How to Invest in Gold
In these shaky economic times, more and more people are considering learning how to invest in gold for added security and to diversify their investment portfolios. However, understanding how to invest in gold can be a complicated endeavour, since there are so many different ways to do so. And some ways can be more risky than others.
Why Should You Invest in Gold?
Before you learn how to invest in gold, you should first understand why gold can be a good investment when the faith in the American dollar isn’t as strong. When the stock market did badly in 2008, so many stocks went down in value and many people were in financial panic – unless they had investments in gold. Gold didn’t lose its value – it actually increased in value! It rose 4.3 percent that year. When the dollar drops in value, gold will always rise.
Gold is an inflation hedge, as well. Other investments can be negatively affected by inflation, but gold is usually less impacted and will hold its value.
Governments often overprint money, but you can’t fake gold. If everything goes bad, and it might happen given the tumultuous political situation in the world today along with many countries in heavy debt, you’ll be very glad that you have investments in gold as a solid back-up plan.
Nowadays, many financial experts recommend that people invest in gold as a form of insurance for their investment portfolios. Generally, they advise people to have 5 percent of their portfolios in gold.
How to Invest in Gold: Physical Gold
Investing in physical gold, whether in the form of bars or coins or even jewellery, is probably the way to go if you’re truly worried about the current economic situation and want some kind of insurance in case everything goes awry.
First, a few things you need to know before you learn how to invest in gold in the form of coins or bars: it can be expensive due to mark-ups and you will have to think about storage solutions for all the gold you buy.
Avoid mark-ups by buying more than 20 ounces of gold coins. It’s also not recommended to invest in collectible numismatic coins, proof coins, or fractional-ounce coins unless you’re a hobbyist or an expert on gold, since these types of coins have the highest mark-ups.
For storage, you’ll need to rent a bank’s safe deposit box or purchase a safe. Another option is to have your physical gold shipped to a storage service, which can cost around 0 to 0 per year, depending on the service.
Now that we’ve got these details out of the way, the most recommended way how to invest in gold is to buy gold coins. Popular bullion coins include American Gold Eagles, Canadian Gold Maple Leafs, and South African Krugerrands. They all are widely recognized and often traded, so you’ll have no problem selling them when you want to. They’re also guaranteed by their governments. However, the premiums on these coins can change from low to high (and vice versa) quickly, so keep an eye and buy when premiums are low. Generally, the Krugerrands have the lowest premium compared to the Eagles and the Maple Leafs.
You can purchase gold coins through a dealer or a website. Do lots of comparison shopping in order to make sure you’re getting the lowest premiums. And when you invest in physical gold, make it a long-term investment. If you’re looking for quick gains, you should consider the other methods of investing in gold.
How to Invest in Gold: ETFs
If you like the low risk factor of owning physical gold but aren’t sure about the hassle of storing it, ETFs might be the answer to the question of how to invest in gold. ETFs are short for exchange traded funds, which are investment trusts that are sold on stock exchanges. They act like index funds; except they are much more liquid and you can trade them like stocks. You’ll still own gold when you invest in ETFs, but you won’t have the gold in your hand – it will be stored for you. When you want to sell, it’s much easier to do so than finding a buyer for your physical gold.
Gold ETFs can be much more convenient than holding physical gold, but there are costs associated with that convenience. You’ll pay brokerage fees for buying and selling as well as the costs of running a gold ETF. Reduce these extra costs by trading less and using a discount broker. Taxes can be higher on an ETF than a stock, so it’s better to use a tax-sheltered account (e.g. an IRA) to invest in a gold ETF.
There are two gold ETFs that trade in the U.S. – streetTRACKS Gold Trust (symbol GLD) and iShares COMEX Gold Trust (symbol IAU).
How to Invest in Gold: Mutual Funds and Stocks
Gold stocks are shares of gold-mining companies. You could invest in the stocks of the companies themselves or invest in a mutual fund that focuses on these specific stocks. In the event of a stock market crash, gold stocks usually do better than other stocks.
Although you could invest in a single up-and-coming gold mining company and hope for big gains, that would be akin to buying a lottery ticket. Master how to invest in gold by putting your money in a gold fund instead so you won’t be affected if one of the mining companies doesn’t do well. Master how to invest in gold funds by doing your research – some gold funds buy smaller stocks and others buy stocks from more well-established mining companies. It all depends on what you want – stability and small gains or higher risk but the possibility of a higher reward?
Another smart way to invest in gold stocks and add them to your investment portfolio while reducing risk is to invest in around 10 gold stocks. Vary your stock picks – invest in some stocks from bigger companies and some from new mining companies. Well-established gold mining companies will have a more steady flow of gold moving, but they might not bring you many gains. New mining companies that are still looking to strike gold are very risky because they don’t have a supply of gold yet, but if they succeed, you stand to make a huge profit.
Gold funds and stocks have one big advantage over physical gold: liquidity. You will be able to easily sell your funds and stocks when you want to, without having to look for a buyer for your coins and bars. Despite the taxes you might have to pay (for short-term gains, profits are added to your total income, while long-term capital gains are usually tax free), many investors consider gold funds and stocks as a more efficient and convenient way how to invest in gold.
How to Invest in Gold: Gold Options and Futures
Investing in gold options and futures isn’t for beginners – this method requires a deep knowledge of the market. In the options market, you can either buy calls or puts. When you purchase a call, you are betting that gold prices will rise. When you purchase a put, you’re hoping that gold prices will go down. It’s pure speculation, so there is a lot of risk involved. Options also will expire after a specific period of time, so that adds to the risk. Why do some investors go with gold options despite the high risks? Gold options allow you to manage a large investment with less money. If you’re just starting to learn how to invest in gold, it’s probably best to try the other methods before jumping into investing with gold options and futures.
Which Method Is the Best For You?
As with any other investment, thinking about how to invest in gold really depends on the approach that you want to take with your money. Are you willing to take risks for the chance of a big pay-out? Gold stocks might be your best bet. Are you concerned about the economy and want a safe investment in case everything crashes? Get some physical gold in the form of coins and gain some peace of mind. Want to be on the safe side, but don’t want to deal with the nuisance of finding a place to stash your gold? Find a good gold ETF that you trust and invest in that.
Now that you know how to invest in gold, the time is now to make your investment. Prices are continuing to rise and they might be out of the reach of most investors sometime soon. Talk with your financial advisor about adding gold to your portfolio, whether through gold coins and bars or a gold fund. Once you’ve figured out how to invest in gold and diversified your investment portfolio, you’ll be on much more secure financial ground.