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Investing in Gold - How to Invest in Gold

Updated on May 10, 2013

How to buy gold

For hundreds of years investors have been turning to gold as a safe haven and protection in times of economic uncertainty. Gold is more than just a metal used in jewelry, for thousands of years it has been a preserver of wealth against inflation and currency manipulation. This article looks at the 4 ways which an individual can gain exposure to gold.

1. Physical Metal (coins and bars)

Physical gold is perhaps the safest method of investing in gold, many people will make the point "if you cant hold it you don't own it". Owning Physical gold gives the individual ultimate control over their investment. Physical gold has intrinsic value, this means that the value lies is in the metal itself. Physical gold is also one of the few investments an individual can make which has no counter-party risk. If you think about a bank account, shares, a pension plan there is counter-party risk which means that the investor is reliant upon another party in delivering on their end of the bargain. For example if I have $1000 in the bank, and my bank goes bust my $1000 bank account is now worth nil (assuming no insurance). This is counter-party risk, the risk that the other party to the contract will not deliver their obligations. This become important in times of economic uncertainty as the risk of financial institutions becoming insolvent increases. Intrinsic value and counterparty risk are key arguements for buying physical gold.

Physical gold takes the form of coins and bars which are designated in various weights. The price of gold is measured in ounzes and the most common gold coin or bars are 1oz in weight, coins are also available in 1/2 oz, 1/4oz and 1/10oz and other less common measurements. There are several different types of gold coin, the most common are gold Eagles, gold buffalo, Canadian Maple, Krugerrands, Sovereigns. Gold bars are typically for larger investments but there are various bars available at bars of 1 oz or less.

Gold coins and bars can be purchased through coin shops and bullion dealers in most towns and cities. A number of bullion dealers also offer excellent online stores, which provide an easy way of buying gold. As always be sure to carefully research the dealer before making any purchase, there is plenty of information on the Internet available for this.

Where to store gold and insuring it are important points to consider before making any purchase decision.

2. Gold ETF's

ETF means Exchange traded fund. These are purchased the same way as one would buy a stock. ETFs are traded on all major stock exchanges. A Gold ETF is an investment which is designed to track the price of gold. There are many Gold ETF's to chose from and some are much better than others so careful research is necessary before making any decision to invest in a Gold ETF. It is important to ensure that the ETF is a physical ETF. This means that the share capital is invested in physical gold which is held in a secure warehouse and regularly audited. A good Gold ETF will provide the investor the right to redeem thier investment for physical gold if they decide to. The Sprott Physical Gold Trust (NYSE ticker code:PHYS) and the Central Gold Trust (NYSE ticker code: GTU) are two of the better gold ETF's which are backed by physical metal.

The advantages of buying a Gold ETF lies in the convenience. Unlike physical bullion there is no need to worry about storage and insurance issues and because an ETF is traded on a liquid market like a stock it is very easy to buy and sell. The disadvantage to ETF's is that unlike physical gold they do have counterparty risk and are reliant upon the ETF remaining solvent.

3. Gold Futures contracts

These are high risk leveraged products which are not recommended as a long term investment. Gold Futures are essentially a deal to trade gold at terms decided now for settlement at a later date. Futures can be to buy or sell, buy contracts profit if the price of gold goes up, sell contracts will profit if the price of gold falls. The reasons for buying a futures contract are very different from owning physical gold. The attraction of Futures is due to the leverage involved which provides the opportunity for investors to make large profits from relatively small movements in the price of gold. This also makes them dangerous to inexperienced investors as large losses can rack up very quickly if the price of gold moves against the contract. Gold futures contracts do not offer the safety of phyiscal gold or even ETF's. Futures contracts are primarily a means of speculating on the price movements of gold and have a short term focus.

4. Gold Mining Shares

Shares in gold miners offers the investor exposure to gold in an indirect way. It would seem logical that the price of gold mining shares would follow the price of gold however this is not often the case. As I write this article gold mining stocks have overall performed poorly in comparison to the price of gold. The Market Vectors gold miners ETF (ticker GDX) is a fund which invests in a basket of leading gold mining stocks. The below 1 year chart show the price of GDE vs the price of gold and as can be seen the value of miners has performed poorly in comparison to the price of gold.

Depending upon your outlook and risk appetite this could be seen as a good opportunity to buy gold shares while they are trading at relatively low values compared to the price of gold. The risk with gold mining shares is that they are subject to the general movements of the stock market. Compared to ETF's or even futures shares in gold miners offer the weakest correlation to the price of gold.

Why you should own Gold

In this video John Embry from Sprott Asset Management discusses the importance of owning gold. In the view of John Embry gold will gain in prominence as a monetary asset in the years ahead and will likely gain an official role in the future of the worlds financial system. John also discusses the importance of owning PHYSICAL bullion rather than the paper based investment funds.

John Embry on why you should own Gold

In summary

In summary I hope you found this article useful as an introduction into investing in gold and the methods which can be used. Please do not take this article as investment advice as this was not the intention and be sure to carry out your own thorough research before investing in Gold.


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  • Theeyeballkid profile image

    Theeyeballkid 5 years ago

    Thanks iamageiuster.

  • iamageniuster profile image

    iamageniuster 5 years ago

    Great hub on gold and different ways to invest in gold.

  • Theeyeballkid profile image

    Theeyeballkid 5 years ago

    Thanks Caerleon, I agree completely with your comment. I do think we will see a hyperinflationary crisis in one or more major developed countries within the next 5 years. Now is the window to seriously look at converting at least some paper assets over to physical gold. In the short term gold price may soften a little, but medium to long term it is about the safest investment anybody can make at the moment. I like Silver as well, I think today there is enough awareness around silver for it to move pretty closely alongside gold as a hedge against inflation.

  • profile image

    Caerleon 5 years ago

    Nice hub, it's good to see you extol the virtues of physical gold investment. Too many people seem to think of physical gold as an absolute barbarous relic with little place in the modern investment portfolio. However, it can actually be extremely useful, especially for protecting savings from inflation.


    Caerleon -