How To Invest In Gold

The Various Methods To Invest In Gold

Gold is a precious metal which is popular as an investment. This is due to the fact that it behaves like a currency, yet because it is a physical element mined from the ground, it is a finite resource. Gold cannot be reproduced or duplicated (unlike, for example, banknotes). Therefore many investors feel that gold is a solid financial standard which can usually maintain value better than cash during periods of inflation, deflation, or other economic unrest. If you are new to this form of investment find out here on how to invest in gold.

Buying Physical Gold

The most obvious way of investing in gold is to buy it directly. Gold bars, gold bullions, gold coins and even gold jewelry are ways you can invest in gold. You can buy these from your local jewelry store or online gold traders (just be careful to do research to find reputable ones). The advantage is that your investment will virtually always be worth something, that is, while it's possible to make a loss you are unlikely to lose all of your capital completely. However a major disadvantage is in storing and transporting the gold. Due to its value, it is recommended that you store it safely (e.g. in a bank safety deposit box), which can result in additional expense.

When buying physical gold, it is important to ensure its price is not overvalued compared to the current market price. Obviously, there will always be some mark-up from the seller (this is known as the premium), and ideally you would want to only buy at less than a 10% premium. In other words, if you buy gold at a premium of 5%, then when gold rises 5% from the current market price you will break even on your investment. Thus, the higher the premium at which you buy, the more difficult it is to make a profit.

Gold ETFs

When deciding how to invest in gold, some people feel that gold ETFs (exchange traded funds) sold on the stock market are a good way to expose their portfolio to gold without having the inconvenience of storing and trading the physical metal themselves. However gold ETFs can be risky and controversial. This is because you don't own the actual gold; instead you own a piece of paper which says you have a share of physically stored gold. There are expenses due to the storing of the gold, and over time these expenses will erode the value of the share of gold which is yours.

Therefore gold ETFs should be thought of more as a tool to track the price of gold, and less as a long-term investment asset. However for investors wishing to trade and cash in on market volatility, gold ETFs may be the way to go. Some of these ETFs are iShares Comex Gold Trust (IAU), SPDR Gold Shares (GLD) and ETFS Gold Trust (SGOL). If investing in gold ETFs, it is important to do research to find out whether the ETF you wish to buy into is backed by actual physically stored gold.

Gold Mining Stocks

Because gold is a mined commodity, it can make sense to buy stocks in gold mining companies. However, it is important to be aware that this is an extremely risky way of investing in gold. This is due to the fact that mining itself is a risky business. Very few mining companies in the exploration phase will go on to strike gold and make profits.

It is therefore critical to do research and find mining companies which have good management and strong production. Even then, you are taking on considerable risk so only a fraction of your portfolio should be in gold mining stocks.

Gold Futures

Exchange-traded notes (ETNs) are another way of investing in gold, although it is known to be risky. This involves paying a sum of money for a set period of time, after which you get a return based on the performance of the ETN. Buying an ETN in gold futures is therefore another way of investing in gold. The reason it is so risky is that there is no protection on your principal so you can lose all your money. Like gold mining stocks, only a small portion of your portfolio should be invested in gold futures.

The Bottom Line On Investing In Gold

Overall, investing in gold is based on the idea that it can hold its value in situations where cash cannot. Thus investing in gold can provide some protection during periods of inflation, deflation or currency devaluation. However the savvy investor should be aware that investing in gold is not without its own risks. When deciding how to invest in gold, one should consider the risks and benefits, and put careful thought into deciding which methods to use and how much to invest.