How to invest in commodities such as gold and why

For decades it has been a practice among investors to “pour” a certain amount of their wealth in physical commodities such as precious metals, and more specifically gold. The main reason for one to diversify his/her portfolio of investments, by including gold among other assets in possession, is to minimize risk. The concept of risk is multi-dimensional in its nature, as it could refer to political instability, inflation risk, currency risk etc. Investing in physical commodities such as gold tends to be especially popular in times of regional or global macroeconomic and political uncertainty, acts of war or even force majeure events, because this precious metal preserves “value” in time and also serves as an appropriate “instrument” for investors to safeguard their wealth against considerably high levels of inflation (hyperinflation). What should be noted, however, is that investing in jewelry (rings, necklaces and so on), which is made of gold, does not equal investing in gold!

Gold is usually measured in troy ounces (oz t), with 1 troy ounce being equal to 31.10 grams of gold mass. Its value (price) is usually denominated in US Dollars and as such there is an almost perfect negative correlation between the value of the US Dollar and the price of gold. On the commodity exchanges worldwide the so called “gold for investment purposes” is usually traded. Such a transaction is VAT free, while no duties, excises or other taxes are levied on it.

Gold for investment purposes can be acquired: 1) by purchasing physical gold (bullion) bars or gold (bullion) coins and 2) by purchasing “virtual gold”, or operating through a specialized account at a Brokerage company. In this case the investor does not own the precious metal physically.

In case one chooses to acquire physical bullion bars or bullion coins, he/she is then able to sell them practically at any time. However, the price he/she needs to pay for their purchase will usually be a bit higher (at least 2-3%) than the corresponding price quote at a commodity exchange. However, owning physical gold is associated with a certain risk of damage, therefore, it should be placed at a well-secured save-deposit box or vault. Investment in bullion coins has become the most popular way to acquire gold. If a certain coin tends to be among the so called “renowned”, or well recognized items, then it should be no problem for its owner to sell it at any location on the globe. Bullion coins usually have a guaranteed gold content by the state, which issues them. Gold content is usually measured in “carats”, with 24 carats being the highest content. The value (price) of each bullion coin does not equal the value marked on its “face”. The real value of a bullion coin is in tight relation with its gold content and this value will change in accordance with the price quote on a particular exchange. Gold for investment purposes is always accompanied by a “certificate”, which states the location of its origin. Bullion coins of lower weight can, at times, be worth more than larger coins. Coins weighing 0.25 of an ounce or 0.50 of an ounce tend to be a top preference. 2 coins weighing 0.50 of an ounce each could be valued much higher than a single coin weighing 1 ounce.

A bullion bar represents a gold ingot, manufactured in unison with specific standards regarding its weight and gold content. Only bars, which are manufactured by refineries that are London Metal Exchange members, can be found at the gold market.

When it comes to acquiring “virtual gold”, an investor is able to purchase a specific quantity of gold, for example 450 grams. In this case, he/she is able to make the purchase at a price much closer to the corresponding quote on a particular exchange. Gold ownership is only “on paper”, while the metal is being physically kept at a vault. Another moment to note is that gold can be traded in online environment via a specific account at a Brokerage firm. When the investor has an interest to sell the gold he/she acquired, this can be done by using several portions of the entire quantity (not necessarily selling the entire quantity on a single occasion). Since the gold acquired is virtual, there will be no concerns regarding its safe-keeping.

If one intends to acquire gold, while residing in Bulgaria, he/she is able to do so: 1) by purchasing Bulgarian and other bullion coins from the Bulgarian National Bank, 2) by purchasing well recognized foreign bullion coins from First Investment Bank (Fibank) and 3) by purchasing bullion coins from Mint Ltd, which is located in the National Art Gallery building.