Stockpiling
gold has been a favorite investment of the wealthy throughout history, and the gleam of gold is still irresistible to many investors today, with gold being the most popular investment out of all the precious metals.
[1] Some people like that gold is a tangible asset that will retain its value even if paper currency loses its value,
[2] while other investors are attracted to the liquidity of gold. For many, gold is a way of riding the inherent economic ups and downs, with gold serving as the "only real hedge against the massive financial excesses that still prevail in the western world."
[3] Moreover, gold is fungible, liquid, portable, and accepted anywhere in the world.
This article outlines four ways to invest in gold. The best choice varies from person to person and depends on the amount of money you have to invest, your investment objectives, the amount of risk you can absorb, and the length of time you intend to hold onto your gold.
Contents
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Steps
- Decide why you're interested in investing in gold. If you have funds to invest, it's important to understand why people invest in gold in the first place, so that you can make sure it's the right thing for you. Understand that gold mainly serves as a store of value and as an investment hedge. Common reasons for investing in gold include:[4]
- Gold is always in high demand. It is a tangible product that can always be passed on without concerns for its desirability in the future. Contrast this durability with antiques and collectibles, which are subject to fluctuations in fashion and style trends.
- Owning gold can protect you from a decline in currencies or from inflation. Countries often start investing in gold when economic growth starts to decline; the more debt-laden an economy, the higher the price of gold will climb.
- Gold can be another "string to your bow" when you seek to diversify your investment portfolio. Diversification is considered to be the best reason to own gold, according to financial experts.[5] This ensures sound financial management, and not putting all your investment eggs into one basket.
- Gold is a sound means for protecting wealth over a long period of time (provided you store it securely).
- During a period of civil instability, gold is a way to protect assets, it is portable, easy to hide, and can give you something to hang on to when everything else is lost.
Buying Scrap Gold
Collecting and storing scrap gold has become a popular investment strategy. With gold prices steadily rising, buying scrap gold is a low-risk way to invest in this valuable resource.
Term of Investment: Varies
Nature of Investment: Low risk - Gold is the safest investment option available and the potential reward far outweighs the minor risk.
Profile of Investor: Ideal for the first-time gold investor, or for someone just looking to set something aside for a rainy day.
- Ask family and friends if they have gold they are looking to get rid of. Practically everyone has broken necklaces, damaged rings, mismatched earrings and other forms of scrap gold that they would love to turn into cash. Work out a price they are happy with, while leaving plenty of room for profit.
- Place an ad in the newspaper. Have an ad run in both the classified section and the help wanted section of your local paper. Most people who are looking at the help wanted ads are in financial distress of some sort, so placing an ad offering to help them make money by selling gold to you can work wonders.
- Place an ad on Craigslist. This is similar to a newspaper ad, yet is entirely free and has the potential to reach more people.
- Monitor Internet auctions. Gold items will often sell for less than their scrap value, making them a great investment tool. Be sure to factor in any taxes or shipping costs before bidding.
- Develop relationships with local pawnshops. Leave your contact information with them and have them contact you if anyone comes in to sell gold items that the pawnshop doesn’t want. Some smaller shops may not have a refiner or even want to deal with scrap gold.
Buying Gold Bullion
Countries around the world, including the United States, continue to spend money they don’t have, creating unstable economies. Gold bullion is the only true hedge against the instability.
Term of Investment: Long term - Even if the economy picks up, inflation will follow close behind. Which asset resists inflation? Gold.
Nature of Investment: Low risk - Experts agree that the investment pyramid is built on gold bullion.
Profile of Investor: Perfect for a new investor.
