Turn your investments into gold

Investing in precious metals is not as simple as might be imagined. With inflation rising all over the world, the number one concern among investors is how to protect their investments from the worsening inflation, or even how to profit from it.

Traditionally, precious metals have always been the answer. Schroder's Alternative Solutions Gold and Metals Fund, launched in Hong Kong last week, expects gold prices to hit $5,000 an ounce in this environment.

Indeed, in the last period of high oil prices and surging inflation in the 1970s gold prices moved from $35 to $850 in a decade.

Silver managed an even more spectacular rise and still stands well above $17 an ounce today. But if you accept the bull case for precious metals and inflation then how exactly do you invest? Here are a few options:


Go bullion

One approach is to go to the Dubai Gold Souk, or your local bullion dealer, and buy gold coins or bullion.

Dubai has a very attractive set of precious metal coins minted with His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, on the face, and the premium over the metal cost is small.

But the problem with coins and bullion is security. I do not like having anything valuable lying around my villa, let alone gold and silver. In some countries people like to bury gold and silver in their garden but that would not be practical in the UAE with people moving around so much.

Buying bullion deposits with a receipt to say what you own is a good alternative, provided you can have 100 per cent confidence in the vault's owner. In the 1970s there were several unfortunate cases of vaults in private hands that proved to be empty when their owners came to take possession of their metal.

That is one reason to favour a government-owned depository like the Perth Mint which is 100 per cent owned by the Government of Western Australia. The Perth Mint has a well established system of depository receipts for allocated and unallocated precious metals.

The unallocated metal has a promise from this state-owned institution to convert the metals into bullion on demand, although in practice there may be a wait of a few weeks. Allocated metal is always instantly available but attracts an annual storage charge. Investors therefore have to decide whether they think a state-owned mint is likely to go back on its promise and invite legal actions, or prove a low-cost option for owning precious metals.



Try ETFs

My other favourite option for retail investors who are not buying by the tonne and want exposure to precious metals without physical possession are Exchange Traded Funds (ETF). Purists will tell you it is safer to buy physical metal and build a vault in your house. But I have to argue that ETFs are much safer for the average person.

All you do to invest in an ETF is either go to your local stock broker to buy them, or set up a simple internet brokerage account.

To buy gold you have some choice but GLD is the biggest ETF and SLV offers the same for silver. You then buy and sell an ETF just like any share, and the money is invested in the precious metal at very low costs to the owner by the ETF managers.

Now purists will again tell you that just as in the Perth Mint unallocated gold investment, you have only a promissory note with an ETF. But again major financial institutions are behind the ETF management and are highly unlikely to fail, and perhaps it is far more likely that your home would be robbed if you have gold and silver under the carpet.

There are also arguments about the liquidity of ETFs. Could they really pay out if all the holders decided to exit? Again how likely is the smaller investor to be caught out by this, and would a systemic failure cause anything more than a delay?



The alternatives

If you want to spread your risk then you could consider doing both ETFs and a bullion deposit. This is of course just a practical guide on how to buy precious metals and store them without having to worry about security issues. There are other ways to gain exposure to precious metals.

You could buy a futures option to buy metal at a certain price on a certain date in the future or a diversified gold fund or shares in large gold and silver producers

Or try your luck among the junior explorers and miners whose share prices have become very depressed by short-sellers recently, and are overdue for a short-covering rally. But these financial instruments all come at a risk premium to the physical metal, although ironically the safest way to hold physical metals is indirectly through depository receipts and ETFs.

For small sums, however, a few of the Sheikh Mohammed coins are very easy to buy and sell.

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