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Ways to invest in gold
Investing in gold waxes and wanes in popularity, depending on a complex set of factors. Lately, gold investors have been on something of a roller coaster, says Cary Guffey, CFP professional and CFP Board ambassador.
“Those folks who bought it years ago at $300 an ounce, they’re still in the black. They’ve done well. But there were a lot of people, when gold topped out at $1,900 an ounce, that were still buying in,” Guffey says. “Now that we’ve pulled back substantially from that, there’s a fairly dramatic drop in a short period of time.”
Still, gold may give some investors a way to diversify their portfolios and hedge against inflation, he says. Investors just need to be careful about putting too much of their money in gold or any commodity, because commodities don’t tend to provide huge growth over the long term.
“Commodities as a whole, 5 percent to 10 percent is the most I’d want to see in a properly balanced, diversified portfolio,” Guffey says.
If you’ve decided to put a portion of your nest egg in gold, there are multiple ways to go about it.
“All ways you invest in gold have pluses and minuses,” Guffey says, and investors need to be aware of them before committing any cash.
Here are five of the most popular ways to go gold.
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Buy gold ETF shares
Gold exchange-traded funds such as SPDR Gold Shares (GLD) are probably the easiest and cheapest way to gain exposure to gold. They can be purchased through any brokerage account just like a stock.
The carrying costs are built into the expense ratio regularly paid out of the total balance of the fund. They’re pretty reasonably priced, partly because of the huge economies of scale involved — SPDR Gold Shares ETF alone has assets of about $31 billion.
- They are cheap and easy to buy and sell. Transactions can be settled in three days.
- They have relatively low carrying costs, thanks to huge economies of scale.
- ETF prices track the market price of gold, leading to pure exposure to gold.
- They are not as tangible as physical gold.
- They are pretty much useless in the apocalypse.
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Buy physical gold
Buying physical gold is exactly what it sounds like. You go to a gold dealer or a gold dealer’s website and get physical gold in the form of coins such as the South African Krugerrand, the American Eagle or a stamped gold bar.
Physical investment-grade gold is sold by weight in ounces or grams and is typically mixed with a small percentage of copper, silver or some other metal to improve durability. That mix can vary, but it is typically 22 karats (91.7 percent pure) or 24 karats (at least 99.95 percent pure).
Many people get a unique satisfaction from having their wealth in a form that’s tangible, Guffey says.
“It is a comfort that I can see it. I can touch it. It’s mine,” he says.
However, there’s a reason the U.S. government’s gold depository in Fort Knox, Kentucky, is synonymous with security: Gold has always been a tempting target for thieves. Because of that, owning physical gold entails significant carrying costs, either paying a company to hold it in their vaults, or building some kind of a vault in your home and accepting the risk that a thief may still manage to relieve you of it.
“If you take delivery of it, what are you going to do? Are you going to have it as a paperweight on your desk? Are you going to have a home safe? What are you actually going to do with this once you’ve got it,” Guffey says. “People need to think that through.”
- It doesn’t require an account with a financial institution to access.
- It holds its value better than other assets in times of political or economic crisis. Think the Great Recession and the stock market slide.
- A thief could steal thousands of dollars from your house in a package no bigger than a breadbox.
- There are generally high transaction costs. Buying and selling gold bullion usually involves paying a fairly high markup to a gold dealer.
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Invest in a gold-linked company
One way people try to invest in gold is by buying stock in a mining company or other company involved in the extraction or manufacture of gold.
However, that’s not the best approach if you’re looking to get a pure exposure to gold, Guffey says. In fact, many mining firms intentionally hedge to prevent their stock price from tanking every time the price of gold goes down.
Mining company stocks are also riskier than gold itself, because in addition to gold price risk, they also have all the other types of risk that publicly traded firms have, Guffey says. That is, managers could make dumb decisions or the country they mine in could become politically unstable.
- Stock can be bought and sold quickly and cheaply.
- They don’t closely track the performance of gold, and may rise and fall with the stock market.
- They are often more volatile than the price of gold itself.
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Buy into a gold-themed mutual fund
Gold-themed mutual funds may contain a mix of gold bullion, gold-related stocks, bonds and other assets that involve gold. Many gold mutual funds are actively traded, so they have higher expense ratios that can drag on returns.
They’re also not as numerous as they were a few years ago when the most recent gold rally started.
“There is a handful out there, but they’ve largely been replaced by ETFs,” Guffey says.
- Actively managed funds could potentially exceed the returns of gold because they include other assets such as gold-related securities.
- Carrying costs of any gold bullion in the fund are included and don’t have to be accounted for separately.
- Most funds aren’t a pure exposure to the performance of gold.
- They could have higher fees than ETFs.
- They may be more volatile than gold itself, due to holdings of gold-related stocks.
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Trade gold futures
You can bet on the price of gold by buying or selling futures, which are basically contracts that say you’ll buy or sell a certain amount of gold at a certain price on a certain date. However, getting involved in the futures market is generally not a good idea for most investors, Guffey says.
“It’s not for your run-of-the-mill investor; it’s for someone who’s a little more advanced,” Guffey says.
- Investors can increase returns by buying contracts, in part, with borrowed money, also known as “margin.”
- Returns from trading futures can be extremely volatile. You can lose a lot of money in a very short period of time.
- The fees may be high.