For those of us who have held gold for decades and have therefore had the advantage of watching the gold market develop with a seemingly endless number of permutations of ownership, the answer might seem obvious. However, his question is a reminder that there exists a great variance in the level of knowledge as to what, on the surface, seems to be a simple act – buying gold.

To those who are new to gold ownership (and I believe their numbers will soon be increasing exponentially), it would seem perfectly reasonable that gold could be purchased as simply as buying any commodity. If, for example, someone were to want to buy an apple, he would simply go to the grocery store and pay the price marked on the apple bin. If, however, he wanted quite a lot of apples, he might go to several stores and have a look at the prices marked, then choose the lowest price. Looked at from this perspective, it seems perfectly reasonable that the purchase of gold would not be significantly more complicated.

However, our local grocer, unfortunately, does not have bins full of Krugerrands and Maple Leafs with prices marked above them. While we sometimes have the opportunity to buy gold from private parties or coin dealers in which a selling price is stated up front, most gold purchases are done through middlemen (banks, investment funds, etc.) who do not actually own the gold they are selling. The middlemen, understandably, are forever seeking ways to maximise their profits on the transactions, and this has led to the number of permutations that exist today.

Risky Business

One of the most risky of these, to my mind, is the Exchange Traded Funds (ETFs), investment funds traded on stock exchanges. Not surprisingly, this method of purchase is the favourite of stock brokers. It is an easy sell for them, since it is structured the way stocks are structured. It therefore seems safe to stock investors. It is not.

With most stocks, the buyer owns a portion of the company, rather than a specific number of the products that the company deals in. When investing in a fund, the fund generally owns a portion of the companies it has invested in. With buying gold through ETFs, however, the buyer is under the impression that he has bought the actual product, when he has not. In many cases, the fund does not have possession of the gold. Therefore, the buyer has bought the "promise" of future ownership.

The first step for many first-time buyers is to say to himself, "I don't know much about this gold craze, but I'm getting worried, and I'm beginning to believe that gold can give me a measure of security. I'll go to my broker and ask him what I should do." When the broker gives him the "inside scoop" on the best ETF, the buyer may say, "What do I do with the gold? How do I store it?" He is likely to be advised, "Don't worry, the fund handles all of that. You won't actually have to deal with the physical gold at all. You just benefit as it goes up in value."