To most people in most countries, investing in gold (or other metals) is something they hear about, but not something they actually do.
First, a brief primer on the benefits and drawbacks of investing in gold:
We'll start with the advantages:
a. Unlike Gold has actual intrinsic (real) value. It's used for jewelry, electronics, dental work, industrial processes, investment (of course), and more. Gold is something that people will always want for practical uses, and therefore it will always be possible to sell your gold.
b. Gold is a hedge against inflation. If the Japanese Yen, US Dollar, or any other currency goes down in value, the price of gold will not drop, but in fact go up in relation to that currency. For example, if the Japanese Yen goes down 50% tomorrow, then gold will simply cost 50% more - which is to say that any gold you are holding can be sold for 50% more. Inflation in Japan has been close to zero percent for a long time, but that is starting to change recently.
c. Gold is a hedge against currency exchange risk. This is a variation on a theme, but if a currency drops reletive to other currencies, then you would be better off holding gold instead of that currency. This isn't just academic, as the US Dollar rose significantly against Japanese Yen in the past year.
d. There is a limited supply of gold. Despite the best efforts of alchemists all over the world over the last several hundred years, gold can't be created from anything else in anything anywhere near resembling a cost effective method. That means that we have what we have, and the earth has only a limited supply. Since gold is useful and there is always a demand, the limited supply means that there is a floor on the price of gold. This is extremly unlikely to change, barring the advent of efficient space mining.
There are certain disadvantages, though, with some being country specific:
a. Gold doesn't earn interest, and it doesn't pay dividends. When you buy a loan like a bond, you are funding a company or government, and they will pay you for the privlidge of borrowing your money. Ideally the amount you are paid should outweigh any inflation. Bank accounts, likewise, are in fact just a loan to the bank, so banks will pay you interest as well. When you invest in stock, you are buying part of a business. If the business does well, then the value of the stock will go up according to the company's growth potential or actual growth. Companies like Sony, Toshiba, Hitachi, Google, Fujitsu, Apple, Amazon, and Rakuten earn profit and can pay dividends on a regular basis - whereas gold is just a lump of metal that doesn't "do" anything. It mainly goes up in value only if new uses are found, or the market is fearful. A box of gold bars sitting in your house also doesn't earn rent like a property can.
b. At least in Japan, purchasing gold is not considered to be exchanging money like, say, FX trading. Gold is considered a physical good, and not a monetary instrument. That means that you must pay sales tax when purchasing gold. The sales tax in Japan is currently 10%, so in order to make money by investing in gold, the value would have to go up more than 10% in order for the investor to recover what they paid in sales tax, plus all of the fees involved in buying and selling the gold.
c. Spread and Transaction Fees. Much like with currency exchange, gold dealers will charge a different fee to purchase gold than they sell it at. This difference is called the "spread", and exists to allow the company to make a profit regardless of parket conditions. On top of that, buying and selling gold is also not free. Besides the spread between buy and sell rates that exists, most companies that deal in gold charge transaction fees for buying and selling. This is probably to cover fraud, security, and testing. In general, the smaller quantity of gold you are dealing with, the larger the fees become relative to the transaction amount - though it varies by company.
d. Tax treatment. Even if an investor buys gold, and the price goes up enough to make selling it profitable, a tax will be exacted on that profit by the Government of Japan. The tax rate is lower if you have held the gold for at least five years. This rule is designed to discourage speculation, but it has the side effect that anyone who might need the money soon should avoid buying gold.
e. Security. If you have invested a large amount in physical gold, then you need somewhere to keep it. Just like cash, you can keep it in "the bank", but then you may need to pay management fees to the gold dealer who is holding it.
For the reasons listed above, many Japanese people would prefer to invest in stocks, bonds, property, or just keep cash.
In some countries where the currency is less stable, there are fewer other opportunities for investing, or the tax regime is less strict, gold transactions are much more popular. For example, in China, there are mom & pop shops that deal in "gold rice", which is very small rice sized pieces of gold of well less than a gram that anyone can buy or sell for cash without any ID.
This makes sense, since the Chinese currency is not the most stable, and the same goes for the local stock market. The government restricts transfers of money to other countries, and the huge property bubble that is collapsing as I write this isn't going to encourage people to invest there.
It's also easy to buy the small pieces of gold little by little over time and build up a nice little nest egg.
The situation is similar in many devloping nations, where people might fear hyperinflation or not trust the government or banks.
In Japan, it's not super common for people to invest in gold. There are multiple reasons for this, but probably the main ones are as follows:
0. Lack of need. Japan's currency is relatively stable, people mostly trust the government, and there has been very little inflation over the past two decades. This means that it's very unlikely for people to make their 10% back on the basis of inflation alone. Instead, people who buy gold are more likely to be speculators rather than investors, or the very wealthy.
1. It's difficult to know where to buy gold. You can but it multiple places, even online shopping sites like Amazon or Rakuten, but the prices are always far above the market rate, and it's difficult to know if you might be getting scammed.
2. Budget. The average person might have a few hundred USD to invest at any given moment, but the more famous dealers charge high fees for small transactions, or only deal in large amounts to begin with.
