Gold is a stable and predictable investment that most investors could benefit from having in their portfolio. Before you add gold to your investment lineup, though, you must know how to invest in it.
Follow these step-by-step guides to learn how to invest in gold.
Before we talk about how to invest in gold, let’s talk about the why. Many people assume investing in gold is only for the ‘rich and famous,’ when in fact, it’s an investment anyone can use to diversify their portfolio.
Gold has held a steady value through the years and is a great way to diversify your investments away from standard stocks and bonds. Gold typically does the opposite of the standard market which means if the stock market crashes, chances are your gold investment will do the opposite.
Before you invest in gold, decide if you want to invest in physical gold or shares of it.
Investing in physical gold is a great way to invest money, but it also differs greatly from your standard stock and bond investments. Rather than going through a traditional broker, you’ll need a custodian to hold the gold for you. Not just any custodian will do either – you need one with proper insurance and bonding, and one how can track and manage your gold investment.
Here are a few ways to physically invest in gold.
Gold coins are the most common way to physically trade gold. They are available in a variety of forms including American Gold Eagle and Canadian Maple Leaf coins. You invest in coins by weight, and the average coin weighs one or two ounces.
Gold coins are a bit different because they’re often in high demand which means you’ll pay a premium for them. Try sticking with reputable dealers versus buying gold coins (and falling for a scam) at a pawn shop.
Gold bullion is what you see in the movies when they’re trading gold. Most commonly sold in one to ten-ounce bars, bullion can be an expensive way to invest in gold since the current price is around $1,850 per ounce.
Since you can’t buy a fractional share or a ‘part of a bullion’, you’ll need a decent amount of money to invest in it. Make sure you use a reputable dealer who is insured and sells legitimate bouillon.
Investing in gold jewelry is the riskiest because there are many fake products out there that look like the real deal and could leave with a serious loss. Only buy gold jewelry from a reputable dealer that you know carefully documented the gold and knows its true value.
Most gold jewelry is sold at a markup and they aren’t always pure. While you may get ‘real gold,’ it may not be the 24 karat gold (pure gold) the seller claimed.
You can also invest in gold abstractly by investing in shares of either ETFs, mutual funds, or stocks. While you won’t get the same type of return, there are benefits of investing in gold shares including the enhanced liquidity since you can sell shares of most investments at any time.
When you invest in gold shares, you aren’t investing in gold itself, but the investments that supply the debt or equity for the physical gold. Your returns may not be as high as physical gold, but they make it easier to diversify.
ETFs and mutual funds in any industry help you diversify your investment. You aren’t putting ‘all your eggs in one basket’ by investing in one company or one industry. ETFs and mutual funds invest in a variety of gold funds, diversifying your investment.
Most ETF and mutual fund gold investments are passive investments, which usually diversify in a variety of underlying stocks and bonds of gold mining companies. Some mutual funds, however, are actively managed, and try to beat the market rather than mimic it, like ETFs do.
When you invest in gold stocks, you invest in the mining and refining companies that handle gold. It’s just like investing in any other company that you’re interested in – you buy stocks which gives you part ownership of the company. If the company does well, you make money, if it does poorly, you may lose money.
You buy gold stocks through a traditional broker. While the stock prices are driven by the price of gold, other factors affect the price too including the company’s operational expenses and other variables.
If you’re an experienced investor and have a high risk tolerance, investing in futures and options is another way to invest in gold, but it’s the riskiest.
Since you’re investing in the ‘right’ to buy or sell a security based on the market’s performance, you have to watch the market closely and know when to activate or hold back on your investments. Futures and options are reserved for experienced investors who want an active role in investing.
If you’re thinking about diversifying your portfolio consider investing in gold. If it’s physical gold you choose, you’ll need a reputable custodian to handle the process for you, including holding onto the gold. You can’t just hold onto the gold yourself and think the IRS will give you tax benefits if you include it in your IRA. There are careful steps you must follow to invest in physical gold.
If you’d rather invest in gold shares, you have many options. We suggest sticking with stocks, ETFs, or mutual funds, but if you’re an experienced investor looking for something with a little ‘risk’ consider futures or options.
No matter how you invest in gold, the bottom line is that it’s a great way to diversify your portfolio and offset the risk the market poses. It’s a great way to give yourself more buying power and to provide more financial peace during retirement.