There’s a lot of buzz about gold … but be wary.

With world financial markets in turmoil, gold seems an attractive investment – especially to inexperienced investors. But is it that simple?

The current price of gold at $NZ2260 an ounce is a new financial bubble. Just 2 years ago it was $NZ1419 – and 10 years ago in November 2001 it was $663 an ounce. But a bubble's life-cycle is hard to predict. And as gold has risen in value, so has the market been flooded with gold dealers, most of them internet based. So making a profit on gold, as with any commodity, depends on monitoring the market, research and luck.

You still need to follow the “golden” rule of investing and diversify. A basket full of golden eggs exposes you to serious risk if that market goes bust, but having some gold as part of a diversified portfolio may work as a hedge against volatile currencies.

There are a number of ways you can invest in gold.

Physical gold

Bullion refers to gold in bulk form, such as bars, ingots and coins. You can buy from a gold dealer, either from their premises or online. But you will have extra costs such as secure transportation, storage and insurance. Gold and other precious metals trade at a premium to the market price – this discount can increase through high demand, making physical gold more expensive to buy.

You can also buy from a bullion brokerage, which transports the gold to a vault.

With an allocated account, bars and/or coins are identifiably yours through numbers and hallmarks. You pay for storage and insurance. The gold will belong to you even if the custodian (the company that's looking after it for you) runs into trouble.

Unallocated accounts sell you a set quantity of gold stored in a vault, but you don't own identifiable bars and the gold can be lent out. You don't need to pay for insurance or storage, so costs are lower. But if the company goes bust you will be a creditor and possibly unable to recover any of your investment. Two local companies offer bullion accounts: you can have an allocated gold account with the NZ Mint, and both kinds of accounts with NZ Gold Merchants.

"Paper" gold

Another option is to invest in companies that mine the stuff. If the price of gold rises, so do mining companies' profits and their share price. Like all investments you should research a company before you invest in it: look at the quality of management (including their track record), its past market performance, the reserves it has available, and whether it is producing gold or just exploring for it.

Our view

• Remember gold is a commodity and can have sudden rises and falls.
• It doesn’t earn interest, unlike many other investments. Plus you may have to pay for insurance and storage.
• As with stocks and bonds, if you buy gold as a speculative investment you’re likely to pay tax on it when you sell. However, if you buy the gold as a holding investment you won’t pay tax unless there’s a change to the law.
• Gold of purity .9999 is exempt from GST under our tax laws.

More information

• Gold price: www.goldprice.org 

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