Investing in gold and coins could be a headache for the new investor. There are many ways to invest in gold but not all of them are recommended. In this article, I will present to you all the ways of gold investing and I will explain why investing in physical gold is the best way to invest in gold and coins.
In today’s economic environment, it is crucial for the investor to have part of his/her portfolio invested in gold. In these troubled times, there should not be an investment portfolio that does not include gold.
Investing in Gold and Coins
Gold in the Past and Gold Now
In the past, humans used gold as a way to facilitate trade and to accumulate and store wealth. In particular, there was a gold standard policy where early paper currencies were generally backed by gold with every printed bill corresponding to an amount of gold held in a vault. This approach to paper money lasted well into the 20th century.
Nowadays the gold standard policy has been replaced by fiat money therefore, the link between gold and paper money has long been broken. Nonetheless, investors and central banks, still consider the yellow metal a paramount investment tool. For example, central banks still own huge amounts of gold.
Who Buys Gold?
It is not only investors who buy gold. In fact, 50% of gold demand comes from jewelry. People love to wear gold.
Another 40% comes from direct physical investment in gold bullion, gold bars, and coins, including all collectible numismatic gold coins, medals, and so on. Physical gold investors include central banks and individual investors. The Chinese and Russian central banks are some of the many central banks who invested in physical gold recently.
Gold is considered to be a safe haven asset. Every time there has been political and economic instability, gold has been called upon to save the day. When a paper currency loses its value and global inflation starts rising, gold offers security and acts as a safe haven for the investor.
Last but not least, industrial demand for gold is on the increase, especially in technology. Computers have gold and so do mobile phones. Gold is also used in electrical appliances, medicine, and so on.
Reasons to invest in gold
- To protect and preserve wealth from unexpected events.
- A hedge when the stock market is not expected to do well.
- Portfolio diversification.
- The weak dollar
- Loss of confidence in central banks
- Geopolitical uncertainty (Middle East, Brexit, ISIS, North Korea, Hong Kong.)
- The US-China trade war.
- The covid-19 caused recession
- Low or negative interest rates
| Black Monday1987 | Iraq-Kuwait War1990 | Dot Com Crash2001 | Financial Crisis2008 | |
|---|---|---|---|---|
| Stock Market Decline | -38.9 | -22.5 | -27% | -34% |
| Gold Price Results | +5% | +7.5% | +1% | +5% |
| Gold Outperformed Stocks By Ratio | 45:1 | 31:1 | 29:1 | 40:1 |
Investing in Physical Gold
Gold Bullion Bars
Gold bullion bars are a popular way to invest in gold. They are available in various sizes, 12kg, 1kg, 100gr, 50gr, 10gr, 1gr, etc. Gold bullion bars must be certified for weight and purity. A serial number is attached to all certified gold bars for security purposes. Bars’ purity must be 99.5% (24 karats) at least, whereas there is a number of manufacturers producing bars at 99.9% purity. (24 karats too)
Gold bars can be sold easily at any given time. However, it is best to own smaller size bars rather than the 12 kg or 400-ounce bar. Imagine, owning a 400-ounce bar and wanting to sell it. It’s not easy to find an investor willing to fork out $650,000 overnight. If you want to liquidate 10% of it you can’t exactly see off 10% and sell it. The best option is to own smaller-sized bullion gold bars, as most gold investors do. They offer much better liquidity.
Gold Bullion Bars Pros
- Direct exposure
- Tangible ownership
- High liquidity (small size bars)
Gold Bullion Bars Cons
- Markups
- Storage
Gold Coins
Gold bullion coins are another popular way to invest in gold. Bullion coins are priced according to their fine weight plus a small premium, based on supply and demand, as opposed to numismatic gold coins, which are priced mainly by supply and demand, based on rarity and condition. If you are willing to invest strictly in gold, focus on widely circulated coins and leave the rare coins to collectors.
Bullion coins are mostly minted in smaller than one-ounce sizes, making them a more convenient way to invest in gold compared to larger bars. Reputable dealers can be found almost anywhere, even your local bank might be able to help you.
