A common question asked by investing beginner is ‘What is the best way to hold gold?’. Such a question is far too wide and vague to give a proper response. The best way to hold commodities such as gold will depend on what matters most to you; security & capital protection, efficiency of returns, or liquidity. With different priorities, the optimal commodity investing method could differ dramatically!

Many investors are drawn to the allure of gold because of the ‘security’ it gives them. Commodities, unlike the Fiat currencies such as United States Dollars and the Euro, have a substantial inherent value. Unlike companies, gold doesn’t produce an income, but its desirability and industrial uses gives it a far greater internal value than a paper note with a picture of the British Queen on!

If investors are drawn to commodities for this reason, then it is likely that security is their number one priority. These investors will forgive a more expensive investing method if it allows them to feel more secure and gain more comfort from their commodities holding.

In this article, I will outline 5 key methods of holding gold, and suggest which two are the most secure, for all the paranoid gold bugs out there!

Derivatives. Investors can purchase futures contracts which entitled them to delivery of a certain quantity of gold at a certain date for a certain price in the future. With this contract in possession, it means if the price of gold rises as the exercise date approaches, the future contract represents an opportunity to get a bargain. And as such, the contract itself will appreciate in value (to represent the value of the bargain purchase it gives the owner). In financial terms, this is equivalent to holding gold during the contract period.

Safety: Derivatives rely on the counterparty being solvent enough to give delivery of the gold (or monetary equivalent) at the end of the period. Derivatives counterparties hold collateral to set against potential future liabilities, but this isn’t always sufficient.

Note: Investors unsure of how to invest in commodities sometimes entrust their funds to ‘synthetic gold ETFs’, which purchase the contracts above to replicate a holding in gold, therefore these carry similar safety levels.

Physically Holding Gold. Gold can be purchased as bullion coins or bullion bars or various sizes. Safety: Whilst physically taking delivery of gold poses a risk of theft, sufficient insurance will theoretically cover you against any losses of gold due to fire, theft and flood etc. This makes it one of the safest methods of holding gold.

Gold Certificates. Not available from the US government, but available worldwide from other government-backed schemes, such as the Perth Mint of Australia. Gold certificates give investors the right to receive the monetary value of the amount of gold on the certificate upon encashment. Whilst these are usually backed by gold – the certificates themselves are usually ‘unallocated’, meaning a specific block of gold isn’t held in a vault waiting to pay that specific certificate. Instead, certificates just represent floating debt of the issuer.

Safety: This means that the creditworthiness of the certificate issuer is paramount, and you carry out plenty of research before buying.

Physical Gold Trusts & ETFs. There are some very large funds which accept relatively small investor deposits and allow you to own an (unallocated) share of gold that a particular fund holds. Unlike gold certificates, the amount of gold held by a unit trust usually matches the amount of gold owed to investors. In other words, if a gold trust were to be liquidated, every investor should get their fair share.

Safety: Whilst this physical structure appears safe, some ETFs are structured in a complicated fashion, and lend out their gold assets to other parties in return for rent to boost their income. This introduces the same type of counterparty risk as derivatives. Make sure you know what your ETF is doing with its gold.

Owning Shares of Gold Miners. When the price of gold rises, all else being equals, so do the share prices of gold miners, as they will now be able to sell their stock at higher margins! Therefore owning equities in the mining sector can provide interesting exposure to gold prices.

Safety: However, when you purchase a share, you also take on the risks of the whole gold company, which will among other risks include; risk of mismanagement, risk of political intervention and risk of business errors. Therefore when you buy a share of a gold company, you’re getting a lot more risk than you might have initially thought!