How do you invest in gold?


Gold can be a wise way to diversify your investment portfolio.
Gold can be a wise way to diversify your investment portfolio.
Comstock Images/Thinkstock

Whenever the economy begins to sag, it isn't long before serious investment advisors and doomsayers alike begin to throw the word "gold" around. Depending on who you ask, gold is either a wise way to diversify an investment portfolio or an insurance plan against the coming apocalypse. Historically, gold has been seen as a low-risk investment that can mitigate your losses when stocks and bonds begin to lose value, mainly because the price of gold tends to increase during bear markets and periods of inflation [source: Steel]. The common wisdom is that gold will never hit rock bottom, since it will always have some inherent value as a precious metal.

After the credit crisis in 2008 and the ensuing slumps in the stock market, the commodity price of gold began to climb. The metal posted record highs repeatedly over the next two years, reaching $1,432.50 per ounce in December 2010 [source: Dreibus]. Over the course of 2010, gold increased in price by 27 percent. By comparison, the rebounding stock market increased by only 11 percent that year [source: Steel]. Economists disagree about whether gold can possibly continue its meteoric rise in price. Some predict that the current high is a bubble set to burst, and that a huge selloff of gold will soon drive the price back down [source: Flood]. Others are sure gold still has another year or more of strong gains [source: Krauth]. Historically, the price of gold tends to be volatile, experiencing regular peaks and troughs as big-picture economic conditions change.

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Whatever happens to gold, the metal is always a good long-term investment. Many financial advisors recommend investors keep about 5 percent of their portfolio in gold or gold-related securities, as a hedge against downturns in the market [source: Picerno]. But how does someone invest in gold? Is it as easy as walking to the jewelry store and stocking up? Read on to find out how to invest in every type of gold, from coins and bars to mining stocks and commodity futures.




How to Buy Gold Bullion

Gold bars are sold by reputable gold dealers in many different denominations.
Gold bars are sold by reputable gold dealers in many different denominations.
©iStockphoto.com/zennie

Of course, the simplest way to invest in gold is to go out and buy some. But to make sure that you get gold at the right price -- and in a form you can easily sell back when you want to cash in your investment -- you need to make sure you are working with reputable gold dealers [source: Grendon International Research]. The World Gold Council, a gold industry association, is a good source for trusted dealers and it lists them online.

Minted bullion coins are one of the most popular forms of gold bullion. Several countries mint their own gold coins in 1 ounce or partial ounce denominations. Some of the more popularly traded coins are American Eagles, Canadian Gold Maple leafs, Australian Nuggets and the most popularly traded, the South African Krugerrand. These coins are heavily circulated for investment purposes, because their gold content is guaranteed by their respective governments. While the coins have face value and can be used as legal tender, they are more frequently traded for their gold content (usually about 22 karats) [source: United States Mint].

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When buying bullion coins for investment purposes, buy several coins at once, and buy the larger denominations (at least 1 ounce, as opposed to 1/10 ounce). Dealers usually add more markups to their prices for smaller denominations and sales of small lots of coins [source: Picerno]. Avoid rare or numismatic coins (coins traded on collector's markets), since they are more often bought and sold for their collectible value instead of their gold content [source: World Gold Council].

Another popular option for buying bullion is to purchase gold bars. Gold bars are sold by reputable gold dealers in many different denominations. Reputable dealers are listed by the World Gold Council, and many banks and brokerage houses will sell gold to the public.

Many refiners worldwide produce gold bars, and all authentic gold bars will be engraved with the refinery's seal. Dealers identify gold by this brand. Any brand is acceptable, as long as it is accredited by the London Bullion Market Association. Buying accredited brands ensures that the bars can be sold back to any dealer [source: Grendon International Research]. Dealers look for brands as proof of authenticity and purity of the gold. Finally, when buying gold bars, it is essential to obtain authenticity certificates from dealers [source: Grendon International Research].

Investors should also keep tax implications in mind. Sales of bullion are subject to federal capital gains tax in the United States, and in other countries, but are tax free in the European Union [source: Grendon International Research]. When it comes to storing and securing gold, investors can either purchase a safe, use a safe deposit box in a bank or pay a dealer to store gold onsite.

How to Buy Gold-based Financial Instruments

Buying gold bullion may not be for every investor. Many choose to buy gold-based financial instruments instead. That way, investors can capitalize on the rising price of gold without worrying about the storage and security concerns, and the extra due diligence required to make sure bullion is authentic.

Exchange traded funds (ETFs) are one of the safest methods of investing in gold. Similar to mutual funds, ETFs are run by fund managers who purchase gold on the commodities market. ETFs are purchased through the stock market, making them an easy choice for new investors dabbling in alternative investments for the first time. The funds are also highly liquid: Selling shares is as easy as calling your broker. Generally, ETFs rise and fall with the price of gold, but don't increase in price by the same wide margins as commodities because fund managers have their own expenses that eat into the profits [source: Picerno].

