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Updated on Wednesday, July 1, 2020
You can invest in gold by buying physical gold, gold ETFs, gold futures or investing in gold mining stocks and funds. There are advantages and disadvantages to each approach, and pros and cons to gold in general: It’s a good safety net in a down market, but storage of physical gold can be a hassle and liquidating it may be expensive. Here’s the lowdown on how to invest in gold, and what to consider before you do.
4 ways to invest in gold
There are a variety of ways to invest in gold — and yes, you can buy solid gold bars. (Although that might not be practical.) Here’s how it breaks down.
1. Physical gold
On the most basic level, you can purchase physical gold — gold bars, gold coins, gold jewelry or even gold by the gram or fraction of a gram.
“One gram of gold seems to be where a lot of growth is happening right now,” said Ed Moy, former director of the U.S. Mint and chief market strategist for gold seller Valaurum. “The executive assistant making $75,000 a year can’t buy a one-ounce gold coin, but they can afford $50 worth of gold.”
- Gold is a tangible asset: Even if the financial system fails and stock prices fall to zero, you still have actual gold.
- It diversifies your portfolio: Gold does well in times of uncertainty, providing stability in your portfolio when other investment classes dip.
- Gold tends to hold its value over time: Even during times of high market volatility or inflation, gold is a steady commodity.
- Storage can be a challenge: You must physically store the gold, which may require a safe (and the headache of having it in your house), or paying storage costs to hold it somewhere secure.
- It’s tougher to cash in: There are costs involved in buying and selling gold, and you must do so through a gold dealer. “You can’t just spend it at Costco and get change from it,” Moy said.
- Ongoing investment is a challenge: Ongoing investment, such as investing a certain amount each month, is difficult because you must buy gold in whole quantities unless you’re buying gold by the gram.
How to buy physical gold:
Unless you’re a large institution, you’re probably not going to buy gold bullion directly from a mint. Mints sell gold to wholesalers, who then sell it to retailers, and you must locate a reputable gold dealer from the bunch. This may be as simple as searching for gold dealers online and researching them. Look at their rating with the Better Business Bureau, see if consumers have made complaints against them and look into what those complaints are.
“There are a lot of fly-by-night operations,” Moy said. “Look for companies that have been in business for a long time, usually through several up and down cycles for gold, and someone with a good reputation.”
Gold is commonly sold in bars, rounds and coins. Collectors tend to like gold coins, which come with designs on them and are easily sellable to people who buy and sell gold. You can also buy coins in one-ounce denominations or fractions of an ounce. APMEX is a large precious metal dealer, as are companies like JM Bullion and Lear Capital.
Although gold jewelry isn’t necessarily a good investment — you typically pay a high premium over the inherent value of the gold — there are a few companies that have started to produce investment-grade jewelry. JM Bullion, for instance, sells one-ounce gold bullion bracelets.
2. Gold ETFs
If you’re looking to put some money into gold but you don’t want to stockpile gold bars in your basement, gold exchange-traded funds (ETFs) are an option. Instead of owning gold, you’d own shares of a fund that gives you exposure to gold. Some gold ETFs own actual gold, while others deal in gold futures contracts or invest in gold companies, such as those that mine gold. Gold ETFs are generally considered commodity ETFs, because they’re invested in a physical commodity.
“If somebody says, ‘I just want exposure to the price of gold and I want to do it in the most efficient, cheap way possible, and I don’t care if I ever see or touch that gold,’ an ETF is the way to go,” said Michael Wittmeyer, CEO and founder of JM Bullion.
- Low fees: The expenses of buying and selling an ETF are lower than the spread of buying and selling physical gold.
- Liquidity: Shares of large gold ETFs, such as SPDR Gold Shares (GLD), can be easily bought and sold.
- More accessible for beginner investors: It’s possible to buy shares of a gold ETF with small amounts of capital.
- No direct ownership: You own an investment that is backed by gold, but you have no gold coins in your pocket.
- Risk: If the market tanks, an ETF is an investment and can tank right along with it, depending on the underlying investments. You don’t get the protection of owning actual gold.
- Volatility: ETFs that invest in gold mining companies, for example, can experience large peaks and valleys, and may not match the performance of gold at all.
How to buy gold ETFs:
You can buy gold funds the same way you’d buy any ETF — through a brokerage account, such as Charles Schwab or E*TRADE — and you should research your investment options. Check the expenses associated with the gold ETF, look at its history and volatility and make sure you understand what the fund invests in. (Is it invested in gold futures? Gold mining stocks? Physical gold?) The largest gold ETFs in terms of assets include SPDR Gold Trust (GLD), iShares Gold Trust (IAU) and Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL).
One thing to note is that capital gains on ETFs that invest in precious metals are treated differently, because precious metals are considered a collectible. Although short-term gains on collectibles are still taxed as ordinary income, long-term capital gains are taxed at a maximum 28% rate, which is higher than the maximum rate of 20% on most long-term capital gains.
3. Gold futures
Gold futures investing is a way to trade gold in a leveraged fashion. Gold futures are a financial contract in which you agree to buy gold from a seller at an agreed-upon price at a specific date in the future. You put down a percentage of the full price, allowing you to bet on a large amount of gold with only a fraction of the full investment needed. Most futures contracts are bought or sold before the delivery date, so most investors never take delivery of physical gold.
