Gold and Commodities NZ
A share pays dividends. A bond pays interest. A rental property pays rent. Gold pays nothing, ever, and neither does any other commodity.
That is not a criticism, it is the defining property, and everything else about holding it follows from it. Your entire return is the difference between what you paid and what someone else will later pay, minus the cost of holding it in between.
The three things to remember
The whole return is price movement, since there is no income. Holding it costs money in storage and insurance. And fine metal is GST exempt here, while collectible coins are not.
Why no cash flow changes the analysis
With an income-producing asset you can ask what it earns and whether the price is reasonable against that. With gold there is no such anchor. There is no yield to compare, no earnings to value against, and no level at which it is objectively cheap or dear.
So the honest description of a gold position is a bet that sentiment will be more favourable later than it is now. That can be a perfectly reasonable thing to hold a small amount for. It is not an investment in the sense that a share in a profitable business is, and the difference is worth being clear about with yourself before buying.
Storage and insurance are real and recurring, whether in a vault, a safe deposit box or your own home with the insurance implications that carries. On a small holding the annual cost can be a meaningful percentage. So gold does not merely fail to pay you, it charges you, and the price has to rise by that amount each year before you are level.
The GST point that is specific to New Zealand
This one genuinely matters and is often got wrong. The supply of fine metal is an exempt supply under the GST Act. Fine metal means gold of at least 99.5 percent purity, silver of at least 99.9 percent, and platinum of at least 99 percent.
| What you buy | GST position |
|---|---|
| Investment grade gold bullion at 99.5 percent or above | Exempt supply |
| Silver at 99.9 percent or above | Exempt supply |
| Platinum at 99 percent or above | Exempt supply |
| Collectible or numismatic coins | Not fine metal, so GST applies |
| Jewellery, whatever its gold content | GST applies |
The practical consequence is that a collectible coin sold on its rarity carries GST that a plain bullion bar of the same metal content does not. Anyone buying for the metal rather than for the collecting should be buying the form that is exempt.
The FIF trap on foreign gold funds
Many people hold gold through an exchange traded fund rather than as metal, which avoids the storage problem entirely. It introduces a different one.
A foreign-domiciled fund is a foreign investment, and New Zealand's foreign investment fund rules generally apply to a resident holding foreign shares that cost more than $50,000. Under those rules you can be taxed on a deemed return whether or not you sold anything and whether or not the holding rose. Someone who bought gold expecting no tax until sale can find otherwise.
Physical metal, a New Zealand domiciled fund, a foreign domiciled fund and a derivative position can all give you exposure to the same gold price and be taxed quite differently. Get the structure right before you buy, with an accountant, because unwinding a position for tax reasons realises whatever the price happens to be that day.
The inflation hedge claim
Gold is most often bought on the argument that it protects against inflation. The honest position is that it has done so over very long periods and has failed to over many shorter ones, including stretches long enough to matter to an individual investor.
Anyone who bought at a peak has waited a long time to recover in real terms. That is not an argument against holding any, and it is an argument against treating it as a reliable hedge over the period a person actually invests across. If protection against inflation is the objective, an inflation-indexed bond does the job directly and pays you while it does.
Other commodities are harder again
| Commodity route | The complication |
|---|---|
| Physical oil, grain or metals | Storage is impractical for an individual |
| Futures contracts | Contracts expire and must be rolled, which has a cost |
| Commodity funds | Usually hold futures, so they inherit the roll cost |
| Mining and energy shares | You get company risk as well as commodity risk |
The roll cost is the one that surprises people. A fund tracking an oil price does not hold oil, it holds contracts it must continually replace, and depending on the shape of the futures market that replacement can steadily erode returns even while the spot price is flat. A commodity fund can lose money over a period when the commodity itself did not.
If you are going to hold some
Some dealers offer to store your gold, and there is a critical distinction between allocated storage, where specific bars are yours, and unallocated, where you hold a claim against the dealer's pool. If that business fails, an allocated holding is your property and an unallocated one makes you a creditor. Ask which it is, get it in writing, and prefer arrangements where you could take physical delivery on request.
What this guide does not cover
Tax treatment depends on your circumstances, your total foreign holdings and the structure used, and the FIF rules have detail and exemptions well beyond this page. Derivative positions, mining equities and the currency effect of holding a US dollar priced asset from New Zealand each deserve their own analysis. This is general information rather than tax or financial advice, and an accountant should confirm the structure before you invest.
Related guides and tools
- Inflation adjusted thinking guide, for the claim gold is most often bought on.
- Investment scams guide, for the bullion offers that never deliver metal.
- Term deposits guide, for the alternative that does produce cash flow.
- Australian shares guide, for the other cross-border holding with its own rules.
Test Your Knowledge
Ten questions on holding gold and commodities from New Zealand.
Sources: the Goods and Services Tax Act 1985 treatment of fine metal, being gold of at least 99.5 percent purity, silver of at least 99.9 percent and platinum of at least 99 percent; and the foreign investment fund rules, which generally apply to New Zealand residents holding foreign shares costing more than $50,000. Tax treatment depends on your own circumstances and on how an investment is structured, so take advice from an accountant before investing. This is general information rather than tax or financial advice.
Related tools and guides
- Gold investment calculator: the value and return of a holding over time.
- Portfolio rebalance calculator: keep a commodity sleeve at its intended weight.