- Decide what type of investment-grade gold bullion you want to buy. You have the choice between gold coins, gold bars, and gold jewelry.[6]
- Gold Coins: Historic (pre-1933) gold coins tend to retain the most value, as these have numismatic value in addition to their gold content. Examples of historic gold coins that do not sell at an excessive premium over the gold price because they only contain 90 percent gold are the British sovereign, British guinea, Spanish escudo, French 20 and 40 francs, Swiss 20 francs; and American gold Eagles ($10 face value), Half-Eagles ($5 face value) and Double Eagles ($20 face value). The British sovereign and the American Eagle Gold Coin are notable exceptions with 91.66 percent gold content, or 22 Karat. Other gold bullion coins include the Canadian Maple Leaf, the Australian Kangaroo, the South African Krugerrand (which sparked the entire gold coin investment industry)[7] and the 24 Karat Austrian Philharmonic.
- Gold Bars: Gold is also sold in bars that are usually 99.5 to 99.99 percent fine. Popular gold refineries include PAMP, Credit Suisse, Johnson Matthey, and Metalor. You’ll see the names of these refineries stamped on the bars they process.
- Gold Jewelry: The problem with buying gold jewelry as an investment is that you pay a premium for the craftsmanship and the desirability of the design. Any piece of jewelry marked 14 Karat or less will be below investment quality and any resale for the sake of investing will be impacted by the need to refine the gold.[8] On the other hand, it is possible to pick up antique or vintage gold for very little at estate sales and similar auctions if the worth is not realized, or if people simply don't bid much for it. Older pieces carry more value due to their unique craftsmanship, so this can be a lucrative and enjoyable way to collect gold.[9]
- Choose a weight to buy. Clearly, the greater the weight, the greater its price will be. Something else to keep in mind is your ability to safely store it.
- The American Eagle Gold Coin and the other coins listed above are made in four weights: 1 oz., 0.5 oz., 0.25 oz. and 0.10 oz.
- Gold bullion bars are generally sold by the ounce and include 1 oz.,- 10 oz.- and 100 oz.-bars.
- Find a source that sells gold bullion. Often, the same dealers, brokerage houses and banks sell both coins and bars. When assessing the dealer, see how long they've been in business, whether they're certified with an industry or government body, and in what investment activities they specialize. In the United States, the US Mint provides a list of authorized sellers that you can check.[10]
- See Buy Gold Online for details on how to invest in gold through online marketplaces.
- Jewelers sell gold jewelry, but if you decide to go this route, be sure to choose a reputable store that has been in business for a long time.
- Auctions can be another source of gold jewelry, but be aware that auction items are sold “as is” and it’s up to you to ascertain their value.
- Determine the current market price for gold. After finding the price, verify it with at least one other reputable source, and preferably several other reputable sources.
- Aim to buy gold coins or bars at or below the prevailing market price, plus a premium of approximately 1 percent. Most dealers have purchase minimums, charge for shipping and handling, and offer quantity discounts.
- Get receipts for all purchases and get a confirmation of delivery date before you pay for the gold bullion.
- If purchasing jewelry, retain all receipts in a safe place. If purchasing at an auction, remember to add on buyer premium and any sales taxes.
- Store your gold bullion securely, preferably in a safe deposit box. This is a very important aspect of investing in gold bullion because your investment strategy is only as safe as your storage strategy. Invest in high-quality security mechanisms or pay a company to store it for you.[11]
Buying Gold Futures
Those willing to absorb a bit more risk decide to invest with gold futures. However, it is important to note that it isn’t so much “investing” as it is speculating, which equates to gambling in some respects.
Term of Investment: Varies - In general, investing in gold future is like making a short-term prediction of what you think the price of gold will be in the near future. However, many savvy investors invest and re-invest in gold futures for many years.
Nature of investment: High risk - There is high volatility associated with gold futures and many inexperienced investors will lose money on them.
Profile of Investor: This is primarily for a seasoned and experienced investor; very few novice investors will make money in gold futures.
- Open a futures account at a commodity trading firm. Futures allow you to control a higher value of gold than you have in cash.
- Invest capital that you can afford to lose. If the price of gold drops, you could end up owing more than you invested once commissions are added.