So the question becomes: If you aren't super wealthy, and you are interested in investing in gold in Japan, how can you do it in a cost effective way?
Before getting to the most cost effective way, let's look at some of the less efficient alternatives:
1. Jewely and/or coins - You can purchase jewelry and/or coins at various small brokers and pawn shops in Japan, as well as online. Typically the price you will pay is far above the price per gram for gold you will find listed on Google or Yahoo. This is because the price will be affected by the "quality" of the piece. The beauty, rarity, etc. For example, a famous but rare limited edition coin may sell for much greater than the cost of the actual gold used to make it - in the same way that stamps can go for huge sums of money even though they are just pieces of paper. Another thing to consider is that pure gold is very soft, and so therefore many companies will mix it with other harder metals in order to produce a metal with more ideal characteristics for making jewelry - This is where 18k gold comes from. The result of all of this is that while investing in jewelry and coins might be a fun past-time for some people, it is not really the same thing as investing in gold itself. Further, there is some small amount of worry about whether the items are indeed genuine.
2. Purchasing gold ingots, etc. at small shops or online. You can find gold ingots at some small pawn shops and gold dealers, as well as online, but buying something like 1 gram of gold, you are likely to have to pay twice the official market price. The same thing goes for novelty gold gift cards, etc. For anything purchased from a random seller online, there is a fair chance that you might be getting scammed.
3. Investing in a gold related company - This is something many people have had confusion about. People will invest in (for example) a gold mining company and then be surprised when the investment doesn't turn out how they hoped. Investing in a gold mining company or a gold dealer means you are investing in a company, not in the gold itself. Most of these companies will do well even when the price of gold is lower, but they will not track the performance of gold, and it a company goes bankrupt because of scandal, regulatory compliance issues, or something else, you will lose your investment.
4. "Virtual" gold. This is where you invest in gold online much like you can invest in foreign currencies with FX. There is no specific gold assigned to you, and you can't actually take delivery of the physical metal in most cases. All you can do is sell it. This is probably fine in most cases, but just beware that if the company goes bankrupt, then they may use the gold (if they have it in their posession) to pay off debts to credtors, suppliers, tax liabilities, employees, etc. If you really want to keep gold in case of an economic crash, then you might want to have the ability to covert your holdings into the actual metal you can keep in your house or a safety deposit box.
5. Other financial instruments: ETFs, Futures, or Options. Basically speaking, Futures and Options can be used to hedge financial risk, or for speculation, but are not really suitable for long term investment. ETFs vary widely based on how they are constructed, so research is warranted, but a gold related ETF may just be a basket of stocks for gold related companies.
6. In person through a major gold manufacturers. This is where you take cash and go to one of the three large gold manufacturers in Japan, and walk out with a gold Ingot. This is the most efficient way to buy and sell gold, assuming you are needing to buy or sell large quantities. The three different companies all have different spreads, and charge different fees. Amusingly enough, Costco has a deal with one of the manufacturers, where you can actually walk into Costco in Kawasaki and walk out with gold in your hand.
7. Purchasing gold overseas. You can certainly do this, but you must declare the gold when bringing it into Japan and pay import taxes. If you do somehow sneak it in, it won't help you, because without proof of sales tax, you will need to pay sales tax when selling your gold to any reputable dealer. Gives the word "Sales tax" a new meaning.
And finally...
8. A gold investment plan. These are designed to let you use Dollar Cost Averaging to purchase gold in relatively small amounts over time in an automatic fashion, just like a 401k allows you to invest a small amount with every paycheck.
Before we get into the details, let's talk about the major gold manufacturers in Japan:
1. Mitsubishi Materials - This is part of the Mitsubishi conglomerate, which has related companies ranging from banks to automotive companies. You can think of this as a manufacturing conglomerate and bank that decided to branch out into ingots.
2. Tanaka Kikinzoku - Tanaka is basically a jewelry company that decided to branch out into the ingot business. They do offer an investment plan, and deal in coins as well.
3. Nihon Material - Nihon material is much like Mitsubishi Material in that they are in industrial manufacturer that produces gold plates, film, pellets, etc., for industrial customers, and also happens to offer ingots and an investment plan.
Basically speaking, Mitsubishi is a famous name, and Tanaka is well known, so they both relatively low spreads, but charge very high fees for low quantities. In fact, the last time I checked, Tanaka would charge a huge fee just to hold your gold. This means they are only cost effective for those who have a lot to invest (at once, or monthly). Nihon Material has a slightly higher spread, but it much more affordable in terms of fees.
This reflects the current situation, and may change over time, so please do your research before opening an account.
I'll only go over the Nihon Material plan in detail, since that will be the best option for most people.
Application Process: You need to open an account before you can go anything. The gold industry is slightly behind the times, so you will need to fill out a form online, but they will then mail you an application form to fill in, and send back with copies of your ID and bank account information, along with how much you would like to invest monthly, and into which metals. You can invest as little as 3,000 JPY (Around $30) per month, making this a plan truly targeted at all people.
