Why Gold could be a Bubble

November 23, 2009


Recent returns from conventional asset classes such as stocks and bonds have been, to put it mildly, disappointing. But, there is one asset class that has posted red-hot returns: gold. Since 2000, the price of gold has more than doubled in Canadian dollar terms but the price trend has been accelerating in recent years. In the past five years, gold has appreciated (in CAD) at an average annual rate of close to 20%.

[5 year Gold Price in CAD 2004-2009]

Like moths to a flame, investors are attracted to recent returns. The prospectus for the SPDR Gold Trust (GLD) provides a fascinating insight into the gold market. Jewellery, the primary source of demand for gold has been dropping at the same time that investment demand has been exploding. In the past five years, demand for retail investment products such as coins and bars and gold ETFs has tripled and investment demand alone now accounts for a quarter of total gold demand, up from 10% in the early 2000s.

[Investment Demand for Gold]

It must be recalled that, unlike conventional asset classes, gold pays neither interest nor dividends. Therefore, gold investors, as tulip bulb and dot com investors before them, must rely on the “greater fool” theory of investing for their profits. It is possible, of course, that competing asset classes would continue to languish, gold prices continue to increase, driving more investment demand for the yellow metal. Then again, the feedback loop could easily go negative due to any number of reasons ranging from increased mine supply to scrap supply and once again burn investors who chased returns.

ScotiaMocatta eStore: A pricey way to buy bullion

October 15, 2009


Scotia Bank recently launched an online store selling a limited selection of gold and silver bullion products. The eStore carries Scotiabank gold bars, Maple Leaf gold coins from the Royal Canadian Mint, Scotiabank silver bars and silver maple leafs and will deliver its products to anywhere in Canada. While it is innovative for a big bank to sell bullion through an online store, smaller retailers such as Vancouver-based J & M have been selling bullion by mail order for many years now. A quick comparison between J & M and ScotiaMocatta shows that the latter is a pricier way to buy bullion:

  1. Precious metal products, which are exempt from GST, are subject to sales tax in many provinces but not in BC. As a Vancouver-based retailer J & M does not charge sales tax on pure bullion products but ScotiaMocatta does based on the buyer’s province of residence. An Ontario resident buying an 1 ounce Maple Leaf gold coin could save close to a $100 by buying through J & M.
  2. J & M’s prices on the same bullion products appear to be cheaper than ScotiaMocatta’s. Recently, J & M quoted $1,132 on an 1 ounce Maple Leaf gold coin and $1,106 on an 1 ounce gold bar compared to ScotiaMocatta’s price of $1,173 and $1,121 respectively.
  3. J & M charges a 2% fee only when paying through a credit card but they also accept bank drafts and direct deposits at no extra charge. ScotiaMocatta, on the other hand, charges an administration fee of 3% plus $12 on all orders.

Add it all up and you could save as much as $200 extra when buying an 1 ounce Maple Leaf priced at around $1,000 through J & M instead of ScotiaMocatta.

Note: I have no affiliations with J & M. I have simply purchased bullion from them in the past without any problems.

Investing in Gold Bullion

June 1, 2009


[Thank you for the queries sent into the Personal Finance Clinic. We received 27 questions that I, Money Gardener and Triaging My Way will be answering (most of them anyway) over the next little while. Today’s post is in response to a question received from SG of Toronto who wondered how to invest in gold bullion.]

I’ve written many posts in the past on why gold is not a very attractive investment. Physical gold does not provide an ongoing income stream in the form of dividends or interest — in fact, it costs money to store and insure and over the long term — and the best that can be said for gold is that it keeps pace with inflation, though there may be periods when gold performs spectacularly. In Stocks for the Long Run, Jeremy Siegel notes that from 1800 to 2008, $1 invested in gold would have grown to an inflation-adjusted $2.59, which is much lower than the $306 that even lowly T-bills would have grown into. Despite the low correlation that gold has with other asset classes, the poor risk-reward characteristics provides a good reason for avoiding gold altogether. Still, some investors like the idea of keeping a bit of gold near at hand as a sort of “disaster insurance”.

Investors wanting to invest in bullion could do so through gold coins or gold bars. Various national mints produce gold coins of varying purity that are legal tender. The Royal Canadian Mint produces the popular Maple Leaf gold coins that are 99.99% pure or better and available in one, 1/2, 1/4, 1/10 and 1/20 ounce sizes. The one ounce coin has a $50 face value, which is quite a bit lower than the value of gold content. Other popular gold coins are the South African Krugerrand and the US Eagle. Gold bars are produced by various refiners, are available in various sizes and tend to be slightly cheaper than a gold coin of the same size.

I do not personally invest in gold bullion but have purchased Maple Leaf coins as gifts. There is no GST on Maple Leafs or gold bars but the coins attract a PST in Ontario but not in BC. Vancouver-based J and M ships gold bullion to customers across Canada for a small charge and do not charge any sales tax on pure bullion products. In this thread on Canadian Money Forum, a member suggests Border Gold, another BC-based vendor for buying or selling gold bullion.