associated with your investment?

Like any asset class, gold investing comes with risk. Price volatility sends the price up and down just like stocks, although the price trends upward over time. Physical gold exposes investors exclusively to the natural volatility of the gold price, whereas strategies without physical allocation (gold miner stocks, some mutual funds, futures, and options) carry additional risks.

These risks also introduce the potential for a higher reward, if you make good trading decisions. However, they quickly enter the realm of speculation. Some investors love to speculate on the gold price and use highly leveraged vehicles to maxamize returns. However, it is important not to confuse these strategies with using gold as a savings vehicle.

Indirect exposure usually results in additional risk. Either you pay a high premium to own actual gold, or you forgo gold ownership for a cheaper option with additional risk. Coming back to the gold-backed ETF example: if the fund cannot obtain product during times of high demand (such as March of 2020) you end up buying something that doesn’t exist! In cases like this, the price of your investment may deviate from the actual market gold price.

The tradeoff: Direct gold exposure means you own the risks associated with natural gold price volatility – nothing else. Direct exposure comes with a high premium.

Transparency

What fees are associated with your investment? What premium are you paying over the spot price of gold?

The concern of transparency in the gold industry has been heating up for decades. The lack of industry regulation can be an advantage for consumers, but it also allows shady dealers to charge clients with hidden fees and exorbitant premiums over the spot price. For example, in late 2020, the Commodity Futures Trading Commission charged TMTE Inc. (Metals.com), Chase Metals, and Barrick Capital $185 million for a scheme that defrauded thousands of elderly investors with grossly overpriced gold and silver products.

When engaging in traditional gold investing methods, it is the investor’s job to perform their due diligence and ensure they know exactly what they are paying. If your dealer or platform isn’t fully transparent from the beginning, run away.

Company longevity is the best litmus test for ethics and transparency. Every time global gold demand picks up, new precious metals companies pop up to capitalize on the trend. A long track record of sound business practices and ethical behavior can quickly differentiate the good companies from the shady ones.

The tradeoff: Transparency is non-negotiable. The only trade-off here is the one that ensures your investment goes toward your portfolio instead of a swindler’s pocket.

Security

Is your gold insured? Are you confident in the safety and security measures taken to protect your assets?

Gold’s physical nature gives the investor a variety of options for insurance, storage, and security. Different gold investment strategies present different security concerns. If you purchase products directly from a brokerage firm, you can store your metal in a vault across the globe, or take delivery and store the metal in your house.

Some consider their home to be the most secure storage location.

ETFs and mutual funds each have different security protocols. Many people are shocked to hear that SPDR Gold Shares (GLD), the largest gold-backed ETF in the world, actually does not insure its gold. When you purchase physical gold products, most brokerage companies and jewelers will either include insurance in the purchase price or allow you to insure your metal for an additional fee.

The tradeoff: Security is a top priority for any element as precious and valuable as gold. Because of this, security is often very expensive.

Checking all the Boxes

Vaulted’s founders took a close look at these factors and built a gold investing platform without the trade-offs. Vaulted leverages cutting edge technology and over 50 years of precious metals expertise to fulfill all four of the factors listed below. Vaulted bridges the gap to allow any investor to obtain the benefits of gold.

Ownership
Every Vaulted investor owns 99.99% pure gold kilo bars with unique serial numbers. The Royal Canadian Mint manufactures every gold kilo bar sold by Vaulted and guarantees its weight and purity. The Mint and Vaulted track and report each serial number. Investors can take delivery of their metal anywhere in the United States. If the investor does not own a whole kilo bar, they can convert their holdings to smaller products, or even other precious metals such as silver, platinum, and palladium.

Exposure
Vaulted investors are directly exposed to the price of their pure gold kilo bars and nothing else. Vaulted gold carries no additional risks, and the price movements of your investment are identical to the natural price movements of gold.

Transparency
Vaulted communicates fees with full transparency on every single trade: 1.8% on transactions and a 0.4% annual maintenance fee for storage and security. Vaulted cut out 70% of the traditional precious metals supply chain. This creates the lowest cost structure in the industry for physical, deliverable gold.

Security
The Royal Canadian Mint, an ISO-9001:2000 certified refinery, stores all Vaulted assets. The gold in RCM’s vaults is insured and guaranteed against theft, damage, or other losses. The Vaulted supply chain minimizes the number of counterparties interacting with your metal, tightening the security of the entire network.