Investing in Gold

In general, those wanting to invest in gold directly have three choices: they can purchase the physical asset, they can purchase shares of a mutual or exchange-traded fund (ETF) that replicates the price of gold, or they can trade futures and options in the commodities market. Retail investors, for example, might buy gold coins from one of the best online gold dealers, while more experienced investors implement strategies using options on gold futures.

Key Takeaways

• Several ways exist to invest in gold: buying the metal itself, buying gold funds, or buying gold options.
• Investing in gold bullion for individuals takes the form of gold bars or coins.
• Mutual funds and exchange-traded funds that invest in the precious metal or shares of mining companies offer a more liquid and low-cost way to invest.
• More sophisticated investors might trade gold futures or futures options.

Buying Gold Bullion

Compared with other commodities, gold is more accessible to the average investor because you can buy gold bullion (the actual yellow metal, in coin or bar form), from a precious metals dealer or, in some cases, from a bank or brokerage.

Bullion bars are available in sizes ranging from a quarter-ounce wafer to a 400-ounce brick, but coins are typically the choice for new investors. Not to be confused with vintage numismatic coins, these are new issues priced on their gold content, plus a premium.

For maximum liquidity, most buyers stick with the most widely circulated gold coins, including the South African Krugerrand, the American Eagle, and the Canadian Maple Leaf. Whatever you prefer, be sure you buy from a reputable dealer, either in person or through the internet. Gold coins obviously require safekeeping—either a home safe or a bank safe deposit box. You’ll want to insure them, too.

Gold jewelry also allows the investor in gold to also experience the enjoyment of wearing it. Gold is often combined with other precious gems and metals to improve the overall value and appearance of the jewelry. Pieces are often passed down to the next generation as family heirlooms, adding sentimental value beyond that of the piece itself.

Jewelry is not typically the best option if it’s strictly an investment, because the retail price will usually far exceed the meltdown value. This is because of the workmanship involved and the retail markup. Always determine the purity of the gold before buying jewelry, so that you don’t pay for 18 karats when you are only getting a 14-karat piece. However, jewelry is covered by most homeowner insurance policies (although typically to a low limit), which is an advantage should it be lost or stolen.

Buying Gold Funds

Although it’s more feasible than, say, buying a barrel of oil or a crate of soybeans, owning physical gold has its hassles: transaction fees, the cost of storage, and insurance. Investors interested in a more liquid and low-cost entry into the gold market might instead consider mutual funds and ETFs that replicate the movements of the commodity.

SPDR Gold Shares (GLD), for example, was the first ETF of its kind, opening in 2004. Shares trade on the New York Stock Exchange and can be bought or sold throughout the trading day, just like stock. Each share in GLD represents one-tenth of an ounce of gold. Thus, if gold trades at $2,600 an ounce, the gold ETF will trade for about $260 per share.

GLD invests only in bullion, giving investors direct exposure to the metal’s price moves. Some other gold funds invest both in bullion and in shares of publicly traded companies in the business of gold mining, refining, or production.

Generally, gold stocks rise and fall faster than the price of gold itself. Individual companies also have hazards unrelated to bullion prices—such as political and environmental risks.

Gold Derivatives: Futures and Options

More experienced investors who don’t want to risk a lot of capital might consider options on gold futures or options on a gold ETF. These contracts represent the right—but not the obligation—to buy or sell an asset (gold in this case) at a specific price for a certain amount of time. Options can be used whether you think the price of gold is going up or going down. If you guess wrong, the maximum risk associated with buying options is the premium you paid to enter the contract.

Available in the U.S. through the Chicago Mercantile Exchange, put and call options on gold futures can be bought and sold through a futures broker. Options on SPDR Gold Shares ETF are also available to investors and can be traded in a standard brokerage account that has received approval for options trading.

Meanwhile, some traders buy and sell gold futures contracts—which trade on CME under the symbol GC—to speculate on short-term moves higher or lower in the yellow metal.

Buying Gold Mining Stocks

Investing in gold mining stocks offers another way to benefit from the gold market, but it comes with different considerations than buying bullion or other gold-related assets. When gold prices rise, mining stocks can deliver higher returns than physical gold, as these companies can increase their profits significantly.

However, these stocks carry additional risks: the company’s management decisions, mining operation costs, production issues, and environmental regulations all affect the stock’s performance. In addition, some mining companies hedge their gold production, which means their stock prices might not directly reflect changes in gold prices. When choosing mining stocks, it’s crucial to research the company’s financial health, production costs, mine reserves, and track record of delivering shareholder value.

What Factors Affect Gold’s Price Beyond Supply and Demand?

Gold prices are influenced by central bank policies, currency exchange rates (especially the U.S. dollar), geopolitical tensions, interest rates, and even cultural factors in countries where gold is traditionally important for weddings and celebrations. These influences can cause significant price fluctuations even when physical supply and demand remain relatively stable.

When Inflation Is High, Is Investing in Gold Better Than Investing in Stocks?

Gold often performs well during high inflation periods as investors view it as a store of value that can maintain purchasing power. Historically, while stocks might struggle with rising interest rates that often accompany inflation, gold has typically maintained or increased its value during these periods, though past performance doesn’t guarantee future results.

How Is Gold Stored If You Invest Through a Bank or Other Financial Institution?

When storing gold through a bank or financial institution, you typically have two main options: allocated or unallocated storage. With allocated storage, gold bars or coins are assigned to you with unique serial numbers, and you own them directly.

Unallocated storage means you own a share of a general gold pool, like having money in a bank account. Each option has different costs, insurance implications, and levels of security to consider.

The Bottom Line

Gold serves different purposes for different investors: a hedge against uncertainty, a portfolio diversifier, or a long-term store of value. The best approach to gold investment depends on your financial goals, risk tolerance, and investment timeline.

While ETFs offer convenience and liquidity for general portfolio diversification, physical gold provides tangible security during economic uncertainty. For those seeking potentially higher returns and willing to accept more risk, mining stocks offer exposure to gold while adding the potential benefits and risks of business ownership. Whatever method you choose, gold should be considered part of a broader investment strategy rather than a stand-alone solution to your investment needs.