Beyond bullion: Smarter ways for Canadians to invest in gold

Images of people lining up at gold dealers around the world have become common again, and Canada is no exception. As early as September 2023, Global News reported a “gold rush” at Costco, where one-ounce gold bars were selling out within hours of being listed online.

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

The case against bullion

This isn’t an argument against owning gold directly. I have a few Gold Maple Leaf coins myself and there’s something almost primal about holding them. The weight, the shine—it taps into an ancient fascination with the metal that no security can replicate.

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

The first issue is the bid-ask spread. When you buy from a dealer, you’re not transacting at the spot price you see quoted online. Dealers make their money on the spread between what they sell at and what they’ll buy back for. As of October 17, for example, Vancouver Bullion & Currency Exchange (VBCE) listed one-ounce Gold Maple Leaf coins as follows:

VBCE Buy: $5,893 CAD

VBCE Sell: $6,068 CAD

That’s a spread of $175, or about 3%. In other words, gold prices have to rise by at least that much just for you to break even.

Then there’s the matter of security. I keep mine in a heavy-duty, bolted-down, fireproof safe that wasn’t cheap. Hiding it under a mattress or burying it in the backyard isn’t advisable.

If you decide to store it at the bank, you’ll pay annual fees for a safety deposit box and, more importantly, reintroduce counterparty risk. The whole point of owning gold is to remove intermediaries, but as soon as it’s sitting in a bank vault, it’s no longer fully in your control.

If your top priority is to physically hold your wealth, to have it in your possession, then by all means, buy bullion. There’s nothing wrong with that. Just know it’s not as easy 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 produces no income, every expense—from dealer spreads to storage—comes directly out of your total return.

If your main reason for owning gold is to diversify a portfolio or participate in its price rally—rather than to establish self-custodied reserves as a last-ditch store of value—it’s worth considering other vehicles. Exchange-traded funds (ETFs), closed-end funds (CEFs), and gold mining equities can all provide exposure without the friction, cost, and security headaches of physical bullion.

Gold ETFs

Gold exchange-traded funds (ETFs) are open-ended funds that correspond directly to custodied, audited reserves of gold. 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 helps keep the ETF’s market price closely aligned with 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, since both affect total return over time. A good example is the BMO Gold Bullion ETF (ZGLD), which carries a competitive 0.23% MER and holds unencumbered, 400-ounce gold bars in a local BMO vault that’s regularly audited. 

For investors looking for a low-cost, liquid way to track gold’s spot price, ETFs like this tend to be the most straightforward and accessible route.

Gold CEFs

Before ETFs dominated the market, closed-end funds were the go-to security for gold exposure. Unlike ETFs, they don’t create or redeem shares on demand.

A CEF is issued with a fixed number of shares at its IPO, and afterward, trading takes place only among investors in the open market. Because of that, supply and demand can cause the market price to deviate from NAV, leading to either a discount or premium.