Gold Investing: What You Need to Know

Gold is a valuable metal that you can hold, trade, and use as collateral for a loan. 

Gold is a fairly liquid asset that has historically outperformed fiat currencies. Savvy investors add gold to their portfolios to counteract the volatility of the stock market. Some also consider it a hedge against inflation, because gold typically increases in value as the purchasing power of the dollar declines. 

Before we discuss different types of gold investments, you should understand that gold has a “melt value,” which is based on the weight and purity of the metal itself. It will also have a dynamic “spot price,” which is the current price of one troy ounce of gold if you were to immediately buy or sell it on the open market. 

Arguably the best option is to buy physical gold, such as coins, bars, or jewelry. You own the gold, and can sell it at any moment. Gold is known for maintaining its value over time, and it is likely that there will always be a market with willing buyers. 

Fun fact: Historically, pimps wore gold chains as a fall-back asset. If they got arrested, any money they had on them would be confiscated (as a product of their crime), but jewelry was considered a personal item. They could later have a friend pawn the gold jewelry for bail money.

You can purchase gold from reputable gold dealers online or in-person. You may also find private collectors or pawn shops selling gold. Ideally, you will want to find a broker or store with good reviews, fair prices, and secure delivery options. 

If we are purchasing a small amount of gold, we shop online on websites such as https://silvergoldbull.com/ However, if you buy gold personally, you will likely pay more than if you work with a broker that has industry connections/discounts.

When you own physical gold, you must decide where to store it. For example, you could install a home safe for your bullion, put it in a safe deposit box at a bank, or place it in a vault with a gold storage specialist. 

• If you store gold at home, you can access it anytime, but you may be concerned about burglaries.
  
  
• Safe deposit boxes offer enhanced security, but you can only access your gold during bank hours and the bank is not liable for any loss or damage to your property. Additionally, contents of a safe deposit box are not protected by FDIC insurance, so you would have to get a personal insurance policy. Finally, in light of recent events, you may even need to worry about recovering your gold if the bank fails.
  
  
• With a managed vault, you can expect to find a temperature controlled facility with a multi-layered, high-tech security system. As with gold brokers, you will want to research different storage companies to compare their reputations, fees, and security equipment. You will need to confirm how your specific gold will be identified and segregated from other customers’ bars. You will also need to determine when and how you can access your gold. Keep in mind that turning your gold over to a bullion storage company has risks. We have family members that had gold stored with the Anglo Far-East Bullion Company who recently lost everything as a result of malfeasance/embezzlement at the company.
  

Buying stock with your regular brokerage account is certainly more convenient than buying and storing physical gold. You can buy shares in a company that mines or refines gold. 

As with traditional equity share purchases, your returns will depend on the particular company’s performance (profits and expenses). Your stock could be devalued for a variety of reasons, including the poor yields from the mine, regulatory changes, geopolitical risks, and company mismanagement. 

To minimize your risk, you could buy shares in a variety of individual mining companies, or invest in an exchange-traded fund (ETF) that tracks an underlying basket of stocks of gold mining and refining companies.

You can invest in ETFs and exchange-traded commodities (ETCs) that are backed by gold bullion. The value of these investments tends to rise and fall with the spot price of gold.

Gold-backed ETFs track the current price of gold in the market, by holding physical gold bullion in a vault on behalf of their investors. If you invest in an ETF, you will not own gold directly. Rather, you will own shares that represent your rights to the gold owned by the fund. 

Like traditional shares, you can buy and sell ETFs easily through exchanges – so they are more liquid than physical gold. Additionally, investing in an index-fund offers more diversification than buying stock in an individual gold mining company.

Trading ETFs that track gold is a very convenient way to invest in gold, but you should note that there are lots of trading and management fees involved. Moreover, ETF managers often sell gold to cover expenses, which can lead to discrepancies between the actual value of the underlying gold and the listed value of the ETF.

Gold futures are standardized contracts to buy or sell gold in the future (the agreement will specify the date, price, quantity, and quality.) Those contracts are then traded on regulated exchanges.

The gold futures market is typically highly liquid and efficient, because there are so many professional market participants trading contracts. For example, companies that use gold for manufacturing or resale purposes often trade the contracts to lock-in a future price for gold.

You can use gold futures as a hedge or for speculation. They are a way to minimize the price risk associated with commodities, and hedge against inflation. Futures allow you to participate in the gold market without owning the physical metal, and you can speculate on the future price of gold. 

With gold futures, you can take a long or short position on gold. In a long position, you buy gold expecting the price to rise, and you are obligated to take delivery of the metal. In a short position, you sell the commodity but intend to recover it later at a lower price.

With futures, there is no fund manager making decisions on your behalf – you can buy or sell at your discretion. Additionally, there are no management fees. 

Be careful, because gold futures can be a risky investment. Gold prices fluctuate, and you may lose a lot of money if the price drops significantly between the time you sign the agreement and the time you take delivery.

If you are interested in owning gold in a managed vault, but do not need to take immediate possession of it, you may consider the gold certificate option. Gold certificates represent ownership of a certain quantity of gold bullion, but you are not assigned a specific gold bar/coin in the vault. Storage costs are often lower, because ownership is provided in pooled allocated large bars instead of individual bars. 

Fun fact: In 1865, the US Treasury began issuing gold certificates (representing gold coins held physically in its vaults). The certificates circulated like paper money until 1933, when the US government banned private gold ownership.

Today, some German and Swiss banks still issue gold certificates, as do gold pool programs in the USA and Australia.

Hopefully you enjoyed this brief introduction to the world of gold investing. You can learn more about each investment type by contacting a qualified financial advisor or precious metals broker. If it is a good fit, you should consider buying gold to diversify your investment portfolio!

If you are looking for more financial tips, please read out article Why To Consider Offshore Banking.