Investing in Gold

Gold has been considered a valuable store of wealth for most of recorded history and continues to be one of the most instantly recognizable and widely accepted across the globe. Investors often turn to gold as a hedge against inflation or depreciation in the U.S. dollar against other major currencies. Whereas investing in gold used to be limited to ownership of physical metal, modern innovations have made gold an asset class accessible to all.

Difficulty: Moderate

Instructions

Physical Gold

1. Assess need. Most financial planner suggest about 10% of a portfolio should be allocated to gold. Depending on net worth, it may or may not be practical to have this entire amount in physical gold, since storage and insurance can be quite costly. Still, there is no substitute for physical metal and, in case of emergencies, having some on hand can be priceless.

2. Find a reputable dealer. Whether it's a local store front or an online dealer, buying physical requires identifying a reputable source. If local options are not available, several good online bullion stores are listed in the Resources section below. When comparing dealers, consider shipping costs, applicable taxes, availability and, of course, price.

3. Buy good bullion. The value of gold bullion is based on its purity and the reputation of the assayer guaranteeing the purity. The most popular is minted by national governments such as the U.S., Canada, Australia, Switzerland and South Africa. These highly sought pieces usually command a significant premium above the spot price of their metal content. Other reputable assayers, such as mining companies, may present a better value for the investor but may or may not be as liquid for resale.

4. Pick up scraps. A growing sector of gold investment is recycling scrap from electronic devices, old jewelry or dental fillings. Gold scrap, or gold of lesser purity, is not as valuable investment grade bullion, but can be refined. Most of the major online gold dealers will buy scrap gold.

Paper Gold

5. Consider gold pools. Some mining companies, national mints and bullion dealers sell shares of a gold pool that offers paper ownership of physical gold. These shares can later be resold to realize a profit but generally are not redeemable for physical metal. This system of gold investment was popular before the proliferation of gold ETFs.

6. Use ETFs and ETNs. Exchange traded funds and exchange traded notes move like stocks and are incredibly easy to buy and sell. In the case of gold, they are backed by a physical store of metal and generally track the gold price. ETFs and ETNs are not redeemable for physical metal but are used by speculators to gain quick exposure to the gold market. Several gold funds trade regularly as does at least one gold inverse ETN. See Resources below for more.

7. Speculate on futures. While major industrial users may obtain their supply from the futures market, most participants in futures are merely speculators and never intend to accept delivery as stipulated in the contract. Because one contract covers 100 troy ounces of gold, playing with futures typically involves substantial leverage and therefore involves significant risk. Only the most experienced and traders should use futures for gold investment.

Tips & Warnings

• Though gold is highly liquid, physical metal should be bought as a long-term investment. Use paper methods for more short-term trades.
• Good entry prices in gold generally occur after several weeks or months of declines. Factors that often favor a rise in gold price are a decline in the U.S. dollar, low interest rates and an inflationary monetary environment.
• Because gold is used as a hedge by large market participants, its price can fluctuate quickly in both directions. Profits in paper holding should be realized periodically to protect against violent downturns. These can be converted to physical metal if desired or reinvested elsewhere.
• As with all investing, buying gold involves significant risk of financial loss. Consult with a financial professional before making investment decisions.

Resources

• Why Invest in Gold?
• Gold Futures
• Kitco Bullion Store
• Northwest Territorial Mint Bullion Sales
• Commodity ETFs and ETNs