How to Invest in Gold

Daniel Penzing
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Interested in buying some precious metals? Read our guide to find out how.

Gold is one of the world’s most popular metals to invest in. It’s safe to say that almost everyone has a little gold in their collection, whether it’s as jewellery, recent coinage, or other small tokens.

Depending on the grade of the gold you purchase, gold can also be a valuable investment. This article will look at gold and why you should consider investing in gold bullion from a reputable company.

Why is Gold so Popular as an Investment?

Gold has been used throughout history as a safe haven to help balance economic climates. It’s considered the anti-finance”among the investment industry. Gold was the first global currency because it was one of the very first globally traded commodities. Countries trade gold on the world market to have a universally accepted currency that wasn’t affected by political turmoil or political uprisings.

Gold is used as money or as a currency to hedge against inflation. It’s also used as jewellery, a store of value (sometimes), and a constant investment. Depending on where you live, your gold may appreciate or depreciate in value, mostly due to high inflation or macro-economic market factors.

How to Invest in Gold (and where to buy it)

Gold (or should I say “gold”) is a fantastic investment for anyone with a long-term investment horizon, regardless of which investment strategy you choose. Why? There are many reasons.

Less-Risky Investment

This is true, but not for the reasons you might think! Gold is simply less risky than stocks, government bonds, and the like, as it does not fluctuate as much. But this fact is not the one that makes me the most confident in advising fellow investors to allocate part of their assets into gold.

No, it’s not because gold is less volatile than other securities that I’m an enthusiast, but because I’m positive that gold will appreciate in value even if the stock market crashes.

There’s a solid mathematical explanation for this.

Gold functions as a great “insurance policy” against the risk of a stock market crash, and it does it without suffering the same decline in value that stocks and mutual funds would suffer.

Buy Gold ETFs

Investing in an exchange-traded fund (ETF) is an excellent way to invest in almost any asset class from stocks to gold to commodities. In the arena of gold and silver, however, ETF’s are an excellent option for those who want to invest in a more cost-effective, managed investment vehicle. ETF’s offer a variety of advantages to the average investor who may not have the time, expertise or the interest in a more granular investing strategy. Let’s take a look at some of the main reasons why you should consider investing in gold ETF’s.

There are a variety of gold ETF’s that investors can choose from. Many of them track the price of gold bullion. One of the most widely followed gold ETF’s is the SPDR Gold Shares ETF (GLD), which is one of the largest ETF’s in the entire world. Investors looking to choose from a number of gold ETF’s that follow the price of gold and silver should take some time to do the appropriate research on their own.

Buy Gold ETNs — Exchange-traded Notes

For most investors, gold is a good place to hide from the risk of inflation. To invest in gold but minimize the risk of price volatility, they sell stocks, buy gold ETFs or mutual funds and hold them for a long time. Because of this, gold ETFs and mutual funds are blessed with significant assets under management and are highly liquid. They don’t have the same risks as the standard mining companies.

There are exchange-traded notes that also permit you to invest in gold without holding actual bullion. These notes are a form of short-term debt backed by gold reserves. Most ETNs trade like ETFs. They have the same profile of a gold share.

However, ETNs are not like ETFs that hold physical bullion. ETNs are unsecured. If the issuing company goes bankrupt, the investors will not be reimbursed the full amount in gold. This is the main reason why ETNs are available at a much lower premium than gold ETFs.

The physical upside of owning gold is that you can take possession from the host.

Buy Physical Gold Bullion

No other investment will give you the same return as physical gold.

Purchasing physical gold is inexpensive and easy to do. All you need to do is open a brokerage account with a financial institution and your financial adviser will help with everything else. Once this is done, you will be given instructions on how to place the order from a reputable gold dealer.

You then transfer the funds electronically from the financial institution to the precious metals dealer’s bank account. Afterwards, you'll receive delivery of the gold you purchased.

