How do you invest in gold?

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].

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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