Beyond bullion: smarter ways for Canadians to invest in gold – MoneySense

Images of people queuing at gold dealers around the world have become common again, and Canada is no exception. Back in September 2023, Global News reported a “gold rush” at Costco, with one-ounce gold bars selling out within hours of being listed online.

But before you give in to the fear of missing out, it may be worth considering some alternatives to physical gold. Beyond the investment case, there are several practical reasons why owning bullion directly may not be the best approach for many investors.

The case against precious metals

This is not an argument against owning gold directly. I have a few Gold Maple Leaf coins myself and there is almost something primal about holding them. The weight, the shine: it taps into an age-old fascination with the metal that no security can reproduce.

But objectively speaking, buying and storing physical bullion has never been the most seamless or efficient way to gain gold exposure.

The first problem is the bid-ask spread. When you buy from a dealer, you are not trading at the bargain price you see online. Dealers make their money from the spread between what they sell and what they buy back for. For example, as of October 17, Vancouver Bullion & Currency Exchange (VBCE) was listing one-ounce Gold Maple Leaf coins as follows:

• VBCE Buy: $5,893 CAD
• VBCE Sales: $6,068 CAD

That’s a spread of $175, or about 3%. In other words, the gold price must rise at least that much to break even.

Then there is the matter of security. I keep mine in a sturdy, bolt-down, fireproof safe which wasn’t cheap. It is not advisable to hide it under a mattress or bury it in the backyard.

If you decide to keep it at the bank, you will pay annual safety deposit box fees and, most importantly, counterparty risk will be reintroduced. The whole point of owning gold is to cut out the middlemen, but once it’s in a bank vault you no longer have full control over it.

Article continues below advertisement

If your top priority is to physically hold your wealth, to own it, then by all means buy bullion. There’s nothing wrong with that. Just know that it’s not as simple as clicking ‘buy’ on a screen. You have to find a reputable dealer, pay a premium, arrange secure storage and handle logistics that digital gold holders never have to think about. And since gold doesn’t earn any income, all costs – from dealer spreads to markups – come directly from your total return.

If your main reason for owning gold is to diversify a portfolio or participate in the price appreciation – rather than building up your own reserves as a last store of value – it is worth considering other instruments. Exchange-traded funds (ETFs), closed-end funds (CEFs), and gold mining stocks can all provide exposure without the friction, costs, and security concerns associated with physical bullion.

Gold ETFs

Gold exchange-traded funds (ETFs) are open-end funds that correspond directly to custodial, controlled gold reserves. They benefit from the same in-kind creation and redemption structure used by all ETFs, meaning authorized participants can exchange shares for physical gold (and vice versa).

This arbitrage mechanism ensures that the ETF’s market price closely matches its net asset value (NAV), reducing the risk of persistent premiums or discounts.

There are plenty of choices from Canadian issuers. The main things to focus on are low management expense ratios (MERs) and tight bid-ask spreads, as both impact total returns over time. A good example is the BMO Gold Bullion ETF (ZGLD), which has a competitive MER of 0.23% and holds unencumbered 400 ounce gold bars in a local BMO vault that is regularly audited.

For investors looking for a cheap, liquid way to track the spot price of gold, ETFs like these tend to be the most simple and accessible route.

Gold CEFs

Before ETFs dominated the market, closed-end funds were the best security for gold exposure. Unlike ETFs, they do not create or redeem shares on demand.

At the IPO, a CEF is issued with a fixed number of shares, and thereafter trading takes place only among investors in the open market. Therefore, supply and demand can cause the market price to deviate from the NAV, leading to a discount or premium.