Once they have received your information and set up your account, they will send you another envelope with your login account and password information. You can check your current invested and uninvested balance, and change your monthly contribution amounts, as well as request to buy, sell, or withdraw gold (more on that later).
Let's say that you have some extra money burning a hole in your pocket - you can log in and purchase additional gold beyond your normal monthly contribution.
Likewise, if gold is super high at the moment and you feel like you want to sell some of it, you can - just beware, buying and selling manually somewhat defeats the purpose of automatic contributions and Dollar (or Yen) Cost Averaging (DCA).
The way the account works in practice is that every month on the same day, Nihon Material will withdraw the elected amount of money via direct debit from your bank account, and that money will go into your investment account and sit there as uninvested cash until the following month.
When the next month rolls around, they will invest a little of the money each day, so that by the end of that month, they have invested all of it. Since they only buy on business days, and the number of business days varies per month, and so does the purchase amount per day.
For example, if you were investing 10,000 JPY (~$100 USD), then the daily investment this month would be 454 JPY per day. If this month had more business days, then the amount invested per day would be less. Likewise in a month with a lot of public holidays, the amount invested per business day will be more. The important thing to remember is that the amount you invest per month is fixed, and they automatically deduct the cash and do the work of splitting it up into multiple daily transactions.
The amount of gold you can actually buy for that amount will also vary by day. This may cound confusing, so let's look at an example:
At today's rate, that 454 JPY would buy 0.04954 grams of gold. That is close to 0.05 grams of gold, which means after 10 business days you would have 0.5 grams. In a 20 business day month, you would get 1 gram. This month has 22 business days, so it would work out to about 1.1 grams. A gram is currently roughly a bit over 9,000 JPY so it roughly works out to something a bit more than 9900 JPY worth of gold, which sounds correct given our 10,000 JPY investment contribution example above.
It's nice that they spli the purchase by day to give you the best average price, since the price of gold can sometimes change a lot in the course of a month. It's even nicer that they do this without taking transaction fees every time since there are so many transactions!
Everything that I have talked about up until now, you can also do with many online investment accounts, such as for example Crowd Bank. Crowd bank will also let you set up an investment account with direct debit, and they will also split the amount up by day and automatically invest every day so you get the best average price. Likewise, you can also do spot purchases and sales in addition to regular contributions.
The major difference is this:
With gold manufacturers (including Nihon Material), you can actually withdraw the gold! This means you can have the advantages of investing little by little with low fees, and also physically owning gold!
Basically, the way this works is that you just apply to receive a gold bar online, and they will send it to you.
You can request 5g, 10g, 100g, with various options all the way up to 1kg.
The 100g and up bars have no "bar fee", whereas the smaller bars do have them. Given that the fees on something like 5g would be very significant in relation to the value, I would say that you should wait as long as you can before requesting a bar, with 100g being the best obvious choice. If you are only able to invest a small amount, and a 100g bar would take forever, then perhaps 50g is not a bad option.
Warning: You probably want to avoid the larger bars like 1kg even if you are super wealthy. Why? Well, for tax reasons.
As mentioned above, any gold you hold for more than 5 years can be sold with an advantagous tax disposition. Besides that, profits below a certain amount can basically be ignored. Each gold bar comes with a sales tax receipt and a serial number. You can use these to prove the date of purchase, and that you have paid sales tax (otherwise you would have to pay it again!). If you have a bunch of 100g bars, you could sell off a few every year to pay for your living expenses, starting with the older ones.
If you have a 1kg bar, then you have to sell the whole thing! The bar may be less than 5 years old, and also it may have generates a huge profit or loss. If it's generates a loss, then you probably don't want to sell it, but you might need to if you really need the cash. On the other hand, if it's generated a huge profit, then you will immediately blow past the tax deductable amount of profit.
You can get Nihon Material (or one of the other companies) to convert a 1kg bar into 100g bars, for example, but all of the companies charge a huge fee for this because they can. Why can't you just sell your 1kg bar and buy 10 bars at 100g each? Well, because then you are selling, and buying, so you have to pay the taxes mentioned above, plus sales tax again. Ouch! So as long as the companies keep their re-bar fees lower than that, then people will pay.
So... avoid the smallest bars for fee efficiency reasons, and avoid the largest bars for tax efficiency reasons.
I have left Tanaka and Mitsubishi out of the discussion because they have higher fees in general for smaller bars, so the extent that it seems like they are actively trying to discourage anyone who is not wealthy from investing. Nihon Material offers you the chance to get your hands on real gold, while having a reasonable pricing structure.
With the JPY falling against the dollar, inflation on the rise in Japan, gold rising to an all time high, and the instability in the financial markets as well as political instability recently, investing in gold might make sense to a lot of people.
Investing a huge amount of money at once while the prices is at historical highs hardly makes any sense, but neither does waiting - so an investment account with cost averaging is the perfect solution. Whether you have $30 per month or $1,000 per month to invest, Nihon Material has you covered. If you have more than that, then you might get a better deal with one of the other companies, since the spread potentially becomes a more significant factor vs. the fixed fees.
