How to Invest in Gold

The stock market ups and downs in 2020 are inspiring many investors to invest in alternative assets like gold.

Owning precious metals can be an excellent way to hedge against stock market volatility and paper currency inflation. Gold reaching a new all-time high in July 2020 is also sparking interest in learning how to invest in gold.

There are several different ways you can buy gold. For instance, you can purchase physical gold bars or by investing in precious metal stocks.

Is Investing in Gold a Good Idea?

There are several good reasons to invest in gold. One reason is that gold is a very stable investment over the long term. Historically, it holds its value very well. It has a long history as a currency and a sign of wealth for multiple civilizations.

Another reason to invest in gold is that it is an inflation hedge. Paper money loses its purchasing power over time, gold doesn't. An ounce of gold will command more dollars as the value of those dollars drops. 

Gold is also a wonderful way to diversify your investment portfolio. The value of gold tends to rise when the market falls, and vice versa. For this reason, gold becomes a popular investment during periods of economic uncertainty.

Consider this…Warren Buffett recently bought an approximate 1% stake in the world’s second-largest gold miner, Barrick Gold (NYSE: GOLD). While this investment seems boring at first glance, the “Oracle of Omaha” has repeatedly been bearish about investing in gold.

Should you invest in gold because Warren Buffett is? First, you should analyze your portfolio and decide if gold fits your investment strategy. You probably shouldn’t sell all of your index funds and buy precious metals, but a small position to can help diversify your portfolio.

Gold may deserve a spot in your portfolio but remember one thing. Precious metals don’t earn passive income like dividend stocks or bank account interest. Most gold investments only make money if the asset prices rise and you sell for a profit – buy low and sell higher.

What is the Best Way to Invest in Gold?

While there are many ways to invest in gold, each option has different risks and rewards. As always, do your due diligence and understand how investing in gold works.

Gold Bullion and Gold Coins

Buying gold bullion that you can touch and store in a vault or personal safe can be your best option. When investing in gold stocks and funds, the holding company possesses the gold and won’t let you exchange stock shares for physical gold.

Gold bars and collectible coins tend to have the highest purity levels and investor demand.

However, buying physical gold bullion can be pricey. Even reputable dealers charge a premium up to 5% above the current spot price for gold bars and coins.

Here are some of the legit places to buy physical gold.

Vaulted

Vaulted lets you buy fractional shares of physical gold bars stored at the Royal Canadian Mint. Whether you invest $10 at a time or buy an entire ounce, you pay a competitive 1.8% transaction fee. There’s also a 0.40% annual maintenance fee similar to gold bullion ETFs.

You can have Vaulted mail you physical gold bars via FedEx. Read the full Vaulted review here.

Use Reputable Gold Dealers

There are lots of places selling gold online including private sellers on eBay. But you should stick with a reputable dealer to avoid buying “fake gold.”

JM Bullion and APMEX are two reputable dealers for bullion and coins. If coins (rather than bullion) are your thing, you may also want to consider David Hall Rare Coins.

Gold Trust ETFs and Mutual Funds

When deciding how to invest in gold, you might start with gold trust funds. Most online brokers let you buy gold trust ETFs that hold gold bullion.

This low-effort and cost-effective way can be cheaper than buying physical gold bullion as you avoid the transaction premiums. However, most gold trusts do not let you redeem your shares for physical bullion like Vaulted.

Like other trust ETFs, your investments rely on appreciating gold spot prices to make money as you don’t earn dividends or royalties. These ETFs also have relatively high expense ratios between 0.20% and 0.50% – notably higher than stock and index funds.

Three of the most widely-held gold trust ETFs are:

There are also ETFs and mutual funds that hold at least one other precious metal – usually silver. You may prefer this option if you want instant diversification and have exposure to other precious metals.

Gold Streaming Companies

Streaming companies don’t own the mines but help finance mining projects. The company receives royalties from the production. Buying shares of gold streaming companies let you earn dividend income from gold mining projects across the world. This is a more traditional investment and is affected by movements in the stock market. A broad stock market selloff like we saw in March 2020 can impact the share price of streaming companies. 

Investing in streaming companies can be less risky than directly investing in gold miners whose fortunes may rise or fall may hinge on the success of a single mining project.

