This article is meant for beginners who are considering Gold as a possible investment Option.

As an investor you have plenty of investment options to invest your money in. Let me list the most popular investments considered by people.

1. Stock Market Investments : These include your investments in mutual funds or derivatives like futures and options related to stock markets.
2. Real Estate Investments : These include your investments in property, your house, any land or apartments you buy etc.
   
3. Savings Account or Bank Deposits: This is the money you put in your savings account or CD's or term deposits. Ya, this is also a form of investment.
4. Commodities Investments: Money you invest in commodities like Crude Oil, Gold, Silver, etc. Investing in commodities other than Gold is not that popular.

Among all the above investing options that you have, note that stock markets and real estate investments do very badly when the economy is moving down, e.g. in a recession like the current one. Suppose you have a situation where economy is slowing and you also face a risk of inflation then all the first three investment options will give unpleasant results. Bad economy will keep the price of real estate and stocks down. Inflation will also affect the corporate world and put a downward pressure on stock markets. The government will find it hard to increase interest rates because of the risk of slowing down the economy further. And this will make putting money in savings account less attractive. Gold Investments (or other commodities) will be the only investment options which will outperform in a recession+ risk of inflation scenario - exactly like the one we have after the global stock market crash of 2008.

Thus, personally i think gold acts like a hedge to protect any other investments you have in your portfolio and it must be seriously considered. This post is an introduction to investing in gold, especially for beginners.

There are several ways of investing in Gold and make sure you understand the pros and cons of all the gold investment methods listed below:

1. Physically Buying Gold : This means you actually buy gold in the form of Gold Coins, Gold Bars or maybe even Gold Jewelry. This has the advantage that you do not have to know anything about investing in order to make this 'investment'. You can actually go to a shop and buy gold. However this method of investing in Gold has a serious disadvantage that you have to protect the gold. The Gold Coins or Gold Bars that you have purchased are vulnerable to theft, damage or similar risks. Even if lets say you do manage to protect it, you have to worry about impurities in the gold that you have bought and this might also eat up most of the profit that you would possible make from this gold investment. Physically buying Gold is recommended only when you are buying it in small quantities, or want to gift gold coins to someone or if you have a nightmare understanding how to invest in mutual funds etc.
2. Gold Mutual Funds: Gold Mutual Funds are Mutual Funds which invest in Gold. They are a much safer investment option as compared to buying gold coins or gold bars. You do not have to worry about protecting the gold from damage or theft, neither of impurities in the gold etc. All you do is put money in a gold mutual fund and the gold mutual fund then further invests that money in gold. When gold prices rise, the mutual fund makes profit and you get good returns.
   
3. Gold ETFs or Gold Exchange traded Funds: An ETF or an Exchange traded fund is a Mutual Fund which is traded on stock exchange. If you have an online trading account you can buy and sell gold etf with a few clicks on your computer. This is my preferred method of investing in gold for reasons which I have now made clear. I recommend that you too consider Gold ETF as your preferred investing method in gold. It is hassle free once you have a trading account.
4. Buying Gold Futures in the commodities market: This is as easy as investing in Gold ETF mentioned above, but you need a trading account where you can buy and sell commodities. Buying in futures is convenient when you want to buy a lot of gold. This is because Futures Trading is a leveraged trade where you can buy say 1kg of gold without having to pay the entire price for 1kg. You simply pay the margin requirement for that futures trade. However futures trading, since it is highly leveraged is also risky. If you do not know what Futures trading is, i would recommend you stay away from this gold investment option.
   

If you observe how stock market investments have behaved with respect to gold investments in the past century, there is one clear pattern which emerges -

When Stock Market Crashes, Gold Price tends to shoot up.

In order to understand this, let us look at the graph on the right which is a chart of Dow/Gold Price Ratio. The Dow Jones can be thought of as an indicator of how the economy or stock markets are doing. The Gold price will indicate how your investments in Gold would do. So a higher value of Dow Gold Ratio would mean Dow Jones Industrial average is high as compared to Gold Price. A lower value of Dow Gold Ratio would mean the Gold Investments are performing better than average stock market investments.

In the Dow Gold Chart above you will notice that there are sharp bottoms exactly in those periods when the stock markets crashed. This indicates the well known and useful logic : in order to protect your investments in stocks, you better have some portion of your portfolio dedicated to gold.

It would be as silly to put all your money in Gold as to not invest in Gold at all. Given this, one is faced with a common question : How much should I invest in Gold?

The answer to this is not easy and depends a lot on your personal taste and your investment strategy. However a thumb rule is : Invest around 5% to 25% of your money in Gold. Whether it is near 5% or near 25% will depend on your expectation how well the economy is going to do. If you expect deeper recession or are afraid the economy may come crashing down even further, or expect a dollar collapse in future (see the video below) then you would want to maximize your gold investments. I would put at least 25% Gold in my investment portfolio. Or even more, depending on how deeply you will be affected by dollar crash.

The answer to this is simple. If the continued debt of U.S. Government, continued attempt to bailout failed companies does lead to a downward pressure on the U.S. dollar, if other countries in the middle east, asia and around the globe start losing faith and dumping the dollar, then dollar will come crashing down faster than you would normally expect.

What is difficult to answer: When will the United States Dollar Crash or will the dollar crash at all?

What is easy to answer: What will be the effect of dollar crash on Gold? Answer: A weaker dollar will result in panic buying of Gold. Gold price will rise as fast as the dollar will fall.

Thus if you are dependent on the dollar value, for example if you are in United States why not consider Gold Investment as a hedge against any possibility of Dollar Crash?

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