A “table banging” opportunity to buy gold

"People rightly buy gold when they see inflation ahead," said William Rees-Mogg at a recent meeting of private investors in the City. With the Bank of England struggling to maintain its inflation target, the current lull in gold prices, says John Reade at UBS in London, could prove a "table-banging opportunity" to buy "decent amounts". But what's the best way to go about it? Type "buy gold" into Google and you'll be met with a huge range of choices. Most have advantages and drawbacks, depending on your aims and concerns. Here are the three options now open to retail investors.

Investing in gold: physical ownership

Physical gold held in your hand remains the ultimate in tangible wealth. You can buy physical gold from bullion dealers, including Baird & Co (0208 555 5217) and Chard (01253 343081).

But the big problem with storing gold coins at home or keeping small bars at your local bank is the loss of "integrity". Gold stored and traded by professional bullion dealers always comes with an absolute guarantee of its history, weight and purity. If you take it out of that professional system, your gold instantly loses this guarantee and loss of integrity is the greatest single cost in private gold ownership. That's why gold coin dealers charge such wide spreads between the price to buy and the price to sell. In the UK, expect to pay spreads of 4% and above, both on purchase and sale.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

For modern-day bullion coins, such as the Chinese Panda or Australian Nugget, don't be surprised to get only "melt" value when you come to sell, even though you will pay up to 16% above the spot price of gold when you buy.

Investing in gold: storage programmes

An "unallocated pool programme" will let you buy an entitlement to gold, stored at low cost, with a view to taking physical delivery sometime in the future. Kitco.com currently quotes a 1% dealing spread on its pool programme. The Perth Mint Certificate is underwritten by the Australian government. It also offers an "allocated" programme, where ownership of a specific portion of gold bullion costs 1.5% per year plus a $50 flat fee with a minimum investment of $10,000 (visit www.gold.ie, the UK and Ireland agents, for details). Alternatively, you can buy investment-grade bullion, stored in secure professional vaults in London, New York or Zurich, for just 0.12% per year at BullionVault.com. It lets you quote your own bid and offer prices using an online order board, and also gives you instant settlement with no credit risk.

Investing in gold: trust-based funds

The exchange-traded gold funds (ETFs) launched over the last half-decade let you track the price of gold if not actually own it by trading a security on the stockmarket. The leading ETFs hold gold in trust at HSBC in London; ask your stockbroker about LxyOr GBS. It can only be traded during London market hours and, like the Perth Mint, it also requires a transfer of cash from sterling to dollars.

Another potential drawback of the gold ETFs is their daily shrinkage. These funds all charge 0.4% per year to cover storage, insurance and administration fees, deducting this fee from the physical gold backing each share. But while the amount of gold backing each share shrinks a little each day, the title on each share remains the same typically one-tenth of an ounce. Over time, this gap only grows wider. The shares in LyxOr GBS now represent 9.874% of an ounce rather than a full 10%. The gold ETFs may soon consolidate their shares, repricing them to account for this shrinkage.

Investing in gold: gold mining stocks

It may have come late this year, "but Shopping Season has indeed arrived", says Doug Casey in the International Speculator. The price of gold mining stocks always dips during the summer lull in equity trading, but this year a "relentless flow" of news is throwing up bargain opportunities. Pay special attention to solid results that go largely unappreciated by the market, says Casey. Here are two of his current "best buys".

Dynasty Metals & Mining (Vancouver:DMM) owns three projects in Ecuador, one of which is approaching production. Fear of political risk has kept the shares cheap, despite Dynasty already holding 4.6 million ounces of gold in proven reserves. In April it received the final permit it needed to build and run a 2.5 million ounce mine where cash costs are put at just $181 per ounce. The company recently raised C$6m in finance, with no warrants attached, from Sprott Asset Management "another vote of confidence". Buy on weakness, reckons Casey.

Almaden (Toronto:AMM) is one of Casey's "favourite project generators", and the stock is "on sale again" after rising on news of a joint-venture with Canadian Gold Hunter (T.CGH), one of mining entrepreneur Brian Lundin's current vehicles. Almaden has a further 22 active projects underway, including a scoping study in British Columbia, plus four new test-drilling sites. Expect plenty of news. It's a "strong buy".

Adrian Ash is head of research at BullionVault.com, now the world's fastest-growing gold ownership service for private investors.