Investing in gold is not as easy as it sounds. That’s because, while everyone has easy access to buying stocks, bonds and mutual funds, investing in gold is not regulated by the same authority. And there are many ways to acquire gold, or at least reap the benefits of gold investing. For example, you never see a commercial telling you to buy Apple stock, but you do see a lot of commercials offering to sell you gold. Because of the way gold is often sold, you’ll need to get a good understanding of how gold works before you invest. Following is a background offering reasons to invest and how to go about it.
Why Gold is Different than Other Investments
First of all, if you do research into whether or not you should get involved with gold, you’ll get very divided answers. That’s because gold has a reputation that is not favorable with investors. There are several reasons for this.
First, gold has a long history of greed and excess. It is an emotional metal that brings out feeling in investors. Good investors try not to use feelings when making investment choices. Think back to the gold rush of the 1840s and you can see the corruption and greed that was widespread as a result of gold. Of course, many good things did come out of that rush, such as the state of California and eventually an intercontinental railroad system.
Second, gold is a metal, and a metal is a commodity. Buying a piece of gold is like buying a vacant piece of land and waiting for the price to go up. However, with a piece of land you are counting on the value of the location to improve. When it comes to gold, one piece of gold is the same as every other piece. There is no business involved in buying a piece of gold, and therefore it is a different kind of investing then investing in stocks. Some call this speculation.
Third, when you buy gold you have to physically take possession and store it. The shipping, storing and insurance costs of holding gold are very large, and recur over the entire length of ownership. Holding a few gold coins is easy, but if you invest a large amount of money in gold it is much more expensive. Gold is heavy, awkward to store, and comes in all shapes and sizes.
Fourth, the purchase and sale price, or bid and ask spread for gold is very high. If you were to buy and sell a stock in a few minutes, the bid/ask spread that you pay would likely be only a few cents, and is usually a fraction of a percent. However, if you were to buy a gold coin today you would have to pay retail price. If you wanted to sell it right away, you would likely only be able to get wholesale price. The difference between the retail and wholesale price, known as the bid ask spread, could be as high as 20% on gold. That means that you often need a significant price change in the underlying gold value to make a profit.
And finally, it is hard to find access to gold in bulk. While you can buy lots of gold related stocks and funds, buying gold itself is a little tricky. The majority of gold that is purchased by regular gold investors is purchased as gold coins. Gold coins carry an extra price because they are already stamped and formed into a collectable shape. That means you need to pay extra for the retail value of the coin itself, as well as help cover the profit and marketing costs of the company selling it. There are other ways to buy gold, which we’ll cover below, but now let’s look at the top reasons that people invest in gold.
Top Reasons to Invest in Gold
So after listing all of the differences between gold and other common investments such as stocks and bonds, you’re probably wondering why anyone would go through the bother of investing in gold. Well, here are some of the top reasons that people are investing in gold.
First, gold offers a hedge against inflation. One of the biggest reasons investors like gold is because of this hedge against inflation. For example, if you put $1,000 worth of gold in your safe, and a $1,000 worth of cash next to it. What will they both be worth in twenty years? The cash will be worth $1,000. The gold? According to history, it could be worth between $1,000 and $10,000. The higher inflation goes, the faster the price of gold rises. That’s because people purposely buy gold when inflation is high to protect themselves. This is self fulfilling in that it further pushes up the price of gold and all but ensures that it keeps pace with inflation.
A second reason that gold is a good investment is because of the stability. While this isn’t usually an issue in developed countries, small countries often have inflationary problems or political shifts that can all but wipe out the value of their currency. While the value of stocks, currency and other volatile country specific assets can swing wildly, gold is accepted worldwide and is a much more stable investment. When people start to fear than an economic collapse is coming, they often withdraw their money from the banks and stocks and purchase gold. The somewhat stable value that it offers makes it a good reason to invest in gold.
A third reason to invest in gold is because it is often a hedge against the rest of the stock market. While you can never predict the course of gold or the stock market, the paths of the two investments are often negatively correlated. That means that while one goes up, the other goes down. This is especially true during large drops in the stock market. That’s because the fear and greed that result from a bad economy and a faltering stock market. People downright panic when markets collapse. This causes many investors to pull all of their money out of the stock market and to look for safe investments. Gold is often considered the investment of choice in these situations. In fact, when the markets have a long slow rise, gold typically follows, but when the markets dive, gold typically rises quite quickly. Investing in gold as a hedge against a declining market is not a bad bet, especially during volatile times.
