How To Invest in Gold

Many individuals are interested in investing in gold for a variety of reasons. Some view it as a long-term hedge against inflation; others believe that it provides the opportunity for rapid price appreciation. In addition, many people feel comfortable investing in a “hard asset” rather than a financial product. There are a variety of ways to participate in this asset, whether it be buying the physical product or just participating in the price changes through derivatives. However, your choice of how to invest will be influenced by your reason for investing.  This article will discuss the various ways you can invest in gold based upon your investing goals.

Step 1

The first and most simple way to invest in gold is by purchasing a gold fund. This can either be through a gold-oriented mutual fund or a gold Exchange Traded Fund (ETF). Most mutual funds are gold oriented; for example, Fidelity Select Gold (FSEGX) holds only 8% of its $17 billion of assets in gold bullion, with the rest held in cash or in stocks of gold mining and gold related companies. This fund does not claim to track the price of gold bullion, but simply invests the large majority (80%) of its assets in gold and gold-related stocks. SPDR Gold Shares (GLD), however, is an ETF that strives “to reflect the performance of the price of gold bullion, less the Trust’s expenses.” If you want to invest in gold through a large, well-known fund that can be a long-term investment with relatively low cost, a gold fund may be the answer for you.

Step 2

Another option for buying gold without purchasing the actual physical commodity is to buy gold futures. Gold futures, with the root GC, are traded on the COMEX (a division on the NYMEX), with electronic trading on the CME Globex platform. You can purchase these futures to take advantage of the price changes in gold. While this product won’t charge an annual fee, and has relatively small commission for the purchase, but they are short-term contracts that you may have to change more frequently. While you can wait until the contract expires to take delivery of the gold, it may be easier to just to sell the contract to lock in the price change. This is an indirect way to invest in gold due to the derivative nature of the futures. Essentially, the price of the futures contract tracks what investors believe gold will be priced at when the contract month arrives. Please be advised that futures and other derivatives products are for experienced investors only.

Step 3

Buy physical gold: coins or bullion. You can hold it personally or have a bank or dealer hold it for you. To purchase physical gold, your best bet is to find an authorized gold, coin, or precious metal dealer. One popular physical gold product is the American Eagle Gold Bullion Coins. According to the US Department of Treasury, they are "America’s only official investment-grade gold bullion coins," as well as the "only gold bullion coins whose weight, content, and purity are guaranteed by the United States Government." Due to their backing from the US government, these coins are some of the most liquid gold coins available. These coins can even be held inside of an IRA.


For those who are interested in diversifying their portfolio by investing in a hard asset, there are many ways to participate in the gold market. You can buy and hold physical gold in the form of coins or bullion, or you can invest in financial products that are designed to hold gold or track the price movements (such as gold futures). Gold mutual funds and ETFs make this asset class easily accessible to any investor.

 

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