Gold Investment Tips

There are a number of ways to invest in gold, each with its own advantages and disadvantages. These include bullion and coins, market-trading via exchange-traded funds, investing in companies that actually mine gold, and investing in gold futures.

Traditional Gold

Investing in bullion and coins is probably the most familiar format for people with gold. Pictures constantly show gold coins and gold bars, which cement the image in our minds. Common bullion coins include South Africa Kruggerands, U.S. Mint Eagles and Canadian Loons. Bullion and coins are available from the respective government and private vendors, and all sell at the spot price value plus a premium. This premium can range from a simple 10 percent markup to whatever a vendor thinks he can get for the coin. For example, due to the cessation of the U.S. mint in making any gold eagle coins in 2009, private coin sellers were charging as much as 50 percent over the spot price for available coins. This markup effect can be seen every day on eBay and other market formats where price is driven by instant demand. Keep in mind, these commissions and premiums eat away at the value of the coin and, when bought, you then have to wait for the coin to appreciate that much more to actually make a profit. On the other hand, if your assumption is the dollar will fall in value due to inflation, then the rise in gold due to demand for protection may more than make up for the cost of obtaining the coins. It's a hit or miss assumption, since gold does not create value itself. It is only worth what people are willing to pay for it.

ETFs and Market Investment

For those not interested in dealing with so many premiums and commission buying and selling, exchange-traded funds (ETFs) may be the better way to go. ETFs are publicly traded in shares on the stock market like any other stock. They are managed like a mutual fund, but they don't have all the paperwork and restrictions (or the costs). You can buy and sell like any other stock, with your cost being only the commission you pay your stockbroker. The two major gold ETFs are SPDRs Gold ETF (ticker symbol: GLD) and iShares Gold Trust ETF (ticker symbol: IAU). Streettracks is the larger of the two and because of that fact, moves closer to the actual gold-market pricing since it commands more shares. ETFs do have costs, and their small management fees eat away at the value of a share over time, so the details are added in the ETF annual notices.

Gold Mining Companies

If you would rather invest in the production of gold, you can buy the public shares of companies that mine gold. The rules for investing in this option are the same as any other company stock--you need to research the company, watch developments that affect the industry, and be ready to sell when there is a downturn, if needed. This takes time and work. Also, these companies' values are not directly tied to the price of gold, so the spot price may rise and the companies' stocks stay flat. This may be a bit of a disappointment to those thinking they are directly connected.

Gold Futures: Buyer Beware

Finally, there are gold futures. These are contracts where producers and users of gold lock-in prices of gold that they will need or produce so that price fluctuations don't burn them needlessly in the future. Investors are allowed to make investing bets on which way gold prices will swing. Futures are about as close to gambling as market investment gets, at least among the regulated platforms. The added benefit with futures is that you can invest a small amount to be allowed to play a large bet. You can invest $1,000 and be allowed to bet $20,000. If you win with a price increase, then your profits can be huge. However, if it swings the other way, you can lose your entire investment and owe more.
If you're going to go the road of futures, make sure you do it with money that you don't mind losing. Second, have a thorough understanding of how futures work before getting started. There are a number of web sources that provide very detailed primers on how each approach works. Finally, never assume what worked one day with futures will work the next. Take the example of Barings Bank. The institution was one of the world's premier finance houses until one of its market traders lost billions in bad bets on futures in the Singapore stock market, in a matter of a few days. The same can easily happen with gold futures.

Conclusion

Gold can be invested in multiple ways, but each has its pros and cons. The investor needs to decide which works best for his needs. Some are more comfortable with the feel of actual gold coins. Others believe the market systems will remain unharmed and choose electronic holding instead. Still others speculate on the fringes. So study, research and go with whichever approach works best. Just don't invest in gold because someone told you to. Do your own homework first.

References

• SPDRs Gold ETF
• iShares Gold Trust ETF
• Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World, Nick Neeson and Edward Whitley, Little Brown and Co., 1996.

Resources

• The U.S. Mint
• eBay: Category - Gold Bullion
• COMEX Futures on Gold