How should SMSF trustees invest in gold?
Precious metals were at the forefront of investors’ minds in 2020, as the fallout from the COVID-19 crisis saw the price of gold rise by more than 20%, with investment demand soaring.
Despite the pullback in the gold price seen in Q1 this year, the investment environment in the years ahead is likely to remain supportive for gold.
For investors wanting to build a well-diversified portfolio, the precious metal can offer several key benefits, including the fact that it has:
- Historically outperformed in low real interest rate environments, with the gold price typically increasing by approximately 20% per annum in years the real cash rate in Australia was 2% or lower.
- Historically been the best performing asset in the months, quarters and years that the share market falls. For example, in the worst five years for Australia’s equity market (where stocks on average fell by 24%), the price of gold increased on average by 39%.
How to invest in gold
Separate to the discussion on why to invest in gold, is the question of how.
Note that for the purpose of this article, we are excluding gold miners from the equation, as although they are exposed to the gold price, they do not mimic the return on gold itself, with a range of factors that can lead them to outperform, or underperform the precious metal.
The table below highlights three main ways investors access gold these days, with The Perth Mint offering all of these options to its clients. The table also highlights the potential advantages and drawbacks of each option for investors like SMSF trustees to consider.
While physical bars and coins which people self-store (for example at home) will forever remain an important part of the overall gold market, they are less popular with SMSF trustees for a number of reasons, including the fact they are typically more expensive to buy and sell.
For this reason, SMSF trustees tend to invest in gold via:
A depository account like The Perth Mint’s Depository Online option
This is similar to a share trading account, but instead it is used to buy and sell gold and other precious metals which are held in custody by The Perth Mint on behalf of investors.
As an example, The Perth Mint Depository Online option allows SMSF trustees to trade 24/7 without the worry of having to store the metal themselves.
Valuations can also be provided to facilitate the reporting requirements SMSF trustees must adhere to.
A gold ETF like Perth Mint Gold (ASX:PMGOLD)
Bought and sold like regular shares via a stockbroker or online trading account, gold ETFs are becoming the most popular way for SMSF trustees to invest in gold.
Gold ETFs also tend to be the lowest cost way of accessing gold, with trading spreads that are cheaper than buying bars or coins. Management fees are also very competitive. As an example, ASX:PMGOLD has a management fee of just 0.15%.
Gold ETFs are arguably the easiest way for SMSF trustees to invest in gold, given the vast majority already own shares and can therefore make an investment out of their existing brokerage account.
For a more detailed read on the key reasons why investors like SMSF trustees are turning to gold, please access our latest SMSF investment whitepaper.
How gold ETFs keep fees and costs low
Costs are a critical factor for investors to consider as the trading spreads incurred when buying and selling an asset eat away at the returns generated. One of the advantages of gold ETFs is that they are inexpensive both from a management fee, as well as a trading cost perspective.
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Benefits of holding gold in Australian dollars
Does it matter what currency you buy gold in? While long-run returns and the role that gold can play in a portfolio tend to be similar irrespective of the currency here's some things to watch out for.Source: Benefits of holding gold in Australian dollars