How To Buy Gold

Gold is permitted as an investment in any Canadian registered savings plan and is most easily held in the form of certificates in any brokerage account or RxSP.

Any chartered bank in Canada is required by law to sell you gold if you ask them too (don’t ask me why, I think it is a very old provision in the Bank Act that dates back to the good old days when the gold standard prevented the credit excess).

There is usually a “safekeeping fee” that accompanies the holding of any bullion (unless you bury it in your own backyard). If you take delivery in coin or wafers or bricks (i.e. “lumps” of various sizes), you need a safe deposit box for example. If the bank agrees to hold your gold for you and give you a certificate instead, then they pass thru a safekeeping fee. For example, TD Waterhouse charges 1 cent per ounce per month to the brokerage account that holds gold in the form of a certificate.

If you choose to take delivery of gold, you will likely also be charged GST and a delivery fee (in the case of bullion such as wafers or bricks).  If you choose to take delivery in the form of a Maple Leaf gold coin, you will likely be charged the numismatic value of the coin in addition to a delivery fee.  Banks vary greatly on the amount of delivery fee they charge and this fee also varies by location of the branch you take delivery at.  It pays to shop around.

In an SDRSP, you cannot take delivery of bullion (since the holdings have to stay in the account), so your alternatives are: buy into a Gold ETF, purchase a buillion certificate, or purchase shares in a gold mining company. Each has its advantages & disadvantages:

Gold ETF – easily traded as per any stock. Tracks the price of gold pretty accurately. The safekeeping fee is buried in the price as is the fact that any ETF will hold about 10% cash to facilitate redemptions. That is why it does not track the price perfectly. The main disadvantage in my view is that there is a ton of counterparty risk. E.G. the IAU ETF is a Barclay’s exchange traded fund in New York that is managed by JP Morgan and holds its gold in Bank of Nova Scotia vaults located in the UK. Hence it is exposed to risk from any of 3 parties, and both the US and UK governments. There are no decent CDN ETFs, the two largest in the USA are GLD and IAU.  If you don’t think that counterparty risk is real, suggest you read the blog entry on Wachovia on this site.

Bullion Certificate – can be purchased by appointment at the bank of your choice (I use TD, but Scotiabank has the most volume in bullion trading). The gold is sold to you in USD and you are charged the typical horrific bank exchange rate to CDN. You must settle the purchase in cash (typically by decrementing your bank account, or by bank draft or lots of hard cash if purchasing at a bank that you are not a customer of). Don’t lose the certificate – it is a negotiable instrument. When holding in a registered plan or self-directed brokerage account, you don’t actually get the certificate (you don’t get stock certificates either), it is just recorded on your account. The risk here is counterparty risk with the single bank or brokerage firm that is holding your certificate (reasonably insured by FDIC unless you are holding a lot of money in this form) and also the risk that the Cdn government might sieze or freeze your gold if the going gets really tough. This has happened in the past in other countries when they needed to prop up their currencies (it will be interesting to watch Iceland on this topic). On the plus side, certs track the price of gold perfectly.

Gold Miners – purchased like a stock because they are stocks. Advantage is that they can be purchased in CDN thereby avoiding a USD exchange rate in the transaction. Does not track the price of gold perfectly but in my experience will often outperform bullion because the company will usually make money even at a flat price for gold (since they are in effect creating gold at a cash cost less than what they are selling it for). Downside is that there are times when the price of gold goes up and the price of the stock goes down (due to flight from the market to hard currencies for example). Also you have company risk due to bad business decisions, labour disputes, skewed performance due to hedging practices, etc.

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