Do you have questions about how to buy gold? Have you wondered what gold does for a diversified portfolio? In this guide, we give some background on gold as an investment, and how to purchase gold yourself.
Why Invest in Gold?
A wise investor knows to never go “all in” on one type of investment. That is speculation, not investing. When building your personal wealth with a long-term outlook, you need to include assets that will lessen the ups and downs of other sectors. Gold not only smooths out the bad times in equities, but also preserves purchasing power in case of currency devaluation.
Gold's Function in Your Portfolio
Gold serves two major functions in your investment portfolio: managing risk, and preserving purchasing power. Gold serves to reduce the volatility that equities can bring to your holdings, as it traditionally moves inversely to stocks. Holding most or your assets in one category leaves you exposed to market shocks. Having a section of your portfolio invested in gold can help serve as a hedge against the effects of quantitative easing or the chance of another economic downturn.. In fact, most financial advisers recommend that you diversify your investment portfolio as much as possible. So if you don't currently own gold and are looking to stabilize and strengthen your portfolio, gold is a viable option that should be considered carefully by you and your financial adviser.
Gold vs Silver
Gold is the traditional hedge against inflation and currency devaluation. Many smaller investors start with silver, due to the higher cost per-ounce of gold, then convert their silver to gold once their silver holdings reach a certain amount. Gold is less volatile than silver, which appeals to risk-averse investors. Gold also takes up far less physical space than an equivalent dollar amount of silver, making it easier to stack and easier to transport.
Self-directed IRAs were introduced in 1997. They allow you to choose the specific assets for your tax-deferred retirement account. This can include gold bullion (but not collectible coins). You can select from many different items, such as American Gold Eagles or Gold Buffaloes, Canadian Gold Maple Leafs, Australian Kangaroo/Nugget coins, and gold bars from approved refiners such as PAMP or Credit Suisse. Learn more about a precious metals self-directed IRA, or call one of our live traders at (813) 482-9300.
How To Invest In Gold
So, you've decided that some diversification in your portfolio is a good thing. Now, how do you go about it? There are two ways to invest in gold. One is focused on the short term, treating gold like any other commodity (paper gold), and the other is a long-term strategy, utilizing gold's properties to complement your overall portfolio (physical gold).
Paper Gold vs Physical Gold
“Paper gold” is defined as a financial instrument designed to give you “exposure” to gold, without ever actually owning any. These can be futures contracts, options, or shares in an exchange-traded fund (ETF). Even ETFs that claim to be backed by physical gold usually have clauses in the contract that prevent the average investor from exchanging their paper for bullion. This may be a minimum of 10,000 or 100,000 shares turned in at once, or only allowing bullion disbursements to brokers. All of these instruments carry counter-party risk, where you are dependent on someone else carrying through their part of the bargain.
Physical gold is just that – real gold that you can touch and see, such as coins, bars or jewelry. Bullion coins, like gold bars, have little to no numismatic value, and are valued for their gold content and high liquidity. Unlike paper gold, you can buy physical gold yourself – no broker needed! One of the safest and easiest ways to do so is buying gold online through a major bullion distributor, such as Gainesville Coins. Beware of commissioned salespeople who will try to up-sell you to numismatic or collectible coins. If someone tries to tell you old gold coins are immune to confiscation, hang up and buy from someone else. These claims have no basis in fact. They are trying to push over-priced collectibles on you to increase their commission. There's nothing wrong with buying pre-1933 gold coins if you are collecting them and know about the market, but regular investors should stay with bullion, for the lower premiums per ounce.
Gold has high liquidity, making it an easily-disposable asset with no exposure to the banking industry. Gold bullion can be sold in literally millions of places around the world. In the wake of the Cyprus banking crisis, and resistance from taxpayers towards more bank bailouts, the EU and US have implemented bank “bail in” regulations similar to the ones used in Cyprus. Having some gold at hand in case of a sudden banking crisis can provide you with the liquidity you need, while the government decides how much depositors are going to lose from their accounts to recapitalize the bank.
Types of gold bullion
Gold for investment comes in three basic forms: gold coins, gold bars and gold jewelry. Each has its benefits (gold jewelry isn't usually considered an investment product, due to low resale value.)