- Buy a gold futures contract. Gold futures are legally binding agreements for delivery of gold in the future at an agreed upon price. For example, you can buy 100 oz. of gold for a 2-year contract worth $46,600 for as little as 3 percent of the value, or $1,350.
- The commodity trading firm charges a commission for every trade.
- Each trading unit on the COMEX (Commodity Exchange) is equivalent to 100 troy ounces.
- Electronic trading on the Chicago Board of Trade (e-CBOT) is another way to trade gold.
- Wait for the contract to end and collect your earnings or pay your losses. An investor can exchange a futures position for physical gold, referred to as EFP (Exchange for Physical). However, most investors offset their positions before their contracts mature instead of accepting or delivering physical gold.
- When you buy a futures contract for a fraction of the cost of the amount of property involved, you are basically betting on a small change in the price of the property. You can make a lot of money buying gold futures if the value of gold goes way up relative to your currency, but if it goes down, you can lose everything you invested and possibly more (if your futures contracts do not simply get sold to someone else when you do not have enough money down). This is a way to hedge a risk or speculate, but not in itself a way to build savings.
Buying Gold Exchange Traded Funds
Exchange Traded Funds (ETFs) aim to track silver and gold prices and are generally bought through a typical stockbroker. They are much like derivative contracts that track prices, but they differ in that you will not own the underlying gold assets if you invest in this vehicle.
Two types of ETF are Market Vectors Gold Miners ETF and Market Vectors Junior Gold Miners.
Market Vectors Gold Miners ETF: Attempts to replicate (before expenses and fees) the yield performance and price of the New York Stock Exchange Arca Gold Miners Index. The portfolio contains gold mining companies of all sizes around the world.
Market Vectors Junior Gold Miners ETF: Debuting in 2009, this ETF has become highly popular among investors seeking to have indirect access to gold assets. Although similar to the Gold Miners, the Junior Gold Miners ETF focuses on smaller companies that are involved in an ongoing search for new sources of gold. Because these companies are less established, there is more risk involved.
Term of Investment: Short term - There is a fee charged each year that deducts from the amount of gold backing your investment, making this an unattractive way to invest in gold.
Nature of Investment: Medium risk - Because a typical ETF investment is for the short term, risk can be minimized.
Profile of Investor: Primarily for hedge funds, day traders, and other experienced and seasoned investors.
- Use the same broker you would use to buy a stock or mutual fund to buy shares in a gold exchange traded fund, such as GLD and IAU on the New York Stock Exchange. A gold exchange traded fund is designed to track the price of gold, while maintaining the liquidity of a stock.
- Note that gold exchange traded funds do not give you the ability to physically control the gold. Therefore, some gold advocates believe this is an inferior way to own the commodity.[12]
- Another disadvantage is that ETFs trade like stocks and you may have to pay a commission to buy and sell on the exchange. Moreover, any capital gains you realize must be reported and you will have to pay taxes on them.
Tips
- The United States Mint website offers a database of coin dealers listed by state.
- Buying bullion is limited to weekdays during trading hours from 9 a.m. to 5 p.m. EST.
- The commission rate on gold futures trading is negotiable.
- Keep an eye on US Mint consumer alerts for scams and other shady dealings.[13]
- Collecting gold antiquities can be profitable based on their historical value; however, this could be mired in issues of legality, including the need to seek permits, etc. Black market purchasing of such items is not only illegal but immoral; most countries consider antiquities to be items for all of humanity, not just for a select few.
- Don't pay too much for gold. Remember that historically the price for gold has usually been around $400 an ounce, adjusted for inflation (see the 650-year gold price chart here: http://www.sharelynx.com/chartsfixed/600yeargold.gif), but during a bad economy or uncertainties it tends to go up, resulting in a bubble. As the economy improves, the price of gold will revert to pre-bubble price range.
