Investing in Gold: What You Need to Know
Owning gold is one of the smartest long-term financial choices a person can make. There are several ways for you to get exposure to gold, which will be discussed in depth below. Gainesville Coins always carries a wide selection of gold for sale whether you are buying gold online or in person.
The team at Gainesville Coins has more than five decades of collective experience trading gold. For the past fifteen years, we have earned the respect and trust of the precious metals community through our involvement in the industry:
- authorized distributor for world's leading government mints
- member of trade associations such as the American Numismatic Association (ANA) and the Industry Council for Tangible Assets (ICTA)
- member of dealer networks such as Certified Coin Exchange (CCE)
- authorized dealer for Professional Coin Grading Service (PCGS) and Numismatic Guaranty Corporation (NGC)
Our expertise in precious metals has been featured in publications such as Reuters, Forbes, Bloomberg (radio and TV), TD Ameritrade Network, Kitco, and elsewhere. Over 180,000 readers visit our blog each month for insights into how the gold and silver markets work.
This gold investing guide will help you learn why and how investors purchase gold. After reading, you'll be well-equipped to make an informed decision about buying gold.
Below we discuss the reasons to invest in gold. You can also jump to an explanation of how to buy gold once you're ready.
Why Should You Invest in Gold?
Many people are under the impression that gold will always keep going up in value. And, yes, looking back over decades, gold has enjoyed a sustained increase in value over time.
Like so many other commodities, it tends to fluctuate in value depending on many outside influencing factors. It may notch sustained gains in value over a long period of time. Still, those little one-day spikes in value, $10 here, $25 there, aren’t necessarily going to be permanent stairsteps upward in price.
Various forms of gold bullion
So, if gold isn’t guaranteed to increase in value, why should you invest your money in it?
Because gold is used both as an industrial metal and in artistic and non-essential applications, demand for the precious yellow metal is built-in and seen across many market sectors. It can gain in value during both good times and bad. Gold may not offer guaranteed profits, but it helps secure your investment portfolio against recessions, inflation, and economic uncertainty.
In other words, gold has traditionally served as a safe-haven asset for investors. Safe havens are investments that maintain a stable value in market downturns. This is why gold plays a key role in any balanced, diversified investment portfolio.
The main thing to remember about gold is that it’s less an investment and more an insurance—a hedge against inflation. Though it may no longer be a currency, gold continues to be money.
Now that you see gold can be a valuable addition to your financial portfolio, you can take the next step of considering how to begin investing in gold.
Your Options When Buying Gold
Investing in gold can come in several forms. There is, of course, physical gold, which includes gold bars, gold coins, or gold jewelry.
Today, gold ETFs (exchange-traded funds) are probably the most popular form of gold investment. More details on ETFs will be provided below.
Some investors also get exposure to gold by buying gold futures contracts. Futures are primarily used by producers of the metal to hedge their positions. They are also the price-setting mechanism for gold in the market.
Owning shares of gold mining companies is another way to buy gold, albeit indirectly.
Let's compare the pros and cons of these different ways to buy gold.
Physical gold is probably the first thing that comes to mind when you think of owning gold.
Gold in physical form generally comes in coins or bars when bought for investment purposes. With the exception of China, India, and some of their neighbors, gold jewelry is usually not pure enough to qualify as investment-grade gold. 24-karat gold jewelry is not common in the rest of the world—and is impractical to wear.
Gold jewelry used in traditional Hindu weddings
The two main drawbacks with buying gold jewelry as an investment are its lower purity and higher premiums, i.e. mark-up costs. Most jewelry in the West is 18-karat (75% pure) or less. This is for good reason: the alloy is "harder" and more durable to wear and tear. Pure gold is too soft by comparison.
Higher mark-ups on jewelry are due mainly to their greater labor costs. A particularly intricate design or work by a boutique jeweler is more expensive to make than bars or coins, which are efficiently minted with large-scale equipment.
That extra time and craftsmanship comes at a price. Jewelry premiums typically run 50% or higher (above the metal value). Bullion premiums, by contrast, are normally closer to 10% over spot from retailers.
This makes purchasing physical gold bullion your best bet. Most bullion coins and bullion bars are IRA-eligible. Even most semi-numismatic gold coins from the 19th and 20th centuries can be bought at just a slightly higher premium over spot.
Physical gold offers just as much liquidity as any other form of gold, so long as you can deal with the drawback of paying a small storage fee (typically <1%) to keep your gold in an approved vault.
