Generally, investors looking for ways to invest in gold can choose any of the three common options; they can buy physical gold, they can buy shares of exchange-traded funds or those offered by mutual funds, or they can simply trade in gold futures and options. The conservative investors may choose to go with gold coins, while the speculative investors may choose to go with the more risky alternatives such as gold futures and options.
Purchasing physical gold
Compared to other commodities in the market, gold stands out for its accessibility. The average investor can access and buy gold bullion from a gold dealer in the market, or even from a bank or a brokerage. The bullion bars that investors purchase are offered in various sizes, ranging from quarter ounce wafers to the larger 4000-ounce bricks. Most new investors prefer to get started with gold coins, as they progress to the larger quantities. The coins should be confused with the vintage numismatic coins. Gold coins are usually priced based on their gold content, and an additional premium ranging from 1% to 5%.
To ensure that their holdings have maximum liquidity, investors usually purchase the widely circulated gold coins such as:
- South African Krugerrand
- American Eagle
- Canadian Maple Leaf
Whatever choice you go with, you should ensure that you make the purchase from a genuine and reputable precious metal dealer, whether in person or through the internet. Gold coins come with extra security demands since failure to keep them safely can lead to loss by theft. One can therefore store them in a home safe or a recognized bank safe deposit box. Do not forget to insure your coins.
Gold jewelry usually grants investors the chance to wear what they own for the purposes of prestige. Gold is in most cases usually combined with a collection of other precious gems or metals in a bid to enhance the value of the jewelry. Some pieces are usually passed down from generation to generation. This adds sentimental value to the jewelry, beyond its intrinsic value.
Owning jewelry isn’t the most effective approach if you only want to invest. The retail price of the jewelry far exceeds the value you obtain after the meltdown. This results from the cost of workmanship as well as the retail markup. You should always determine the gold content of the jewelry before purchasing, lest you end up paying for 18K gold while in reality, you’re getting a 14K piece.
Fortunately enough, jewelry is usually covered by insurance policies (homeowners). Should it get lost, you can at least recover its value as per the terms and conditions of the policy.
Buying Gold Funds
As much as owning physical gold is more feasible than owning other commodities such as oil or soybeans, it also comes with its unique hassles. Investors who want to purchase gold can expect to encounter:
- Some transaction costs
- Storage costs
- Insurance costs
Mutual funds and Exchange Traded Funds (ETFs) present more liquid and low-cost entry alternatives to investors. These funds usually replicate the price movements of the commodity.
Investors can invest in gold ETFs such as SPDR Gold Shares (GLD), which are some of the oldest of their kind in the market. These shares trade on NYSE, and investors can purchase or sell them at any time of the day, just like they would do with stocks. Each share of these stocks stands for 1/10 of one ounce of gold. This means that if the price of gold in the market is at $1500 per ounce, then the gold ETF will trade for about $150 per share.
GLD invests in bullion only and gives investors direct exposure to the price movements of gold in the market. Some funds usually invest in bullion as well as the shares of publicly traded companies that conduct business in the mining, refining, and production fields.
Generally, the prices of gold stocks rise and fall significantly faster than the price of physical gold. Individual firms are also subject to a host of problems unrelated to the prices of bullion, such as political unrest.
Investing in ETFs that own gold stocks presents higher risks to investors, but also presents higher appreciation potential than the physical precious metal.
Purchasing Gold Futures Options
The more sophisticated investors who do not want to bear the risk of losing a lot of capital can consider futures options on:
- Gold futures
- Gold ETFs
These contracts give investors the right (not obligation) to purchase or sell their gold at a given price for a given amount of time. Investors can use options whether they think the price of gold will go up or go down. If the investor makes a wrong guess, the maximum loss that they will bear is the premium that they paid to enter this contract.
In the USA, for instance, investors can purchase various put and call options on gold futures through the popularly known platform Chicago Mercantile Exchange. They can purchase and sell these options through legit futures brokers.
Investors can also purchase options on the SPDR Gold Share ETFs through standard brokerage accounts that have received verification to take part in options trading. On the same note, some traders can purchase gold futures contracts to make speculations on the short-term price movements of gold.
Purchasing Gold Mining Stocks
If you cannot access physical gold for purchase, you can try out gold mining stocks. You should, however, take note of the fact that gold-stock prices do not necessarily move in line with the prices of physical gold. This stems from the fact that gold mining companies either succeed or fail based on unique individual approaches to various operations, as well as how they allocate their capital and maximize their profits.
This essentially means that you don’t have the security that comes with the physical possession of gold if the companies you choose to invest in do not perform well. My recommendation would be that you start with owning physical gold with a reputable Gold IRA Company, then advance to the other options with time.
You should always consider the risk profile of the investment approach as you invest in gold. Some options may serve you well based on your strategies, such as speculative options to maximize profit, or physical gold to offer you protection against a global economic crisis.
I wish you well,
Eric, Investor and Team Member at Gold Retired!