Gold coins are made in national mints. Common sizes are 1/20, 1/10, 1/4, 1/2 and 1 troy oz. They are usually struck from either 24K or 22K gold. Either style has the exact same amount of actual gold content, but the 22K coins will weigh about 9% more, due to the silver and/or copper added to improve durability and reduce scratching. Modern bullion coins use “fineness” instead of karats. 22K is .9166 fineness, and 24K is .999 or .9999 fineness.
The first modern gold bullion coin, South Africa's Krugerrand, was (and still is) struck in 22K “crown gold”, which is .9166 fineness. Another very popular gold bullion coin, the American Gold Eagle, is also stuck to .9166 fineness, but has silver for most of the alloy, giving it a brighter tone than the Krugerrand.
The Canadian Gold Maple Leaf, Austrian Philharmonic and Chinese Panda are popular 24K gold coins.
All these coins are legal tender, meaning that their weight and purity is backed by the issuing government. While commanding a higher premium than bars, some investors prefer the peace of mind of holding government-guaranteed gold. Some of the premium can be regained when selling.
Gold bars come in sizes ranging from a tiny 1 gram, up to 1 kilogram. The most popular size is 1 troy oz. Gold bars have lower premiums than coins. Many brands of modern gold bars carry serial numbers, and are sealed with an assay card with matching number. They are almost always refined to .9999 fineness (99.99% purity). Older gold bars may not be sealed, but will be stamped with their weight and purity.
Storing Your Gold
There are many options for holding your gold investment. First of all is, keeping it at your home. A highly-rated burglary safe, that is either embedded in the floor or bolted down, is strongly recommended. Secrecy is your most potent defense in home storage. Don't store your gold in an obvious place, and never mention that you have it, even to friends. Word can slip out and travel, eventually finding the wrong person.
A second option is at a bank. Safe deposit boxes are ideal for small amounts of gold. If your gold holdings outgrow the box, you could consider moving to a bullion storage account. There are two types of bullion vault storage accounts: allocated, and non-allocated. With an allocated account, the actual items you are storing are recorded and tracked, separate from others. When you withdraw your gold, you get the same actual items you deposited. In a non-allocated account, your items are pooled into similar items, and the number that belong to you are recorded. When you withdraw your gold, you get the same type of item back (Krugerrands, 10 oz bars, etc), but not the same exact item.
A very important point about non-allocated bullion, is that it is carried on the bank's balance sheet. The bank is allowed to lease your gold out for profit, in exchange for charging lower storage fees than for an allocated account. It also means that if the bank runs into trouble, creditors can claim the (your!) gold.
A third option is using an insured private vault storage facility. Choosing a vault storage solutions offered by your bullion distributor eliminates shipping charges, and makes selling as simple as sending in the appropriate form. Gainesville Coins goes one step more than allocated accounts, offering fully-segregated storage. Your gold is kept physically separate from anyone else's in our UL-rated, insured vault.
Selling Your Gold
There are several options when deciding to sell your gold, some more risky than others. One of the best and safest ways is to sell your gold is to use a large online distributor, such as Gainesville Coins. Most distributors will give you an estimate by email or on the phone, though the price paid will depend on the spot price when your items are received. Many distributors have minimum buy-back levels, which can be thousands of dollars. Others will only give you their “teaser” price if you're selling a large number of the same thing. Gainesville Coins has no minimum buy-back level.
Another option is a local pawn shop or “we buy gold” place. The buyers who come into town and set up at a motel also fall into this category. You may not get top price for your gold, as they are likely selling it as scrap to a gold smelter. If you have pre-1933 or collectible gold coins, another avenue is your local coin shop. They will likely only be interested in coins that have a numismatic value, though.
A last resort is to post an ad on an online classified site, or in your newspaper. Meeting a stranger while carrying hundreds of dollars of gold can be very dangerous! Meet in a well-lit, public place, preferably somewhere with security cameras, and watch for being followed home.
If you have any questions about buying gold, one of our traders would be happy to assist you. Our employees do not work on commission, so there's never any pressure for you to buy something that you don't want. Contact us by email or call (813) 482-9300.