If you’re anything like me, then you’ve been eyeing the buzz around investing in gold. We’re certainly not alone. Gold is a hot topic right now, and thanks to continued Fed and Congressional action (not to mention the disaster that is Europe right now), it looks like it will continue to be for quite some time.
This shouldn’t be surprising. Gold is up an astonishing 400% in the last decade – over 60% in the last year alone. Currency values are plummeting. The stage is set for continued inflation. Investing in gold has made more than a small number of fortunes recently and everything is in place for that to continue. Now is the time to learn about this form of investing so that you are prepared.
It should also come as no surprise to you that the key to investing in gold is not simply going out and purchasing some any way you can, waiting a while, and then selling it any way you can. If it was that easy everyone would flock to gold investing and those fantastic returns would disappear. No, the actual purchase is the easy part. Knowing what form to use when making a gold investment, how and when to buy gold at the best price, how and when to sell gold at the best price, and how your gold investment is helping you achieve your goals is the tricky part.
Investing in gold, like with any other investment, can be approached foolishly or wisely. Investing the wise way is what I want to help you with. Most people wouldn’t just go out and purchase any old stock without some research, and those that do will seriously hurt the returns they can see from their investment. Gold is no different, and blindly investing in gold can reduce your returns dramatically.
Through this site I want to provide you with the tools, advice, and information you need to make better gold investments. Before we do that, however, we’re going to need to know what those goals are.
Investing in Gold The Wise Way: Goal Setting Drives Strategy
Most of us don’t have the money to buy gold just for the fun of it. Instead, we’re investing for a reason. We have a goal. Some need to maintain the value of assets accumulated over long careers. Others want to set themselves up for high growth so that they can retire early. Some might set aside money that needs to grow enough to pay for a child’s college tuition.
Whatever your goal is, if you don’t want to rely on blind luck then you need to let that goal determine your strategy. Successful investors have a plan – a method – for making sure their gold investments work for them instead of against them. They understand that planning strategy are necessary for success. These things are important for any investment, but are especially important when investing in gold.
Gold can be purchased in a variety of forms, each of which has its own set of benefits that make it the right investment for certain goals. Unlike those working with most other financial instruments, those investing in gold need to concern themselves with storage and handling, liquidity when it comes time to sell, and even whether to purchase physical gold versus a gold ETF or stock in a mining company. These decisions can’t be made intelligently until a goal is identified.
Before you continue reading, put some thought into your goal for investing in gold. Then, read the list of how to buy gold below for tips on matching the different purchasing options to your goal. Really consider what properties an investment needs to have, such as security or liquidity, to meet your goals.
Ways to Buy Gold and the Goals They Are Best For
Coins and Rounds
One of the most common methods of investing in gold is the gold coin or gold round. Coins and rounds are physically the same. The main difference is that coins are legal tender and rounds are not. Gold coins also tend to have some sort of collector’s value while the vast majority of rounds only represent the value of the gold itself.
For those investing in gold the goal is to buy gold as close to the spot price as possible, which makes rounds generally a more attractive purchase than gold coins. That said, if you can find gold coins close to the spot price then it is probably a good buy. The American Gold Eagle, American Gold Buffalo, South African Krugerrand, and the Canadian Maple Leaf are your best choices for true coins close to spot.
The bottom line: Coins and rounds are fantastic for investing in gold. They are real, physical gold that you can hold in your hand and keep in your safe or safety deposit box. The importance of that can’t be overstated. They are small enough to be useful for barter and liquid enough to readily sell for cash. Because they can come in fractional ounces they open up gold as an investment for those with smaller budgets. Coins more so than rounds suffer from a collector’s premium, but that premium can be a boon later if it appreciates in value.
Gold bars can be split into two broad categories for the investor to consider: small and large. Small bars act in every way like gold rounds. They are not legal tender, are sized for liquidity and barter, and have a relatively small premium over spot. Small gold bars are sometimes marked in grams instead of ounces or fractions of ounces.
