Gold has long held a fascination for investors, whether it was a 19th century prospector panning for nuggets or a modern-day financial whiz scanning the computer for buying opportunities. Nowadays, you can buy gold in many different forms, from coins and bullion to exchange-traded funds and derivatives.
Is Investing in Gold a Good Idea?
For many investors, gold is a good addition to your investment portfolio — but you should first learn about how to invest in gold and the types of gold assets you can invest in.
Because gold prices tend to be less volatile than stocks, gold is viewed as a comparatively safe investment. People use gold and other precious metals to diversify their portfolios and to serve as a hedge when other investments decline in value. Of particular benefit to investors is that gold’s value tends to increase during times of inflation, when the dollar loses purchasing power.
There are numerous ways to invest in gold. Some options are more liquid than others, which can make them better for investment purposes, so it’s helpful to explore the pros and cons of each.
When it comes to investing in gold, you have plenty of choices. Your choice depends on factors such as budget, risk tolerance and experience.
Investing in Physical Gold
The gold investment that comes immediately to mind is to buy and store physical gold. There are a few ways you can invest in physical gold.
Gold bullion is probably the most popular way to invest in gold, and for investors who have the cash and want to own physical gold, it might be the best.
Bullion is the purest form of gold. It’s sold as gold bars that might range from a few grams to 400 or more ounces, but the most common sizes are one- and 10-ounce bars. This can get expensive, considering that the price of gold on May 18 was $1,961 per ounce. And unlike stocks, you can’t buy fractions of a gold bar.
Gold jewelry might be the most familiar form for casual buyers. It offers certain advantages over gold bars, including the following.
- There’s a large resale market of jewelry enthusiasts.
- It can be passed on to loved ones.
- It is covered under most homeowners insurance policies.
That said, purchasing gold jewelry as an investment isn’t always the best option because of the difference between scrap value and retail prices. For example, you might pay $500 for a 14-karat gold bracelet, but its scrap value — the value of the gold in the bracelet — is a fraction of that price.
Most gold coins weigh one or two ounces, though you can also find half-ounce and quarter-ounce coins. The most widely available gold coins are collectibles such as South African Krugerrands, Canadian Maple Leafs and American Gold Eagles.
One thing to keep in mind is that gold coin prices don’t necessarily align with their gold content. In-demand collectible coins tend to trade at a premium — prices on certified coins are influenced by their gold content and fineness, but rarity is also a factor.
How To Invest in Physical Gold
The most important thing to remember when you purchase physical gold in any form is to do your homework and make sure it’s legitimate. Here are a few options for investing in physical gold.
- Bullion: Use a reputable dealer and stay current on gold prices so you can choose the right time to buy. Most dealers update their prices based on spot prices — i.e., the current value of one troy ounce.
- Jewelry: You can get gold jewelry from a variety of jewelry retailers, but you might find more valuable pieces at pawn or antique shops.
- Coins: There are companies that mint and sell collectible coins, but, like with jewelry, you might find better deals from pawn shops or local collectors.
Wherever you choose to buy gold, it’s safest to buy from a reputable, licensed dealer. Only buy gold — bullion, coins or jewelry — that has been verified by an expert.
You’ll also want to consider the costs of storage, insurance and shipping before you take the plunge into investing in physical gold.
A bullion bank is a precious metal dealer that operates online or in local establishments. Bullion banks typically deal with large quantities of gold, so their customers tend to be institutional investors and central banks rather than individual investors.
Bullion banks typically offer investors a choice between allocated and unallocated gold accounts. With an allocated gold account, the investor owns specific pieces of gold that the bank cannot use for other purposes. Owners of unallocated accounts are essentially unsecured creditors of the bank.
Investing in Gold Derivatives
Gold derivatives can be traded as options contracts backed by physical gold. These options eliminate the hassles of owning physical gold. Because derivatives and options require in-depth market knowledge, they are best left to experienced investors.
Derivatives can result in impressive gains, but they also carry the risk of significant losses. Prices can rise and fall faster than the price of gold itself, and derivatives trade on margin, which means you trade with borrowed funds. If you make the wrong call or invest too much in one place, it can go wrong very fast.
How To Invest in Gold Derivatives
You can buy derivatives through a broker. Note that not every broker offers derivatives, so make sure you have an account with one that does if you want to pursue this gold investment.
Investing in Gold ETFs and Mutual Funds
Gold exchange-traded funds and mutual funds are a good option if you want the expertise of professional fund managers, though some are passively managed index funds that track industry trends or the price of bullion using futures or options. These are good options for beginner investors or those with a lower tolerance for risk.
Funds comprise a significant percentage of overall gold investments, even though they are a relatively new option for investors. ETFs are backed by physical gold and reflect the current price of gold in the market.
How To Invest in Gold ETFs and Mutual Funds
You can buy ETFs and mutual funds through most brokerages and investment apps. Make sure you choose one that best fits your needs — investment options, fees and ease of use are all important to consider — and create an account to get started.
One advantage of investing in gold ETFs and mutual funds is that they give you exposure to gold’s long-term stability while also offering more liquidity than physical gold and more diversification than individual gold stocks. ETFs have the added bonus of trading like stocks — you can trade them for the going price any time the market is open. Mutual funds, on the other hand, trade just once a day, after the markets close.
Investing in Gold Mining Stocks
Buying shares of gold mining companies is another way to get exposure to the market without buying gold directly. The main advantage of this investment is that the return is tied to more than the current price of gold — the company’s performance is the primary factor in the stock’s gains or losses. Here are some things to keep in mind:
- Some stocks pay dividends.
- Gold mining stocks tend not to fluctuate as dramatically as the price of physical gold, because they represent an investment in a company.
- Stocks are not backed by physical gold, so you can lose your investment if the company’s performance falls.
How To Invest in Gold Mining Stocks
Just like with funds, you can invest in individual stocks through an account with a brokerage or investment app.
Which Type of Gold Investment Is Best?
If you’re looking to use gold as a hedge against inflation, buying physical gold might be your best option — just remember that you’ll have to cover the cost of storage and insurance.
If you’re somewhat risk-averse and want to test the waters, consider starting with a gold ETF or mutual fund. However, if you’re an experienced investor interested in taking more risk for the potential of higher rewards, you might look into gold derivatives.
Is It Better To Buy Gold or Gold Stocks?
If you want to invest in gold and avoid the costs that come with physical gold, stocks might be the better option for you. However, they also come with more risk — if the company you’ve invested in fails, you’ll lose your investment.
With physical gold, though the price may fluctuate, you won’t lose the gold itself, so when the price goes up again, you can make back your losses.
Whichever option you choose, it’s important not to put too much into any single investment. A diversified portfolio is the best way to protect yourself from losing too much at once.
The Bottom Line
There are plenty of advantages to investing in gold, including the hedge it provides against other investments and the diversity it can bring to your portfolio. But gold also has certain downsides. One of the biggest is that its value is tied directly to its price.
Gold doesn’t provide a steady stream of income the way dividend stocks or other assets do with regular interest payments. And if you own physical gold, such as coins and bullion, you need a safe place to store it, either in a safe at home or at a storage facility or safe deposit box. This adds an additional cost you won’t face with other types of investments.
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