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Stocks in mining companies provide the same liquidity and ease of trading as ETFs. They also offer some added security for investors, since most stocks will pay an annual dividend even if the price of gold happens to drop. However, while they tend to rise and fall with gold prices, mining company stocks tend to be more volatile. In other words, they usually drop by larger percentages than gold when the commodity price drops, and they spike by a larger percentage when gold peaks [source: Picerno]. Also, since individual mining businesses have their own successes and failures independent of the price of gold, not every mining stock will follow the commodity price [source: World Gold Council].

The most direct method of investing in gold without dabbling in bullion is to trade on the commodities market, buying gold futures and options. Futures are a binding agreement to buy gold at a certain point in the future at an agreed upon price. Options are the non-binding right to buy gold at a set date and price. As the price of gold rises and falls, the values of futures and options rise and fall at similar percentages. Futures and options are inherently speculative, so the risk level is relatively high, but so are the potential rewards when trading pays off [source: World Gold Council]. On the downside, options and futures require a larger initial investment than other investment vehicles, and more specialized knowledge. They are also less liquid. Investors willing to take the risks can trade futures on national and international exchanges like the Chicago Board of Trade and the Tokyo Commodity Exchange [source: World Gold Council].

Whichever method investors use to capitalize on the gold market, research is key to making the most of those investments, so move on to the next page to continue your research.

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Sources:

  • Dreibus, Tony C. and Pham-Duy Nguyen. "Gold Slumps to Lowest Settlement Price in Seven Weeks After Euro Rallies." Bloomberg.com. Jan. 14, 2011. (Jan. 14, 2011)http://www.bloomberg.com/news/2011-01-14/gold-drops-for-second-day-as-confidence-in-eu-recovery-curbs-haven-demand.html
  • Financial Web. "Investing in Gold." (Jan. 5, 2011)http://www.finweb.com/investing/investing-in-gold.html
  • Financial Web. "Investing in Gold Coins." (Jan. 7, 2011)http://www.finweb.com/investing/investing-in-gold-coins.html
  • Flood, Chris. "Gold Price Bubble a 'High Probability' Says Deutsche Bank." Financial Times. Jan. 13, 2011. (Jan. 14, 2011)http://www.ft.com/cms/s/0/2e36ccf4-1f33-11e0-8c1c-00144feab49a.html#axzz1BIbwLh6p
  • Grendon International Research Pty. Ltd. "Buying and Selling Gold Bars A Guide for New Investors." (Jan. 5, 2011)http://www.goldbarsworldwide.com/PDF/BI_12_Buying&SellingGoldBars.pdf
  • Investopedia. "How Do I Go About Investing in Gold." (Jan. 5, 2011)http://www.investopedia.com/ask/answers/06/investingingold.asp
  • Krauth, Peter. "Why Gold Still Has Room to Grow in 2011." NuWire Investor. Dec. 3, 2010. (Jan. 5, 2011)http://www.nuwireinvestor.com/articles/why-gold-still-has-room-to-grow-in-2011-56543.aspx
  • Picerno, James. "How to Invest in Gold." CBS MoneyWatch.com. Nov. 10, 2009. (Jan. 7, 2011)http://moneywatch.bnet.com/investing/article/how-to-invest-in-gold/301604/
  • Steel, Alix. "Gold Prices Soar Nearly 27 Percent in 2010." NuWire Investor. Jan. 4, 2011. (Jan. 5, 2011)http://www.nuwireinvestor.com/articles/gold-prices-soar-nearly-27-percent-in-2010-56739.aspx
  • Steel, Alix. "Several Analysts Project Strong Performance by Gold in 2011." NuWire Investor.Dec. 30, 2010. (Jan. 5, 2011)http://www.nuwireinvestor.com/articles/several-analysts-expect-strong-performance-by-gold-in-2011-56720.aspx
  • United States Mint. "American Eagle Gold Bullion Coins." (Jan. 7, 2011)http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=american_eagle_gold
  • World Gold Council. "Coins and Small Bars." (Jan. 5, 2011)http://www.gold.org/investment/why_how_and_where/how_to_invest/coins_and_small_bars/
  • World Gold Council. "Exchange Traded Funds (ETFs)." (Jan. 5, 2011)http://www.gold.org/investment/why_how_and_where/how_to_invest/exchange_traded_funds/
  • World Gold Council. "Futures and Options." (Jan. 5, 2011)http://www.gold.org/investment/why_how_and_where/how_to_invest/futures_and_options/
  • World Gold Council. "Gold Mining Stocks." (Jan. 5, 2011)http://www.gold.org/investment/why_how_and_where/how_to_invest/mining_stocks/
  • World Gold Council. "How to Invest." (Jan. 5, 2011) http://www.gold.org/investment/why_how_and_where/how_to_invest/