Then there are the large bars. These are the bars people imagine when they think of Fort Knox. Large bars are minted in standard sizes of 100oz and, more commonly, 400oz for use as “Good Delivery” bars on professional gold exchanges. “Good Delivery” doesn’t mean that everything else is “Bad Delivery”, it just means that the mint that created the bar is a known, monitored agent in the market. This means those bars can be bought and sold more or less remotely without verifying authenticity. If you’re slinging around half a million dollars for a large amount of gold, you really want to know that the bar is as pure as the stamp says it is.
The down side of large bars is that the bigger the bar, the fewer buyers there are available. The up side is the bigger the bar, the lower the premium over spot. For individuals investing in gold, there are specialized bullion vaults that let you buy into their stock at lower weights. These vaults do most of their selling on large bullion markets with 400oz Good Delivery bars so you get the benefits of access at lower budgets with smaller premiums. They can be a good deal, but usually you don’t physically receive the gold so it’s not for everyone.
The bottom line: Small gold bars, like coins and rounds, are a fantastic investment for those who want the security of physical ownership mixed with better liquidity and conveniently valued denominations. Larger bars, either bought personally or through specialized vaults, provide the best prices possible. The convenience factor is lower compared to non-physical ownership and this form of investing in gold is also not available to the majority of IRAs.
Gold Bullion ETFs
Gold Exchange Traded Funds (Gold ETFs) are stock-like securities that let people investing in gold buy into a trust managed by the ETF. The ETFs actually own gold, and typically keep it in bank vaults used on professional exchanges (the Fort Knox-like vaults full of 400oz Good Delivery bars). Liquidity is extremely high, but returns are chipped away over time by built-in management and storage costs.
The bottom line: This is a good investment vehicle for those with existing brokerage accounts who like the idea of investing in gold but don’t want to mess with delivery and storage. It is obviously not a good investment for those investing for the purposes of hedging against financial disaster or who want the security of having the gold in their physical possession.
Gold Mining Stocks
Instead of physically investing in gold, you can gain exposure to gold through mining company stocks. While this has benefits, mining stocks have their own set of issues that add to the complexity of the purchase. Mining companies have to contend with politics, environmental legislation, falling new discoveries, and rising extraction costs. There are certainly good deals to be had out there if you can find the right company, but compared to investing in gold directly this is a whole other creature entirely.
The major benefit of gold mining stocks is taxation. Gold mining stocks can be held inside retirement accounts and are taxed at the normal capital gains rate.
The bottom line: For investing in gold I would choose a different route, but for investing in a company (who just happens to be in the business of mining gold) this can be a worthwhile sector to consider. This is also a good investment for those who want exposure to gold inside an account that physical gold can’t sit in, like most IRAs. Like Gold ETFs, this is not a good investment for those concerned with hedging against disaster or who are looking for physical possession of gold.
Certificates are a special vehicle for investing in gold issued by mints, banks, and other entities. These come in two varieties, allocated and unallocated.
Allocated gold certificates are a simple certificate of ownership. You purchase the certificate from a bank, which provides you with a reference to the bar(s) that are allocated to you. For example, you could buy a gold certificate giving you ownership over the 100oz bar #1000 in their vault. When you buy gold certificates you don’t have to worry about transport and storage of anything other than the certificate, though this service comes at a price in the form of a premium over spot built in to the certificate price. All in all you are giving up flexibility for convenience.
More common today are unallocated gold certificates. In these cases, there is not a specific bar of gold with your name on it. Instead, you are effectively paying the company now for delivery of gold later. The company now has a liability on its books because it owes you gold. It is fractional reserve banking, except with gold instead of dollars. Because of this you run the risk of losing your entire investment if the company goes insolvent. This introduces unnecessary risk in your gold investment. If you are investing in gold you should steer clear of any unallocated certificates as they introduce unnecessary risk into your investment.
The bottom line: Investing in gold through unallocated gold certificates is just a bad idea! Allocated gold certificates are better, but are outclassed in convenience by gold ETFs and outclassed in security by physical ownership.