Gold Bullion Coins Pros
- Direct exposure
- Tangible ownership
- High liquidity
Gold Bullion Coins Cons
- Markups
- Storage
Gold ETFs and Mutual Funds
Gold exchange-traded funds, (ETFs) are an interesting way to invest directly in gold. Each share of these specialized tools represents a fixed amount of gold, such as one-quarter of an ounce. These funds can be purchased or sold like shares, in any brokerage. This is a simple and cost-effective way to invest in gold, especially for small investors. ETF funds hold gold bullion as their own asset therefore, you will not have to actually store your own bullion.
Mutual funds hold gold bullion and actually own gold companies. They are part of their own investment portfolios. Investors should be aware, that only a few mutual funds focus solely on gold investing. Most of them own a number of other commodities, which have nothing to do with gold.
Gold ETFs and Mutual Funds Pros
- Direct exposure
- Highly liquid
- A simple way to own gold
- Low cost
- Suited for small investors
Gold ETFs and Mutual Funds Cons
- Fees
- No upside beyond gold price changes
Gold Jewelry
If you believe that, because you possess a lot of gold jewelry, you own a small fortune, then you are wrong. In jewel manufacturing the amount of gold is small. The purity of gold is measured in carats. The purest amount of gold you can find is 24 carats. However, in jewelry 14 or 18 carats is common. Keep in mind, that a low amount of gold in jewelry does not mean that it is not good enough, as gold in its purest form (24 carats) could bend or deform quite easily.
From an investor’s point of view, jewelry will not reward you with high profits, as retail markups are up to 400% of gold’s value. However, bargains can be found at auctions or estate sales. This way you avoid the retail markup.
Gold Jewelry Pros
- Gold jewelry makes you feel good
Gold Jewelry Cons
- Mediocre gold investment
Investing in Paper Gold
Gold Futures and Options
Gold futures are contracts to buy or sell a particular amount of an item (gold) on a given date. Futures are traded in contracts, not shares, and represent a predetermined amount of gold. Some contracts settle in dollars, while other contracts may settle in gold. As a result, the investor has to be very careful. Futures are suited to the experienced investor.
Options are also another way to invest in gold. They give you the option to buy a futures contract, without having to pay the contract outright. Instead, you will have the option to buy the futures contract at a preset time frame and price. An option might reduce losses to the price paid but, a futures contract based on a margin might require more capital than originally invested, in case losses mount quickly. Options are also suited to the experienced investor.
Gold Futures and Option Pros
- Highly liquid
- Small upfront capital investment to control a large quantity of gold
- Low commissions
Gold Futures and Options
- Indirect gold exposure
- Time-limited contracts
- Need to be a financial expert
Gold Mining Company Stocks
Another way to own gold indirectly is to invest in gold mining and refining companies. You can do that by purchasing their shares. If gold’s price rises, so will its profits, and the value of your shares will follow. Simple as that. However, you have to be thorough and diligent when selecting which gold mining company is worth investing in.
Mines are commercial enterprises, with problems such as flooding, subsidence, structural failure, mismanagement, negative publicity, nationalization, theft, and corruption. Such factors can lower the share value of mining companies.
Gold Mining Stocks Pros
- Usually, track the gold price
- You may get dividends
Gold Mining Stocks Cons
- Indirect gold exposure
- Mine operating risks
- Exposure to other commodities
What is the Best Way to Invest in Gold?
As you can see there are many ways to invest in gold. They all have their advantages and disadvantages. If you want to invest small, then gold ETFs could be best for you. You can also invest in gold coins and keep them safe somewhere at home.
For those who are willing to invest a large amount of money into gold, the best will be to invest in bullion bars and coins. Direct gold ownership is best because it has the ability to track gold’s performance. Most investors feel better when owning a tangible asset stored at an independent private facility.
If you are an aggressive and experienced investor with direct access to the markets, the gold futures and options market could be best for you. Beware though, that the risk is high, and so are the profits and losses.
Mining stocks are also an interesting way to invest in gold. Jewelry though isn’t worth considering at all.
Final words
Investing in gold offers several benefits including portfolio diversification and protection from unexpected events. A prudent investor always includes gold in his portfolio, usually around 10%.
There is no one-size-fits-all-all investment however, you are now armed with the knowledge of how the industry works, and all you need to do now is to consider all the available options and make the decision that’s right for you.
During these troubled times, ordinary folks have seen their life savings decimated. It is imperative for an investor to diversify his/her IRA investment in order to protect it. A Self Directed gold IRA investment could safeguard and protect your savings.