“It’s a way for investors to make bets on their convictions,” said Peter Palion, a CFP in East Norwich, N.Y. “If you strongly believe that next week, the price of gold is going to double, you can get into a futures contract with a small percentage of the money that its face value is worth. Then, when that price doubles and you sell your position, you end up with a greatly amplified gain.”
The problem with futures is that the above scenario also works for losses — if the price of gold goes in the wrong direction, you stand to lose a lot. “You could cause yourself a pretty bad loss if you don’t know what you’re doing,” Palion said. “For most people, the best advice is, ‘Forget about it.’ You’re playing with things that, especially right now, are not predictable.”
- Cash flexibility: You don’t have to pay the full price to purchase a contract on a certain amount of gold.
- Speculation: You can make a bet on where you think prices are headed in the future and capitalize on that market movement if you’re right.
- Risk: The price of gold varies, and you could lose a lot of money if your prediction is wrong.
- Amplification: While a correct prediction can yield great gains, an incorrect prediction can intensify losses, since you’re working with leverage.
How to buy gold futures:
Futures contracts trade on exchanges, so you’ll need a brokerage account with a broker that offers access to the futures contracts you want to buy and sell. The most familiar exchange for trading metals is the COMEX exchange. You must put up a margin deposit — a good-faith deposit that you’ll honor the contract — to buy or sell a futures contract.
In a traditional gold futures contract, you agree to buy or sell 100 troy ounces of .995 minimum percent fine gold. At a recent gold price of $1,768 per ounce, a gold futures contract would be worth $176,800.
4. Gold mining stocks and funds
Gold mining stocks and funds are just what they sound like — they are stocks of companies that mine for gold, or funds that include stocks of companies that mine for gold. This isn’t so much an investment in gold as an investment in the operations that are looking for gold, and it comes with risks, like any investment.
“Gold mining stocks tend to be riskier investments that don’t correlate perfectly with gold prices,” Wittmeyer said. “Mining companies have operational risk, regulatory risk, environmental risk and corporate governance risk, and frankly are not the best mechanism for investors who only want to gain exposure to gold prices.”
The price of gold could be going up $1,000, for instance, but if a gold mining company has taken on a foolish amount of debt and a chief executive commits an infraction that results in the company getting sued, that stock could quickly take a dive.
- Take advantage of rising gold prices: If the price of gold goes up but a company’s costs to mine stay the same, you stand to make money as stock prices rise.
- High gold prices aren’t a cure-all: The price of gold might go up, but companies could fail due to other circumstances.
- Other costs can impact value: There are operational costs to running mines, and if the price of gold drops below a company’s base costs to mine it, the entity can fail since there’s no way to mine gold for less. Hence, a slight drop in gold price can cause a big drop in company stock value.
- Mines can run dry: There are physical limitations to gold mines, and no one knows how long one company will be able to mine gold from one location.
How to buy gold mining stocks and funds:
Gold mining stocks and funds can be bought and sold through a brokerage account. Large gold mining companies include Newmont Goldcorp, Barrick Gold and AngloGold Ashanti. Some of the biggest gold miners ETFs include VanEck Vectors Gold Miners ETF (GDX), Direxion Daily Gold Miners Bull 2X Shares (NUGT) and iShares MSCI Global Gold Miners ETF (RING).
Is gold a good investment?
Gold is a solid choice if it’s only a small portion of your portfolio (experts recommend 5% to 10%) and you understand what you’re invested in. Gold tends to hold its value, and it helps to balance out more volatile elements of your portfolio. That being said, if you’re purchasing physical gold, you’ll have to deal with storage. Gold also doesn’t produce income (no dividends), and the IRS taxes gold as a collectible. And although gold keeps its value, it doesn’t grow in value over time the way that stocks and bonds might.
Still, gold is a good option for investors who want to go against inflation and market volatility. During the stock market dive from October 2007 to March 2009, when the S&P 500 lost 56.8%, gold rose in value by 25.5%.
“On the days when the market tanks and you see that you’re only down a fifth of what the markets are, you say, ‘Okay, it’s doing what it’s supposed to,’” said George Gagliardi, a CFP in Lexington, Mass.
Gold as an investment: FAQ
Recent gold value — called the “spot price” — was as follows on June 25, 2020:
- $1,768 per ounce
- $56.84 per gram
- $56,842.52 per kilo
Gold is also sold in special products, such as the Gold American Eagle coin, which is traditionally one ounce of gold, although it’s also sold in half-ounce and one-tenth-ounce increments.
- Gold American Eagle: $1,884.60
- Gold American Buffalo: $1,885.30
- Gold Maple Leaf: $1,863.10
- Gold Philharmonic: $1,864.80
- One 1.5 oz Gold Leaf: $2,845.00
The price of gold is determined by several factors. Gold futures prices have an impact, as does the gold “spot price,” which is the price of gold that is to be delivered right away. Supply and demand play a role, as do market conditions, which are affected by political and economic events. Lastly, currency depreciation can cause the price of gold to rise as a weakening currency may lead people to invest in gold.
The best way to buy gold depends on your goals and preferences. For people who enjoy collectibles or who wish to keep their wealth in physical form, gold bullion, bars and coins can be a good option. Otherwise, gold ETFs are an easy way to invest in gold without worrying about the liquidity of your gold bars. “ETFs are going to be the best-fitting choice for most investors,” Palion said.
Most banks don’t carry gold or make it available for their customers. “Banks have shied away a bit from precious metals,” Wittmeyer said. “Gold is more of a niche investment.”