Options for Investing in Gold: A Guide

There are three options for investors looking to invest in gold: buying the physical asset, buying shares of a mutual or exchange-traded fund (ETF) that tracks the price of gold, or trading futures and options in the commodities market. Average investors may opt to purchase gold coins, while more advanced investors may use options on gold futures as part of their investment strategy.

Buying Gold Bullion

Gold is a more easily accessible commodity for the average investor to purchase compared to others, as they can easily buy gold bullion (in the form of coins or bars) from a precious metals dealer, bank, or brokerage. Bullion bars come in sizes ranging from small wafers to large bricks, but coins are often the preferred option for new investors. These coins are priced based on their gold content and a premium, rather than being vintage numismatic coins. The most commonly circulated gold coins, including the South African Krugerrand, American Eagle, and Canadian Maple Leaf, are typically chosen for their high liquidity. It is important to ensure you are buying from a reputable dealer, whether in person or online, and to safely store your gold coins, whether in a home safe or a bank safe deposit box. It is also advisable to insure them.

Gold jewelry is a way for investors to not only benefit financially, but also to personally enjoy wearing it. The value and attractiveness of gold jewelry is often enhanced by combining it with other precious gems and metals. These pieces may also hold sentimental value as they are often passed down as family heirlooms. However, it is important to note that jewelry is not usually the best investment option due to the high retail price compared to the meltdown value, which is often inflated by the cost of craftsmanship and markups. It is essential to verify the purity of the gold before purchasing jewelry to ensure you are getting what you pay for. If your jewelry is lost or stolen, most homeowner insurance policies cover it, which is a benefit.

Buying Gold Funds

Instead of buying physical gold, which can be costly and inconvenient due to transaction fees, storage expenses, and insurance, investors may want to consider investing in mutual funds or exchange-traded funds (ETFs) that track the movement of gold. One well-known option is SPDR Gold Shares (GLD), which was established in 2004 and can be bought and sold on the New York Stock Exchange like a stock.

Each share of the ETF represents a tenth of an ounce of gold. For example, if gold is trading at $1,300 per ounce, the gold ETF will trade at around $130 per share. GLD only invests in bullion, giving investors direct exposure to the gold market. Other funds may invest in both bullion and stocks of publicly traded gold mining, refining, or production companies. However, investing in an ETF that owns gold stocks carries more risk but also has the potential for appreciation, which is not possible with bullion investments

Buying Gold Futures Options

For those who are more experienced in investing and want to avoid high-risk investments, options on gold futures or options on a gold ETF may be a good option. These contracts give the holder the option, but not the obligation, to purchase or sell gold at a specific price for a set amount of time. Options can be used regardless of whether you think the price of gold will increase or decrease. If you happen to make the wrong prediction, the most you will lose is the premium paid to enter the contract.

These options can be purchased and sold through a futures broker on the Chicago Mercantile Exchange. Options on SPDR Gold Shares ETF can also be traded in approved options trading brokerage accounts. Alternatively, some traders choose to speculate on short-term fluctuations in gold prices by buying and selling gold futures contracts, which are traded on the CME under the symbol GC.

Buying Gold Mining Stocks

If you are unable to obtain gold physically, investing in gold mining stocks may be a good option. However, it is important to note that the performance of these stocks does not always align with the price of gold bullion. The success or failure of a mining company depends on its operations, capital management, and profit generation. Additionally, purchasing gold mining stocks does not provide the same level of security as owning physical gold as the success of the company you invest in can impact the value of your investment.

Conclusion

The key point is that if you are looking to diversify your portfolio with gold, ETFs are the most effective option. However, if you want to protect yourself in the event of a major crisis, it is recommended to own physical gold.