Guide to Gold as an Investment

Many investors have considered at some point whether or not they should devote at least some of their capital to investing in gold. The allure of holding gold bullion bars or coins in your hand is tantalizing to say the least. The issue for most is that they do not know or understand how to invest in gold. Do you simply go to your local coin dealer and buy coins, should you go to a bank? What exactly is a gold fund and is gold actually a safe and profitable investment? These are all questions we will examine as we explore the options for investing in gold in today’s market.

Ways to Invest in Gold

There are many different ways to invest in gold. Buying physical gold is one such way and is perhaps what most people envision when considering an investment in gold. Gold can come in many forms including gold bullion bars of varying sizes, coins and jewellery. Additionally, tangible gold can be bought and sold without ever actually holding, touching or even seeing the object. The most common way this is done is through exchange traded funds or ETFs that use gold bullion as their basis. The final form of investing in gold that we will discuss is through stocks and funds that are not physical gold, but related to gold through mining or processing.

Investing in Gold Bars and Gold Coins

For many of us, it may be difficult to imagine owning and holding a bar made of gold. The first thought that comes to mind might be a gold bar the size of a brick or even larger. However, the reality is that there are many different sizes of gold bars available to investors of all financial means. Bullion bars come in sizes ranging from 1 gram up to 1 kilo or more.

To be of investment quality, a gold bullion bar should be 99.9% pure gold and should have clear markings of items such as the refinery and the serial number. When purchasing gold bars for investment purposes, you should of course try to get the best price possible. Smaller bars will carry a higher premium, which is something to keep in mind when shopping for gold bars. However, they are more convenient to store and allow for multiple small purchases instead of one large purchase.

Gold coins are another very popular choice for gold investors. It is important to understand the distinction between gold coins for investment and gold coins for collection, however. Investment coins are generally minted specifically for gold investment and contain 99.9% pure gold. Collectable coins are usually less than 99.9% gold and often carry a hefty premium as well, making them poor choices simply for gold investment.

Many countries issue gold coins for investment and some of the most popular choices include the American Gold Eagle and Gold Buffalo Coins, Australian Gold Nuggets and Kangaroos and the Canadian Gold Maple Leafs. However, there are many others available and as long as they fit the criteria for investment coins, any of them would make a good choice. Often the deciding factor should be the mark-up.

Physical Gold Pricing

Physical gold is bought and sold based on the current spot price. That is the market price as of the time of the quote, which changes frequently. The mark-up is then added to the spot price to give the retail price of the product. The greater the mark-up, the more the price of gold would have to increase in order for your investment to be profitable. Just as we mentioned with gold bars, the smaller the weight of a coin, the more the mark-up will likely be. Let’s look at an example.

We will take a look at the prices of several bars of gold. Coins will follow the same general rules and could easily be interchanged in our example. Say the spot price of one gram of gold is £30 and you wish to purchase a few grams in gold bars. There are 1 gram gold bars available at a price of £45 each, so let us figure out the mark-up. To do this, we take the quoted price minus the spot price and divide that answer by the spot price. When the result is multiplied by 100, we get the percentage mark-up. In this case, £45 – £30 = £15 / £45 = .333 or 33.3% mark-up. This means that in order to break even on our gold investment, the spot price of gold would have to rise 33.3%! This is not likely to happen for some time and we should seriously reconsider a purchase with a 33% mark-up.

Let’s instead look at a 5 gram gold bar, which might be available at £170. Here, we would take £170 – £150 (spot price x 5g) = £20 / £170 = .117 or about 12%. This is much more palatable, although ideally, we would like to get the mark-up under 10%. However, this is not always possible; therefore it is best to understand the options. In our example, by waiting until we could purchase a 5 gram bar versus 1 gram bars, we saved over 20% in mark-up.

Some larger banks do carry gold bars or more likely, gold coins, in their branch offices. The same guide for pricing applies here so be sure to shop around. A better option for most people is to buy gold coins or gold bars online from reputable dealers. Again, consider all of your options and check reputations. Do not fall for investments that seem too good to be true and protect yourself from gold scams, just as you would any other investment.

Investing in Gold ETFs and Funds

For those who would rather not deal with handling and storing physical gold bars or coins, there are other options for investing in gold. A number of exchange traded funds or ETFs have been created in which the goal is to track and follow the price of gold. The largest gold ETF in the world is the SPDR Gold Shares (symbol: GLD). It has an allocation of gold stored in London and each share is worth one tenth of an ounce of gold. The price of the ETF moves up and down with the spot price of gold and shares can be traded over an exchange just like any other ETF or stock. For smaller trades, the iShares Gold Trust’s shares (symbol: IAU) are worth 1/100th of an ounce, making for smaller per share prices while maintaining the same goal of following the spot price of gold.

Finally, it is possible to take advantage of gold prices without investing directly in gold. Mutual funds offer the option of investing in companies that engage in mining, distributing or processing gold and other precious metals. In purchasing shares in these funds, you are not actually dependant on the price of gold directly, but instead on the companies that are involved in getting gold from the ground to other investors’ hands. You may also purchase stock in individual companies separately; however, this practice does hold more risk and funds are usually the best choice for the average investor. Although the funds do not invest directly in physical gold, they are affected by the price fluctuations. As demand and price for gold go up, so do the profits and in turn the stock prices of the companies involved. If they should fall, the corporations involved in mining, processing and distributing gold would be negatively affected, thus lowering the funds prices.

Gold as an Investment

Many investors see investing in gold as a great hedge against inflation and other economic pressures affecting the world today. It can also be a great source of capital appreciation. However, investing in gold or any precious metal or other commodity carries some inherent risk and should be done cautiously and only as part of a well-diversified investment portfolio. From the years 2000 through 2010, the price of gold per ounce has increased nearly 450% while the stock markets have increased only about 11% during that same time. However, this information should be taken with a grain of salt. There is no guarantee that the price will continue to rise or even be maintained. In fact, prior to this rapid growth in gold prices, from 1980 to 2000, the price of gold actually went down more than 50% while the stock markets grew by more than 1000% during the same period.

Many well-informed analysts believe that there is still room for the price of gold to rise. Demand is growing at a fast rate since careful investors are looking to gold and silver as safe investments in uncertain economic times. Also, the value of gold has increased as its use in high-tech devices and electronics has quickly grown. It is true that there is no guarantee that the gold market will stay hot and gold prices will continue to rise. However, savvy investors know that gold is most properly used as part of a well-planned, well-diversified portfolio, and for long-term capital appreciation and wealth-building.