A string of project failures or missing analyst expectations can result in potential investment losses. Most streaming companies invest in other metals too, so you’re not investing only in gold.

Streaming companies are not risk-free but can complement owning gold bullion. 

Gold Mining Companies

One of the riskier ways to invest in gold is buying shares of gold mining companies. Before going on a buying spree, you must know the difference between senior and junior mining companies.

Senior miners” tend to be less volatile, are experienced with gold mining and have more cash. Barrick Gold is one of the largest senior miners that Warren Buffett’s Berkshire Hathaway owns shares of. This class of mining stocks can also pay dividends in addition to other income-producing assets in your portfolio.

Junior miners” can be extremely risky and are penny stocks with share prices of $5 or less. Most junior mining companies are exploration companies looking to find new mining projects. Once they secure the mining project and get the necessary permits, the stock price can skyrocket as senior miners and other investors buy shares.

Buying shares of individual mining companies is one option. You may prefer this option if you have the time to research their current mining projects, ongoing exploration goals, and the accompanying geopolitical and market risks.

A second option is buying gold mining ETFs and mutual funds invest in most mining companies. Some ETFs focus on senior miners and others only hold junior miners. As gold mining is highly cyclical, these ETFs are an easy way to profit when gold miner share prices rise. But share prices can drop sharply when the industry enters a bear market.

Most gold mining investors do not “buy and hold” this asset for the long-term.

Gold Futures and Options

Highly experienced investors with a lot of cash might consider trading gold futures and options. You invest in futures and options contracts that predict whether gold prices will rise or fall.

This investment option can be riskier than buying junior mining stocks as you use margin trading. If the trade goes against you, you can lose a substantial chunk of change. You may even have to take delivery of physical gold if you trade futures.

Gold Jewelry

You may already have a figurative gold mine in your house – or jewelry chest. Gold has many common uses including fine jewelry, electronics, and dental implants.

There are several ways you can sell scrap gold and make quick money.

One option is going to local gold exchange stores or pawn shops. You might also consider selling your jewelry and valuable to Cash for Gold USA.

It’s important to remember that gold recyclers may only pay you for the value of the gold in your pieces. If you have an unwanted ring that contains gems like diamonds, you might get more money selling it to a jewelry store or even Facebook Marketplace.

Investing in gold jewelry might sound exciting as these items can have more practical purposes than hoarding gold bars. However, deciding on the fair market value as a seller is more complicated than selling physical gold or gold stocks.

Several variables influence the market value of gold jewelry including:

  • The purity level of gold: Most gold jewelry has a rating between 8 karats and 24 karats.
    • 24k gold is “pure gold”
  • Melt value: Jewelers measure the weight of gold jewelry in grams. The karat rating the total gold weight calculates the melt value.
  • Value of other precious metals and gemstones: The presence of other precious metals and gemstones can increase the item’s value above the gold melt value.
  • Current market demand: Popular jewelry designs can be worth more than less favorable designs even if you have the same purity level and melt value.

The potential buyer also may offer less than market value so they can earn a profit. It can be worth the time getting several price quotes to choose the best offer.

You might consider investing in gold jewelry if you’re good at flipping items. Otherwise, investing in gold stocks or buying physical bullion can be better.

Summary

It may be a good idea to own a little gold to diversify your portfolio. You have to decide if you want to own physical gold, like bullion, coins, or jewlery or if you want a more traditional investment by buying shares in streaming or mining companies.

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About Josh Patoka

After graduating in $50k with student loans in May 2008 from Virginia Military Institute with a B.A. International Studies and Political Science with a minor in Spanish (I studied abroad in Sevilla, Spain for 3 months), Josh decided to sell his soul for seven years by working in the transportation industry to get out of debt ASAP and focus on doing something else with a better work-life balance.

He is a father of three and has been writing about (almost) everything personal finance since 2015. You can also find him at his own blog Money Buffalo where he shares his personal experience of becoming debt-free (twice) and taking a 50%+ pay cut when he changed careers.

Today, Josh relishes the flexibility of being self-employed and debt-free and encourages others to pursue their dreams. Josh enjoys spending his free time reading books and spending time with his wife and three children.

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