An alternative to purchasing bullions is to invest in a gold exchange traded fund (NYSEARCA: GLD) which is basically a security that tracks the price of physical gold bullion.

There are several advantages to buying gold bullions. Due to the high demand for the metal, especially in China and India, its price has increased significantly over the years. One investment in physical gold can be sold at any time thereby giving you cash on a 24-31 business day basis.

Another advantage of investing in gold is that its price is not affected by anything else.

Buy Jewelry or Collectible Coins

There are basically two ways of investing in gold – jewelry and collectibles. Jewelry is a physical asset that you can see and finger. With "good" investments in gold bullion you have full title and can call into a broker for delivery.

The main difference between the two is that most investment professionals will tell you that jewelry is a better way to invest if you prefer physical gold as an asset. Jewelry is usually cheaper than investment-grade bullion. Many experienced investors believe that if you own a piece of jewelry that you really like and it provides you a sense of pleasure, than you are ahead of the game.

Many investors also say that collectibles coins are a better investment for the same reason that gold jewelry is – they are easier to convert into cash. The main risk with precious metal collectibles comes from their numismatic quality.

Numismatic coins can be very valuable. They can also be worth less than they were when you purchased them. If you want to add collectibles coins or rare gold coins to your portfolio use them as a long-term investment. Do not consider collectibles to be "liquid". Rather, use them to hedge your portfolio against inflation and economic uncertainty. Buy the best grades possible, being sure to get authenticated pieces, and be prepared to hold them for the next 5 to 10 years.

Buy Gold Mining Stocks

Gold prices are volatile, making it an excellent investment. If you believe that the price of gold is going to rise, you can invest in mining companies. Gold mining companies search for gold ore in the ground. When they find it, they extract it and sell it. It is then sent to jewelers and sold to investors, such as you.

When you invest in gold mining, you should ensure you understand the stock and its fundamentals. There is always a risk that the price of gold will fall, and with mining stocks, there is the additional, unpredictable risk that the mine will run out of gold or encounter technical difficulties.

Investing doesn’t have to be complicated, but you do want to understand the risk of the investment before you jump in.

Here are several areas you should consider:

  • Access to reserves
  • Location of the mine
  • Size of the deposit
  • Ore grade
  • Drill results
  • Artisanal mining
  • Impact of the mine on the environment

Making a sound investment requires research and understanding of the fundamentals of the stock.

Another good way to invest in gold is with direct mining/infrastructure companies. Gold is mined and the gold is sold. A good example of a direct mining stock would be Goldcorp Inc. (NYSE:GG)

Buy Gold Futures Options

For many years, gold futures have been traded mostly in London, Hong Kong, Singapore or Zurich. These are exchanges that allow you to trade in gold futures. There are also American style exchanges in New York and Chicago, which run their markets on an exchange floor. Currently, there are not a lot of futures contracts available on the London exchange and the exchange floors in New York and Chicago come with a stipulated minimum price. Therefore, most of the trade exchanges are more suited to the experienced market participant. If you’re buying gold futures for the first time, you should probably start by learning how to trade them actively before attempting to trade them yourself.

Gold futures contracts are over the counter (OTC), which means you are not buying them from an exchange; rather, you are trading them directly with a market maker or an OTC counterparty. This simplifies trading, in that the trading is done directly through your brokerage account. In addition, this also means that you can trade gold futures and spot gold in the same trading period – something that is not possible in the physical markets. Therefore, you could buy a gold futures option and short sell gold in the spot market in one session, and then reverse these positions the following day – if you did the calculation correctly.

Gold and Your Investing Strategy and Portfolio

There are two important reasons that gold is a good addition to your investing strategy and portfolio. One is that it is liquid and the other is that it can be used as a hedge in extreme economic conditions.

Liquidity

Gold bullion is the most liquid way to own gold. It is immediately available to you at the likely melt value, which is the price at which you could sell it for scrap. When you buy gold coins, you have to sell them first. If you buy gold bars, you might have to melt some of them to turn them into coins. Sometimes, you have to buy a type of gold that is not immediately available in the right size. In addition, if you store your gold in a bank, you have to pay a storage fee. When you own bullion, that is not the case.

