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Gold Investment Guide: 10 Ways to Invest in Gold for Beginners
This gold investment guide covers the basic methods of investing in gold. The different forms of gold investment are explained and the advantages and disadvantages of the various types are discussed. Investors considering putting their money into the gold market will learn how to get started: where to buy the bullion, ETFs, certificates, shares, and the other types of high, low, and medium risk properties.
The Basics of Gold Investment
There are two principle ways people invest in gold:
- Investing in physical gold by owning it
- Investing on paper or electronically
People who own physical gold may either be in actual possession of the gold, hold it in storage, or hold a paper declaring ownership while the gold itself is kept in a depository. With the paper/electronic method, investors usually never see or own the physical gold; they buy or sell shares or contract agreements to purchase and/or sell the precious metal bullion, but it may not be backed by "real gold."
Gold Bullion Coins and Bars
Owning gold bullion is a popular form of physical gold investment. "Bullion" refers to gold that is at least 995 fine, meaning 99.5 percent pure gold. This standardization of purity allows gold to be fungible, meaning one gold bar can be interchanged for another gold bar. This interchangeability, in turn, permits gold's treatment as a commodity that is either allocated (with specific units assigned specific ownership) or, more commonly, unallocated (non-assigned units, treated as part of a bank's general reserve).
Gold bullion comes in precious metal bullion coins as well as ingots, which are gold bars varying from one gram in weight to 400 troy ounces.
Investors can purchase gold bullion directly from a refiner, a bank, a precious metal dealer, or brokerage houses.
A minor disadvantage is that if the physical gold is transported to the investor, it must be stored and secured. The advantages of physical gold investing include:
- Refined bullion does not rust or degrade, making it easy to store.
- As long as gold has value, it can be traded or sold at any time, locally or internationally.
- The cost of investing in bullion is minimal; this is considered the most inexpensive form of gold investment.
Gold Accounts - Allocated, Unallocated, and Pools
In a gold account where the gold is allocated, the investor has full ownership of a specifically inventory of gold bullion. The bullion is stored in a vault operated by a gold depository or bullion dealer. An allocated gold account is considered the most secure method of keeping physical gold. The investor is charged for insurance and storage as well as the gold. The holding institution must issue the gold, which is stored in a vault or depository, to the investor on demand.
An unallocated account with a bullion bank involves fewer fees. Investors "own" gold that is not assigned to them, but considered part of the bank's liquid reserves and can be lent out, making this gold investment more at risk than in allocated accounts. The quantities involved in unallocated accounts are usually greater than 1,000 troy ounces. For lesser quantities, accounts known as "gold pools" are an option.
Gold Certificates as Investments
A gold certificate for investment purposes (versus historical U.S. Treasury gold certificates used as currency) is a statement of ownership. Gold certificates are a way of owning physical gold bullion on paper without storing it. The investor has the right at any point to collect either the gold itself or its fair market value.
Gold certificates are often purchased through certain Swiss or German banks that keep the gold in storage or from the Perth Mint Certificate Program in Western Australia.
When buying gold certificates, investors are advised to pay close attention to the fees charged, which vary widely, as well as the tax implications, which vary by country, and also make sure that the gold is allocated to them.
Gold Accumulation Plans (GAPs)
Gold plans are like savings plans, only the savings are used up immediately in purchases of gold. The way gold plans work is that money is withdrawn monthly from an investor's bank account and used to buy gold, usually in small quantities, building up a significant supply over time. The gold bought is usually unallocated.
Gold accumulation plans can be contracted over a period of a year or longer from banks, brokerage companies and precious metal dealers. Generally, investors can cash out or collect their gold at any point.
Numismatic Gold Coin Investing
Investors who prefer to invest in the physical metal may want to invest in numismatic precious metal coins, which have value in addition to the metal itself; they are collectible due to their rarity, historic value, and other qualities. Thus, the cost of the gold metal may represent only a fraction of the selling price.
Collectible gold coins as well as other historical objects can be bought from coin dealers, at online and live auctions, and from government treasuries. The main disadvantage is the learning curve; people who invest in coins should know their coins and only buy coins with established provenance from trusted vendors.
Gold Jewelry: A Good Investment?
Jewelry and other decorative pieces made of 24K, 18K, 14K, and 12K gold can be held as physical investments. Generally, however, unless the jewelry has universally acknowledged historical or aesthetic value, it is not a very liquid investment. Most jewelry is not 24 karat gold, and, being less pure than refined bullion, is not considered standard enough to be investment quality.
So with rare exceptions, the selling price of gold jewelry is unlikely to exceed the purchase cost and yield a profit. Gold jewelry and even gold dental work already in possession can generally be cashed in to refiners, though not usually at full fair market value.
Gold ETF (Exchange Traded Funds) Investing
Gold exchange traded funds are gold-backed securities traded on a stock exchange. They are backed by (usually allocated) physical gold. ETFs change in price over the course of the day along with the changing price of gold, and tracking error - how well the two correlate - can be a real problem, according to a February 2010 Morgan Stanley report.
An ETF is riskier than investing in physical gold, but in a sense not as risky as a mutual fund, as it is not tied to particular companies, but to a whole stock index. Individuals must buy ETF shares through stock brokers or brokerage accounts, making ETFs an expensive type of precious metal investing.
Advantages of ETFs include the ability to buy single shares, the chance to sell when the price is going down and buy back even cheaper (selling short), and the chance to buy without having the money right then to pay the broker (buying on margin).
Gold Futures Contracts and Options
Gold futures options and contracts are another kind of "paper"-based gold investment. A gold futures contract is a commitment to buy or sell gold at a specified date in the future. Investors make or lose money based on the accuracy of their predictions as to the future price of gold.
For example, if an investor enters into a six month contract to buy gold at the current price, expecting its value to rise, then at the end of the six months, if the price has risen, the investor then buys it at the (lower) contracted price. And if the price has fallen, the investor still buys it, taking a loss.
A gold futures option would give the investor the option to not buy the gold if the price hasn't changed as anticipated; using options, the rewards are likely to be less, along with the lower risk.
Like ETFs, gold futures are bought as securities on a commodities exchange such as COMEX or TOCOM, through a broker, dealer or bank.
Gold Mine Stock Shares
Investing in gold stocks is a popular form of investment among people who already deal in equities. Investors buy shares in either gold mines already in operation or those yet to go into production.
Mines are one of the riskier forms of gold investment, as their success rests on the political conditions in the country in which the mine is located and the various problems that can occur in mining. This means there is the potential for great rewards or great losses. Future mines are, of course, riskier investments than existing mines.
Gold mining stocks can be purchased through a brokerage account.
Gold Mutual Funds
Gold mutual funds are funds that own a diversified portfolio of stocks related to gold, usually mining stocks. These funds diversify holdings amongst various companies by region or across companies, thus reducing company-specific and individual stock risk. For example, gold mutual funds might mix stocks of different gold mines or different stocks in Australia or South Africa.
Investors anticipating a bull market for gold might prefer mutual funds over exchange traded funds, for their greater potential rewards (and despite their greater risk). Gold mutual funds can be purchased through the mutual fund company, a broker, or a bank.