What is the gold spot rate today

Investing in Gold with ETCs

Gold has always drawn people under its spell and has always been a symbol of wealth and beauty. This is proven not least by the numerous historical grave goods that keep coming to light after thousands of years. In the past, the popularity of the precious metal was also based on its good processing properties for the production of jewelry or coins. In addition, it is not susceptible to corrosion. The rare occurrence of gold also creates a unique value.

We have been mining gold for thousands of years - from the adventurers in the gold rush of the 19th century to today's high-tech prospecting in the large mines of South Africa and South America. Nevertheless, if we were to melt down all of the gold available in the world today and cast a cube from it, it would only be 21 cubic meters in size.

This scarcity, combined with the precious metal's popularity, makes it an investment that has outlived many currencies and even civilizations.

 

Traditional gold investments

Despite its stable value for thousands of years, traditional gold investing is neither easy nor inexpensive. Traditionally, the precious metal is physically acquired and stored. But owning physical gold has some disadvantages.

Since it is valuable and at the same time easy to transport, it is still very popular with thieves. This means that gold owners must keep their investments safe - either in a home safe or in a bank. Both are associated with additional and above all high costs, especially for small investors.

Another disadvantage: anyone who wants to sell gold - whether in the form of coins, bars or jewelry - must first have the authenticity of the precious metal checked. But that too has its price. Professional investors therefore turn to recognized storage companies who guarantee the authenticity of the gold deposits deposited with them. And that creates costs again.

Professionals like to use proven standards such as the “Good Delivery” standard of the London Bullion Market Association (LBMA for short). This is where the quality and size of the bars are precisely defined. Such gold bars are numbered and registered with the LBMA. However, the standardized gold bars weigh around 12.4 kilograms and are therefore worth around 640,000 euros (as of September 30, 2020).

Alternatively, investors can also invest in gold mines and gold mining companies by buying their shares on the stock exchange. As a result, they are indirectly involved in the success or failure of these companies in the gold market. As a rule, prices rise or fall with the development of the gold price.

However, investments in industry companies are also highly volatile due to the strong link to the gold price. Furthermore, the companies are exposed to high costs due to the enormous energy and labor requirements in production. Even if the gold price rises, this can reduce company profits.

 

New ways to invest in gold

Investing via ETCs - Exchange Traded Commodities, i.e. exchange-traded commodities, is relatively young compared to purchasing physical gold.

Via ETCs, investors can benefit from the gold price while at the same time getting in and out at any time, just like with a stock. Due to their easy tradability on an exchange, they are often assigned to the ETF category, but on closer inspection they are not.

ETFs on physical gold cannot be issued in the European Union. Because according to legal regulations, these exchange-traded index funds are not allowed to invest exclusively in a single investment object. From this legal situation, ETCs on gold were created. In contrast to ETFs, ETCs do not count as special assets.

Rather, ETCs are to be viewed like certificates. This is because these are bonds of the issuing institution. This means that in the event of the bankruptcy of the financial institution, the ETC holder will go away empty-handed and lose their investment. To counteract this, gold ETCs are usually 100 percent secured with physical gold. Contracts guarantee that the shareholders' assets will be preserved in such an extreme event.

To allay concerns, most product providers hold the gold with reputable custodian banks and even provide a list of the gold bars purchased on the Internet. You can access these lists on the website of the respective provider. Some providers also limit their gold bars to international standards such as “Good Delivery”.
 

Gold ETFs and ETCs: Which Are the Best?

Find out how to invest in gold with ETFs and ETCs in our investment guide.
To the gold investment guide

 

Advantages of Gold ETCs

Gold ETCs have been around since 2003. At the end of September 2020, the amount of gold bars held by ETCs had reached over 3,800 tons. The assets invested in physically deposited ETCs were thus around 198 billion euros worldwide. The advantages of this financial product are obvious:
  • Liquidity: You can buy and sell gold ETCs like stocks.
  • Favorable keeping costs: The annual cost of gold ETCs is between 0.00 and 0.59 percent.
  • Favorable tradability: The premiums on gold ETCs are significantly lower compared to coins or small bars. This has a particularly positive effect if you want to adjust the gold content of your own portfolio through acquisitions and sales.
  • transparency: Many providers of physically deposited gold ETCs provide lists on their websites in which the deposited gold bars are listed with their registration numbers.
  • Payout: You can also have your investment sent to your home in pure gold from some gold ETC providers - for an additional charge, of course.
  • Tax advantage: ETCs that physically deposit the gold are treated by financial regulators like physical gold. The basis is the latest ruling by the Federal Fiscal Court from June 16, 2020. You do not have to pay tax on income from growth after a holding period of one year.
 

Cons of Gold ETCs

As everywhere there are disadvantages. Anyone who already owns a large amount of physical gold can possibly manage it more cheaply themselves or through an appropriate investment platform. In addition, you can neither see nor touch gold ETCs, and certainly not put them in your jacket pocket. In an emergency, you could not use your ETC Gold property to buy essential food.
 
 

Physically Backed ETCs

Most precious metal ETCs are 100 percent secured by the corresponding physical precious metal. As a rule, physical gold ETCs are linked to the gold spot price, the so-called "spot price". Since gold is usually traded in US dollars, there is still a currency risk against the euro. Two providers counter this with currency-hedged gold ETCs, which in comparison therefore also have a slightly higher total expense ratio (TER for short).

In addition, there are also exchange-traded commodity indices that reflect the price development of the corresponding futures. Therefore, in order to invest in such synthetic ETCs, you need to understand how the futures market works. Since most private investors do not have this knowledge, a physically backed gold ETC is the better alternative for those investors.

 

Gold as an important part of the portfolio

Even investors who are skeptical about future gold price developments usually have a portion of the precious metal in their portfolios. In general, the price of gold moves independently of other asset classes such as stocks or even other commodities.
   

The development of stocks, gold and commodities in comparison

Source: justETF Research; As of: 09/30/2020, figures in EUR

 
According to current portfolio theory, you can reduce the risk by investing in as many different asset classes as possible. Gold has proven to be a good addition, as it often performs significantly better when other asset classes achieve poor performance. This was evident, for example, during and in the years that followed the financial crisis of 2008-2009.

In order to use gold as a “safe haven” in such times, it is advisable to divide the portfolio between 5 and 15 percent of the precious metal. For more considerations on using gold in your ETF portfolio, see our article How to Build a Robust ETF Portfolio in Six Steps.

Gold ETFs and ETCs: Which Are the Best?
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Dominique Riedl

Dominique Riedl is the founder and owner of justETF. He has many years of experience in structuring, managing and controlling large assets. After studying business administration at the Nürtingen and Solothurn Universities of Applied Sciences and the Rotterdam School of Management, he worked as an analyst and account manager at Flossbach von Storch AG. He developed his passion for ETFs while looking for a simple and effective implementation of investment strategies.