A Beginner’s Guide to Investing in Gold

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Only 18 days into 2016, and we can already say that it’s been a rocky year. The world is going through rough times in many ways; the second episode of the Chinese stock market crash last week has spooked stock investors across the globe. Bond yield spreads are rising, adding to investors’ fears of bigger defaults in the bond markets. And at the same time, leaving cash idle in the bank isn’t earning savers anything. With interest rates under one percent and inflation close to two percent, investors who are stashing cash stand to lose all of its worth in real terms.

In times like these, gold bullion might be looking like the next best alternative for your investment portfolio.

Bullion investing is basically gaining financial exposure to precious metals—primarily, gold, silver, platinum, and palladium. Of these, gold offers the most liquidity.

1. Physical Gold

The simplest and most direct form of gold investing is in buying gold jewelry, gold bars, with an IRA, or gold coins—jewelry from a jewelry store, bars from a bank or a dealer, through your self-directed IRA administrator, or coins from a dealer.

Coins are the most commonly held form of physical gold, after, of course, jewelry. The best options are the American Eagle, American Buffalo, and Canadian Gold Maple Leaf coins.

When looking for a coin dealer, always seek one who offers the best bargain value. Albeit small, dealers charge premiums on coins above the spot gold price, meaning that you’ll be buying these coins at a price higher than the current market price of gold. In order for you to make money on your investment, the spot price of gold must increase enough to cover the premium you paid. This is why you should look for a dealer who is selling coins for the lowest premium.

2. Gold ETFs

If you don’t want to buy physical gold, you may gain indirect exposure to gold through exchange-traded funds (ETFs).

ETFs indirectly track the price of a basket of assets. Gold ETFs, in particular, come in three forms: 1) those backed by physical gold, meaning they track gold’s spot price; 2) those backed by gold miners’ stocks, such that they track the stock prices of a handful of prominent gold mining companies; and 3) those backed by gold futures, meaning they track the prices of derivative contracts that speculate the future price of gold.

3. Gold Stocks

The third possible way to add gold to your investment portfolio is to buy gold stocks. By “gold stocks,” I mean companies that are involved in the mining, exploration, development, and production of gold.

The risk involved here is that like any other listed company, gold stocks are exposed to stock market fluctuations. The same rules of investment will apply here that apply to any stock on the stock market, in that you’ll have to weigh the financials and fundamentals before jumping into any of these stocks.

4. Gold Derivatives

Finally, gold options and gold futures contracts are an indirect way to invest in gold—but a very risky one. Experts say that gold derivatives should be the last investment resort for any novice investor.

Unlike the spot gold market, where the prices are listed as they are, the futures market trades contracts on future price speculations. Because of the risks involved and the level of sophistication required, investors should strike this option off their radar if they’re not a seasoned trader.

To wrap it all up, gold derivatives, gold stocks, and gold ETFs that are not physically backed by gold are some of the riskier investments. On the other end of the risk spectrum, there’s physical gold and gold-backed ETFs, which are relatively simpler, safer investments.

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