- Since the gold price tend to be dramatically cyclical, subject to many factors involving its demand and supply, it can be quite difficult to value gold in an environment of constantly depreciating paper currencies. One way to value gold is relative to the price of stocks, which tend to be easier to value (e.g. tangible book value, earning power, dividend). Take a look at the Dow/gold ratio from 1885 - 1995: http://www.sharelynx.com/chartsfixed/115yeardowgoldratio.gif. The Dow/gold ratio is the Dow Jones Industrial Average ("the Dow") relative to the gold price per ounce, or how many ounces of gold the Dow can buy. A high Dow/gold ratio means stocks are overpriced and gold is cheap, while a low Dow/gold ratio means gold is overpriced and stocks are cheap. A quick look at the chart and its relentless upward slope yields the immediate conclusion that stocks will buy more and more gold over the long term (e.g. an investor's lifetime), i.e. stocks are a much better long-term investment than gold. However, there have been long periods where gold outperform stocks, such as between 1929-1942 and between 1968-1980. Those who bought at stock market high in 1929, when the Dow/gold ratio was near 20, are still not back to even today relative to gold (2011) where the Dow/gold ratio is about 8. On the other hand, investors who were scared out of stocks and bought gold at the peak of the gold bubble in 1980, when the Dow/gold ratio was close to 1, would have missed the opportunity of a lifetime to multiply their money by at least 8 times relative to gold, as the Dow/gold ratio is around 8 today (2011). To prevent such mishaps, it is helpful to look at the Dow/gold ratio: buying stocks and selling gold when the current Dow/gold ratio is significantly below the historic trend-line (which averages about 20 today, and increasing), and selling stocks and buying gold when the current Dow/gold ratio is significantly above the historic trend-line.
Warnings
- Gold is expensive, and storing large amounts does bring certain security concerns with it.
- As with any investment, be prepared to possibly lose money. The worth of commodities such as gold will fluctuate over time and seeing the value of your investment decrease is a real possibility. Consult a financial adviser prior to investing in anything if you're unfamiliar with the methods and risks of investing your money.
- You will pay a premium for "collectible" coins. You can think of the worth of collectible coins as having two separate parts: the value of the bullion, and the collectability value. There is no guarantee these will go in the same direction. If the value of a coin you are considering comes mostly from its collectability, consider whether you wish to invest in gold, or in collectibles.
- Never pay significantly more than market price for gold bullion. (Typically, more than 12 percent premium above the spot gold price is too much.)
- Make sure you can tell if the gold is real to avoid wasting your money on fake gold.
- Holding on to gold does mean that you are appreciating your assets, but you still need to be sure you're practicing good money management at all times.[14]
- Don't tell people you're investing in gold. Doing so potentially gives away that you're storing it in your house, or somewhere equally vulnerable. Only tell people who really need to know, such as a spouse, heirs in a will, etc.
Related wikiHows
Sources and Citations
- ↑ http://en.wikipedia.org/wiki/Gold_as_an_investment
- ↑ http://www.investopedia.com/articles/optioninvestor/09/midas-touch-gold-investor.asp
- ↑ http://www.forbes.com/2010/09/24/barrick-gold-newmont-mining-markets-novagold-resources.html?boxes=Homepagechannels
- ↑ http://www.nzmint.com/bullion/invest
- ↑ http://www.nzmint.com/bullion/invest
- ↑ http://www.investopedia.com/articles/optioninvestor/09/midas-touch-gold-investor.asp
- ↑ http://bullion.nwtmint.com/gold_krugerrand.php
- ↑ http://moneycentral.msn.com/content/invest/extra/P143352.asp
- ↑ http://buying-gold.goldprice.org/
- ↑ http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=lookup
- ↑ http://moneycentral.msn.com/content/invest/extra/P143352.asp
- ↑ http://goldprice.org/buying-gold/2006/01/gold-etf.html
- ↑ http://www.usmint.gov/consumer/
- ↑ http://www.investopedia.com/articles/optioninvestor/09/midas-touch-gold-investor.asp
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