Diversification

Just as other assets should be diversified, so should your portfolio. It would not be wise to invest in gold bullion if that was the only asset in your portfolio. But when you put it together with other assets, gold is a good way to diversify.

Should You Invest in Physical Gold?

If you have a certain degree of skepticism about the stock market, you might worry about investing in gold today. However, gold can still be an attractive investment in the right circumstances.

In order to determine whether it’s the right asset class for you, here are a couple of considerations to make.

What are you after? When it comes to a legitimate investment, it’s very important to know what you want. Are you after short-term stability? Then you’ll want to invest in something that produces cash flows. Are you after a long-term investment that will deliver cash in the future? Then you might be a good candidate for commodities because of the physical value that they deliver over the long term.

Where are you investing? Some people invest in gold because of its history as a way to hedge against economic conditions. If you’re trying to stabilize your investment portfolio and you’re looking at other investments, gold might be a good asset class to add because it’s supposed to be uncorrelated with the other investments you might have in your portfolio. However, if you’re looking for capital appreciation, then gold may be a terrible choice because it doesn’t have a strong correlation with capital markets.

How Well Does Gold Hold Its Value in a Downturn?

Gold is the king of precious metals, and its value has skyrocketed over the years. There is no denying this. But is gold’s value consistent in downturns? To a small degree, gold does well in downturns, but it is not ideal. If you are looking for a safe haven during a crisis, the crisis is likely to send gold at least temporarily into a downward spiral.

Gold is a hedge against currency weaknesses. However, when you need to access some hard cash, either to buy groceries or pay a bill, what do you do? You sell off that gold to raise cash and wait until the crisis is over to reinvest in gold. This could take a few days at a minimum.

Gold held for investment does not have any liquid value. Therefore, if you need to liquidate your gold holdings to obtain liquid cash, you will not be able to transact if the buying and selling of gold is not allowed. And when the crisis ends, you may find that your gold has lost its value – or perhaps even worse.

Regardless, gold is easy to spend in a crisis, and you may need to in order to live.

Why Is Gold Valuable?

People have looked to gold to fulfill all kinds of needs depending on the economy. Typically, it can be used as a currency, but sometimes it becomes more valuable as an investment. This can place the currency in a tricky situation because it is just as hard to place a value on something that also holds value itself.

So, why is gold valuable? In times of economic distress, gold tends to hold its value. This can help when dealing with the ups and downs of the economy because it is not tied to the same things that paper currency is.

In addition to using it as money, gold can also be used as a counterbalance to negative inflation. So it’s true that it can stabilize the economy but it doesn’t offer the same kind of safety net when it’s not an investment.

As an investment, the value of gold can increase over time. It’s been a precious resource for thousands of years, and it may become an even more valuable asset in the future. And in the meantime, it’ll still serve as a great currency in times of crisis.

Where Does the Demand for Gold Come From?

The demand for gold comes largely from investors. However, here’s a bit of history and background on gold demand.

When economies are growing, people will often allocate some of their disposable income towards gold coins. Gold is seen as a way to preserve wealth and protect against volatile market conditions. This is why we often see gold prices rise during recessions. In addition, investors like gold because it can be a hedge against inflation. With the Federal Reserve “printing money” (increasing the money supply) to stimulate the economy during the last couple of recessions, there was a rapid rise in the price of gold.

Another place where demand for gold comes from is from jewelry. People tend to buy gold during periods of high unemployment and environmentalism.

Another interesting historical note about gold and also silver is that they were the only currencies that were backed by hard assets until the late 1960’s and early 1970’s. Keep in mind that paper money isn’t backed by anything but a promise from a bank. It used to be backed up by gold. Gold is the only currency with a long history of being valuable all over the world.