Vault storage is a requirement for including gold bullion in your IRA. Otherwise, you can take on the liability of storing your gold at home or in a safe deposit box. Many people go this route. But if you choose these alternative storage options, you must forgo using your metals to directly fund a retirement account.
Essentially, an ETF is a fund that holds a large stockpile of gold and then sells shares of ownership that track the gold price. It's the most popular form of a gold derivative available in the market today. You can think of it as gold ownership that has been securitized.
ETFs are fine as a short-term hedge, or as a way of speculating on the gold price. These securities are a convenient method of gold exposure.
However, ETFs come with fees and, unlike buying gold futures, the largest gold ETF (the SPDR Gold Trust, abbreviated GLD) expressly does not allow you to take physical delivery of your metals (unless you're a bank that's an Authorized Purchaser). You can only redeem your ETF shares for cash settlement.
Gold futures are basically a commitment to buy a specific amount of gold at a later date (usually one month in the future). Yet the contract size on the New York Mercantile Exchange (NYMEX) is 100 troy ounces. That means each contract is for roughly $200,000 worth of gold. That's obviously a lot of gold to store!
Floor of the New York Stock Exchange (NYSE)
Because it deals with bulk quantities of metal and involves international institutions, the futures market is where the day-to-day price of gold is determined.
Most traders sell their futures contracts for cash rather than taking delivery of any physical metal. The majority of futures trading is between "Market Makers," large banks and institutional entities, who merely swap ownership over metal already in vaults in London, New York, and other major hubs. For this reason, the gold futures market is subject to much greater leverage and opacity than the other forms of gold investment.
GOLD MINING STOCKS
An open pit gold mine
Shares of gold miners—often simply called "gold stocks"—are generally more volatile than the gold price itself. Gold mining stocks tend to lose more value in a bear market for gold, but they may stand to gain more than the raw price appreciation of gold in a bull market for the metals.
In other words, miners usually have greater upside than the underlying metal, but they often have a lower floor as well. A gold bar can't default on a loan or go bankrupt, but a mining company can.
Gold stocks are also more complicated investments. Trends within the mining industry and the financial health of individual firms in the sector are influenced by more complex factors than merely what's happening to the gold price. Thus miners are a less straightforward way of getting exposure to movement in the gold market.
More to Consider About Investing in Gold
Gold's calling card is that it tends to hold its value relative to everything else over time—unlike currencies, which we know are always being robbed of purchasing power by inflation over the long-run.
It's a stable, tangible asset that provides a degree of portfolio protection. During bear markets, when your other investments tend to fall in value, the steady or rising gold price will help counteract some of those losses. High liquidity means gold is easy to sell for its full market value, at any time and virtually anywhere in the world.
Gold is also a good portfolio diversifier because it doesn't share any particularly strong correlations with any other asset classes, other than being inversely related to the purchasing power of currencies and the accompanying interest rate environment.
Gold Sovereign coins from the United Kingdom
But let's also examine what gold can't do.
Gold may not be the single best inflation hedge at any given time, based on some measures. Historically it's incredibly unlikely the gold price could ever rise enough in a year to offer similar returns to the riskiest assets. For instance, it would be unheard of for gold to rise 500% in a year, like some stocks or cryptocurrencies have done.
Unlike equities, futures, or options, gold also takes up space. That does add some friction to holding gold as an investment or moving it around. That's why gold is a long-term vehicle for wealth preservation. It's more akin to a savings account or CD that you hold onto, except gold is far better hedged against inflation than bank deposits.
Another downside is that gold offers no yield, and if you factor in the cost of storage, it actually comes with a marginally negative interest rate. You're paying a small fee which amounts to a slightly negative yield. (Of course, when bond yields are low and real interest rates are already at zero or negative, this drawback for gold virtually disappears, because comparable safe-haven investment instruments would also offer negative real rates.)
Finally, gold can be "boring" at times! Some years its price just sort of trends sideways. Its bull markets come cyclically, and in the time in between its job is simply to hold its value relative to other assets and investments while inflation and money-printing erode the value of currencies. It's fair to say that gold is a more conservative investment than the stock market. As a safe haven, it serves a different role. Remember that gold is only a portion (perhaps 5% to 10%) of a fully diversified investment strategy.
Why Diversification Works in Investing
We've mentioned "diversification" in an investment portfolio a few times—but what does that mean, exactly?
Diversifying your investments means allocating your portfolio to a mix of different assets. The idea is simple: Don't put all your eggs in one basket. Doing so lowers the overall risk profile of your portfolio.
