If you want to invest in gold, there's a lot you'll need to know. Is it a worthwhile investment for your portfolio?
When you think of gold, what comes to mind? Eighteen-karat gold jewelry? Gold bricks stacked high in a vault? Sacks of gold coins used for bartering or paying tax collectors in Robin Hood’s days? Or a sensible part of a modern investor’s asset allocation strategy?
Although global economies do not depend upon gold in the way they once did, gold is still an attractive investment. Why is that? And exactly how do you invest in gold?
The Allure of Investing in Gold
Gold can be a sound investment because, unlike currencies and securities, gold is in limited supply. (The gold supply increases as more gold is mined, but very slowly). Thanks to this scarcity, gold serves as a hedge against inflation. An ounce of gold can buy roughly the same amount of goods today as it did 50, 100, even 200 years ago. That’s not the case, of course, with a dollar bill. In fact, the value of gold typically increases as the value of a dollar falls.
For this reason, gold is a good choice for investors who want to insulate themselves somewhat from the inevitable effects of inflation. And who doesn’t?
But how do you make this happen? Believe it or not, buying gold (even physical gold coins) is doable for the average investor; you simply need to take the time to do it right.
How to Invest in Gold
Three common ways to invest in gold are:
Gold exchange-traded funds (ETFs)
Physical gold (e.g., gold coins)
Gold ETFs: With a gold ETF, you don’t have to worry about storing real gold (or paying for storage) or having your gold stolen. It’s easy to buy and sell ETFs using any discount broker and you can even include gold ETFs in your Roth IRA so your earnings can grow tax-free. Two gold ETF options are the StreetTracks Gold Shares (GLD), traded on the New York Stock Exchange and iShares Comex Gold Trust (IAU), traded on the American Stock Exchange.
Mining stocks: A more indirect way to invest in gold is via mining companies. You can purchase mining company stocks or a mutual fund or ETF that focuses on companies that mine precious metals. (Although gold is perhaps the most common investment metal, silver, platinum and other metals offer similar opportunities).
Gold Coins: For those who want a different kind of investing experience altogether, you can actually go out and buy real gold in the form of gold coins (which offer slightly better liquidity than other “real gold” options like gold bars).
How to Buy Gold Coins
Obviously you can’t just run down to the store and pick up a bag of gold coins. A number of Websites do, however, make it relatively easy to buy gold coins. Some sites sell coins directly; others provide trading platforms for individual investors. Both have pros and cons: marketplace sites typically offer better deals because you cut out middlemen but buying from direct dealers can provide an increased sense of security. As with any investment, however, it’s important to do your homework before buying gold coins; many sites are reputable, some are not.
There are also many kinds of gold coins available. Each is produced by different government mints and have different weights and purities, meanings it’s important to know the current value of the type of coin you are looking at buying. Popular coins include the American Eagle coin, the Canadian Maple Leaf coin, and the South African Kruggerand coins.
Gold And Your Investing Strategy
A sound investing strategy can be summed up in one word: Diversification. You may want to make gold a component of your portfolio, but don’t go overboard. Gold is not a total alternative to stocks and bonds, nor is gold a get rick quick scheme. Gold provides protection from inflation and, for some, the specter of total economic collapse. Although the price of gold is somewhat volatile, it has proven to make steady gains over time. The bottom line? You are not going to make a huge splash with an investment in gold, but gold coins especially will offers a tangible investment in a very intangible financial system.