How to Invest in Gold in Canada

Gold holds a unique position in the financial ecosystem as an asset class that continues to be recognized as a store of value and used as an inflation hedge.

The COVID-related sovereign debt binge and sustained lower interest rate environments have created a subset of global macro investors allocating capital towards gold and betting on higher inflation.

Heightened geopolitical volatility also adds to the appeal of safe-haven assets such as gold.

Investors that are seeking to begin investing in gold can express such an opinion in the following ways: 

The spot price of one Gold ounce in USD is $2329.45 as of 2024-06-19 05:10:00

1. Owning Physical Gold

Buying physical gold is certainly the most direct way to get exposure to the spot gold price and its appreciation, but it involves making arrangements for secure storage.

It is also important to find bullion dealers that offer reasonable prices while trading these physical gold positions and liquidating them for cash.

Bullion dealers often markup prices and may not offer the best executable price when liquidating physical gold.

Further, it is essential to have secure storage facilities to prevent theft.

Did You Know?

The largest gold nugget called the “Welcome Stranger” was discovered in Moliagul, Australia weighing as much as 2,520 ounces.

2. Buying Physical Gold ETFs

Physical Gold ETFs are great tools to own physical gold with limited operational involvement in storing and maintaining physical stock of the commodity.

Such funds often have world-class infrastructure that can operate at scale and minimize costs for investors.

ETFs holding physical gold and not futures provide price exposure directly as they own the underlying commodity and will participate in gold price appreciation.

However, such investments will have an embedded cost of carry and will only produce returns if the price of gold appreciates.

Such an investment represents a safe haven position and will benefit in periods of chaos and market volatility.

3. Investing in Gold Producer Stocks

While owning physical gold is the best way to get commodity exposure, investing in stocks of gold producing companies can be a great alternative as such equities benefit from price appreciation and can increase dividends to investors which are absent when holding physical commodities.

Gold acts as an inflationary hedge and such producers will benefit immensely as they can extract greater revenue from the same output.

Gold producers can take advantage of bull markets in the underlying commodity as they are best positioned to generate higher revenues and increased cash flow prospects from their gold reserves and increased production levels.

However, necessary due diligence is needed to ensure that such companies have appropriate licenses and are compliant with all regulations to engage in gold mining.

Despite what conventional wisdom would suggest, gold producers may be locked into long term hedging programs capping the prices they’d receive for a certain period minimizing their ability to participate meaningfully in any price appreciation.

4. Gold Futures

Gold futures are instruments representing 100 troy ounces per contract that are traded nearly 24×7 with a reasonable amount of liquidity.

Margin accounts are necessary to trade futures and since these products employ leverage, it is important to size positions appropriately to avoid taking larger-than-necessary positions.

Positions are marked to market and it is necessary to meet maintenance margin requirements; otherwise, the broker will issue margin calls/liquidate positions until margin requirements are satisfied.

Gold futures are an extremely liquid, direct way to own gold with leverage.

Gold futures can be settled financially or be taken into expiry to settle physically at the exchange’s specified delivery point.

Gold futures contain risk and should be used by sophisticated investors as losses can exceed initial investments in volatile price moves.

5. Other Gold ETFs

With the proliferation of various exchange-traded products, there are a large number of ETFs that provide exposure to gold through futures or represent an index of gold miners and producers.

Invesco DB Gold Fund is a good example of an ETF that deploys gold futures to replicate returns of spot gold and VanEck Gold Miners’ ETF GDX represents several gold producers.

Both methods can provide exposure to the underlying commodity but will have their nuances and may not move in lockstep with the spot price of gold.

Gold futures need to be rolled as these products are settled financially meaning that the cost of the roll is incorporated into the fees of the ETF.

By investing in an ETF, investors can achieve diversification as ETFs are a great way for investors that don’t want to over-allocate to a particular position and can own several different producers on a diversified basis in the case of a gold miners’ ETF index.

On the other hand, gold mining companies are driven by factors such as operational efficiency, grade of gold produced and mining permits or regulatory environment.

As a result, while there are numerous ways to express a long gold view using exchange-traded funds, it is important to have a firm grasp on what the product can and cannot do to tether expectations to reality and optimize return on investment. 

Gold ETFs holding gold futures will lose out every time the fund rolls the contracts, thereby not enabling investors to participate fully in the price appreciation of the underlying price of spot gold.

Potential Risks of Investing in Gold

Investors aiming to get exposure to gold can encounter a variety of risks depending on the instrument of choice to express their view.

These risks vary depending on the vehicle used to invest in gold.

Below are a few of the risk considerations that should be kept in mind while investing in gold.

Storage Risk

When holding physical gold in bars or bullion form, it becomes extremely important to have a secure storage facility to prevent any chances of theft.

Such expenses should be factored into the cost of acquisition and kept in mind while calculating the return on investment.

Price Volatility

Gold spot price is driven by supply and demand fundamentals, global macro events and random market volatility in the short term, which is similar for all precious metals including silver and platinum.

Such price fluctuations can impact the day-to–day P&L of holding such an investment and investors need to be comfortable with the volatility associated with investing in commodities.

Market Risks

Investing in equities of gold miners entails a certain market exposure and any commodity producer is closely linked with the economic business cycle affecting their stock price.

It is important to understand this risk factor while investing in commodity miners and how to hedge such market exposure in case the investor anticipates headwinds. 

Acquiring Physical Gold

An investor wishing to own physical gold needs to be certain of the quality of the commodity being bought and must procure the metal from an authentic verified source.

Such investments are priced similarly with different precious metal dealers and any bullion dealer offering a significant discount might be too good to be true.

As such, investors should exercise caution while having a healthy sense of skepticism. 

Is Gold a Good Investment?

Gold has several properties making it a good hedge against inflation and providing investors with a source of safety in risk-off market scenarios.

Further, despite limited real-world applications, gold has stood the test of time emerging as the pre-eminent store of value.

Overall, investors should allocate a small percentage of their portfolio towards precious metals to de-risk their holdings against market sell-offs and a surge in inflation expectations.

One ounce gold bullion bars

Frequently Asked Questions

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  • What is the best way to invest in gold?
Sid Mohapatra

Sid Mohapatra is an energy trader based out of Toronto working in power and natural gas trading. Prior to working in commodities, Sid worked at a top Canadian bank’s fixed income and derivatives business. He possesses strong fundamentals in asset allocation, global macro thematic investing and physical commodities.

As a graduate of McMaster University, Sid specialized in Finance and has taught numerous sessions on Investing, Financial Securities and Trading courses. He led and managed the Horizon’s Trading Center at McMaster University.

Sid’s unique experience brings a breadth of institutional knowledge to the retail investing universe. He covers equity derivatives, structured credit instruments and tax harvesting techniques to help Canadians make better financial decisions in the ever-changing landscape of financial markets and investing.