Ideally, the asset mix shouldn't include too many investments whose values are highly correlated. For example, owning five different oil companies isn't really diversification. Each of those companies operates in the energy sector, so their returns will likely all be in the same general direction.
Gold is among the only truly non-correlated assets. This means that gold prices move mostly independent of other sectors of the economy. The one exception is that gold does at times offer inverse returns to the strength of the U.S. dollar (or any currency, for that matter). Owning gold helps balance the performance of your investment portfolio and can stabilize your nest egg during market downturns. It often contributes to ironing out volatility in your portfolio.
Managing risk is a crucial element of investing. There is no such thing as risk-free returns. Make no mistake: every investment comes with risk. So it's useful to hold some assets as hedges or insurance. As we've seen in many past financial crises, everyone must prepare appropriately to avoid a "rogue wave" or "Black Swan" event that erases up the value of their pension or investment account.
Best Options for Buying Physical Gold
You can start investing in gold by purchasing even just one bar, round, or coin. Most investors intend to hold their gold for a given period of time before liquidating it when it is most financially advantageous to do so. The options of bars, rounds, and coins can be confusing, especially when considering the benefits for each type of gold asset.
Here’s a basic rundown of the advantages that gold bars, rounds, and coins offer and how they can play a role in your gold investing strategy:
- Gold Bars – Bars are generally the least expensive form of bullion. They allow investors to buy the most amount of gold, gram for gram, per dollar. Some gold bars are available in fractions of less than a quarter or even a tenth of an ounce, making these relatively affordable from the perspective of entry-level prices. Some of the most well-known gold bars, such as those from Credit Suisse, qualify for inclusion in Roth Individual Retirement Accounts (IRAs).
- Gold Rounds – Gold rounds often cost a little more than bars but usually much less than gold coins. Rounds also come in a much wider array of designs than gold bars; thus, they can offer superb artistic appeal. Many gold rounds from approved mints that are at least 99.5% pure qualify for inclusion in IRAs.
- Gold Coins –Though the most expensive option, gold coins are monetized as legal tender coinage. They are often the most highly liquid option since more buyers tend to be familiar with gold coins. Some gold coins, including American Gold Eagles and Canadian Maple Leafs, qualify for inclusion in IRAs.
How to Buy Physical Gold
So, you’ve decided you want to buy gold bars, rounds, and/or coins… Where to go from here? Your friendly gold coin dealer or bullion broker!
Retail venues such as a dealer or broker will offer you the opportunity to buy your gold in-person or online at a fair market price. Of course, a fair market price in a retail setting is not the gold melt value. You are going to pay more than melt to buy gold.
Gold dealers and brokers need to pay for overhead, insurance, and other costs associated with doing business. In return, they provide you with a safe and reliable way to buy gold for your investment portfolio.
For gold bars and rounds, you should usually expect to pay anywhere from 5% to 20% over gold melt value, depending on the manufacturer and size of the piece. The smaller the weight of the gold bar or round, the higher the premium will be.
Numismatic premiums on gold coins vary widely, with vintage gold coins selling possibly for many multiples of their spot price. Gold bullion coins sold mainly for the intention of precious metal investment will tend to retail for 10% to 20% above gold melt values.
Be careful if you’re choosing a gold dealer based solely on price. While you might find outfits selling gold products advertised for lower premiums, you could end up paying much more than you expected. Buyer beware—you will get what you paid for, and sometimes much less if you’re unlucky.
Backdoor trades and parking lot exchanges of checks and cash for gold often don’t end well for the buyer. Fraud prevention and consumer advocacy groups have unfortunately reported many cases of unsuspecting victims paying for what they think are legitimate gold products that end up being gold-plated base-metal pieces or stolen goods… Stolen goods that could get traced back to you.
- Fair prices—not too high or too low for given items
- A physical address and phone number with staff help that promptly answers or returns calls
- A decent return policy that allows buyers to get their money back on products and services with which they are not satisfied
- Affiliations with major bullion and numismatic organizations such as the American Numismatic Association, Industry Council for Tangible Assets, Professional Coin Grading Service, and others
- Good ratings from the Better Business Bureau and mostly positive feedback on customer review forums such as Google Reviews and Yelp!
If you do a bit of research on what you want to buy and choose a gold dealer you’re comfortable working with, you should be in good shape. Don’t forget to ask plenty of questions. Your gold dealer will be happy to answer your questions so that you can begin investing in gold with knowledge and confidence.
The information in this article is intended for educational purposes only. It is not intended as investment advice. Consult a financial professional before making any investment decision.
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