A fourth reason is that many people buy gold because they don’t trust the government, Wall Street or their banks. While this isn’t really a great reason to buy gold, it is definitely one of the reasons that people buy gold.
A fifth reason is simply to speculate. While this is also not a good reason to buy gold, if you are going to speculate on stocks or real estate anyway, why not speculate on gold? While we would never recommend this, it appears that if you look at the long term prices of gold, they often go in long periods of growth, followed by long periods of moving sideways or not at all. That means that you may be able to ride the momentum of rising or falling gold prices to make money.
So now that you know some of the top reasons that people invest in gold, let’s find out how to actually buy gold for yourself.
How to Invest in Gold Yourself
There are several ways that one can invest in gold. A few of them involve taking possession of the gold and others involve buying securities that are related to gold.
1. Gold Coins. The most common way that average people buy gold is to buy gold coins. Some of the most common coins that are bought and sold are the American Buffalos, American Eagles, Canadian Maple Leafs, Vienna Philharmonics and South African Krugerrands. These coins can be purchased new (if available) or used through thousands of different marketplaces. There are thousands of websites that make a market in these gold coins. You can also find them on such places as pawn shops, ebay or even craigslist, but the most common place to hear about gold like this for sale is on TV commercials. Before you buy any gold coins, make sure you do your research and ensure that the price you are paying is fair. Coins have a large markup in cost over the raw price of gold. That’s because of all the work that it takes to melt gold, stamp the coins, and market and sell the coins. Furhtermore, anything that is considered a collectible usually carries a higher price than the raw material costs.
2. Gold Bullion and Bars. For investors looking to buy a little more gold than a coin offers, there are many companies that sell gold bullion. Gold bullion is typically gold acquired by a company, melted down, purified, and then classified into the proper percentage. For example, you can buy .995 purity, which means that the bullion you are buying is at least 99.5% pure gold. While bullion typically refers to melted gold, it is typically sold in bars. Bullion bars are not always the large bars like you see in Fort Knox or in bank heist movies, but are typically rather small. They start at a standard size of 1 troy ounce and are usually available in 10, 32.15 (one kilo), 100 and 400 ounce bars. Like coins, this type of gold investment has a manufacturing markup to cover the cost of gathering, melting and forming the bars. However, the larger the bar, the smaller the markup. And the markups on bars is much less than the markup on coins. There are hundreds of companies that sell gold bullion bars. Shop around for the best price before you purchase any. And remember, you will have to pay for shipping, storage and insurance on these bars for as long as you hold them. All of these expenses, along with the buy / sell spread, makes it difficult to make a profit unless the price of gold rises substantially.
3. Gold ETFs or Gold Mutual Funds. If you want to invest in gold but you don’t want to store it, or worry about reselling it, then a gold ETF or other fund might be your answer. A gold fund buys gold, stores it and insures it. Then they issue shares in their fund that can be bought and sold on the market. While mutual funds are only bought and sold at the end of each day, ETFs (exchange traded funds) can be bought and sold whenever the stock market is open. While these funds have expenses that cover the costs of owning and managing these funds, along with a small amount of profit, their expense ratios are actually still very low compared to some other funds. And for the convenience you get, these funds may be the best way to invest directly in gold. These funds can be purchased through almost any broker, traditional, discount or online.
4. Gold Futures and Options. For experienced investors, it is possible to speculate on gold by buying futures contracts on gold. These types of contracts allow you to lock in the price you’ll pay for gold at some time in the future. As prices fluctuate, the value of your contract rises and falls. For example, let’s say the price of gold is $1,500 and you bought a call option contract that allows you to buy 10 ounces of gold for $1,500 in 3 months. If the price of gold doesn’t change or falls, you will lose the price you paid for the option. If the price rises however, you will be able to cash out your contract for a profit, depending on how much it rises. Contracts and options like these are for advanced gold investors, but they are another way that you can benefit or hedge using the price of gold.
5. Gold Related Companies. Finally, if you want to have exposure to gold but don’t want to buy the metal itself, you can consider buying companies that are associated with gold. In other words, you can buy stock in companies that benefit from the price of gold. For example, there are lots of gold exploration and mining companies. If they are successful in finding or mining gold, they benefit. These companies also benefit from increases in the price of gold, because they typically get paid a percent of the gold they find or mine. There are many other companies whose values are influenced by the price of gold. To get more examples, go to a mutual fund prospectus of a gold mining and exploration fund and then browse the types of companies that are available for investment.
Hopefully, if you’ve made it through this entire article, you have a better understanding of what gold investment is, why you would want to invest, and maybe even a simple understanding of how you could get started with your own gold investment.