You’ve probably heard about investing in precious metals, but how much do you know about it?
Anywhere between 2.5 million and 25 million Americans are thought to have invested in gold. As a precious metal that’s been coveted for centuries, it’s surprising that the figure isn’t larger.
But, in reality, not many people know how to invest in precious metals. Who do you go to and where do you start? It’s not something you’re taught in school, which means it’s up to you.
To help, here’s a guide with what you need to know about how to invest in gold.
Why Invest in Precious Metals?
A lot of people ask, “Why should I invest in gold or silver?” Or, alternatively, “Why should I invest in platinum?” (Platinum is rarer and heavier than gold.)
It’s a great idea to find out why you should invest in precious metals before you do. It’ll give you a deeper understanding of whether it’s the right investment path for you.
The first upside is to investing in gold is that you have the opportunity to acquire something physical (a “real asset”). This is in stark contrast to a share of a stock that only ever exists on a piece of paper (known as a “paper asset”).
It also isn’t unlimited. The amount of gold and silver in the world isn’t rapidly increasing, although miners do find more year on year. But, the overall quantity we have isn’t likely to have a huge rise.
There’s also the fact that precious metal prices are inversely proportional to the American economy.
When the economy is weak, gold usually goes up in price, which has been a long-running pattern.
Gold prices were at around $50,000 at the beginning of 2020 before the Coronavirus struck. They are now sitting around $60,000 as of September 2020. This is an all-time, historic high for the precious metal.
These are just three of the reasons why many people want to invest in precious metals. If it doesn’t sound like the right investment for you, take a look at some other investment ideas to find the perfect fit.
So, now you know they why to invest in gold, let’s move onto the how to invest in gold.
How to Invest in Gold
There’s no single best way to invest in gold. How you choose to invest comes down to your personal preference and what will work best for your money. To help you decide, here are the different routes you could take.
1. Buy Gold Bullion
A gold bar is a measured quantity of refined gold that has been made by a producer meeting the standardized conditions for manufacturing, labeling, and recording gold. Gold bars are frequently called gold bullion or gold ingot.
One of the safest and most secure ways to invest in gold is to buy gold bullion.
This is the actual metal in its pure form, either as coins or gold bars. The bars are available in a huge range of sizes, going from a quarter-ounce wafer all the way up to a huge 400-ounce brick.
Gold bullion bars were the traditional way to invest in gold by buying it. Nowadays, though, coins are the more preferred options, such as the American Eagle or the South African Krugerrand. These are very common gold coins that have the maximum liquidity.
You can buy gold bullion from various sources, including gold dealers and banks. However, if you choose to buy yours, make sure you find a reputable source who you can trust to give you real gold. Once you have them, keep your gold safely stored in a bank safe deposit box or a safe at home.
You can also buy gold jewelry if you’d enjoy wearing your investment as well. But, be cautious as this isn’t usually the best way to invest. The price you buy your jewelry for is likely to be much more than it’s meltdown value because of the craftsmanship that’s gone into the piece.
Unfortunately, owning actual gold does have its downfalls. You have to keep it safe, pay to insure it, and pay for transaction fees, all of which take away from the profit of your investment.
2. Buy Gold Funds
If you want to invest in gold with a lower entry cost and avoid the hassles of storing a precious metal, then gold exchange-traded funds might be the option for you.
The major downside of this approach is that when you buy shares of a gold fund, you won’t actually own any gold. This is because gold funds control gold derivative contracts that are backed by gold. They do not control gold itself.
Meaning, you’ll be investing in a paper asset, not a real asset like gold bullion. When you sell your shares of a gold fund, you won’t receive the precious metal in any form. Rather, you’ll receive the cash value of your shares.
The purpose of a gold fund is to give you financial exposure to the price changes of gold, not to let you possess or control gold itself.
The oldest exchange-traded fund (ETF) is SPDR Gold Shares (GLD). You can buy and sell shares on the New York Stock Exchange and your share will replicate the value of real, physical gold.
The stocks do tend to fluctuate a little faster than actual gold and company risk factors can affect your share price, making it a little higher risk than buying gold bullion.
3. Buy Options on Gold Futures
The third method is usually reserved for more experienced investors who know the market. These investors can opt to buy gold futures options or gold ETF options.
These are essentially contracts that show the right to buy and sell gold at a certain price for a certain time.
These are used when the price of gold is expected to rise or fall, so you have to have a good knowledge of the market. It’s high-risk, high-reward.
4. Buy Stocks in Gold Mining
If the options above aren’t resonating with you, there is a final option—mining stocks. Rather than investing in the gold itself, you can invest in the mining behind it.
These stocks don’t always follow the patterns of regular gold stocks as they’re reliant on the performance of individual companies, but it can be a good alternative if you don’t feel comfortable with the other methods.
Investing in Gold is Speculative
When it comes to gold, I don’t think of it as an investment. Why? The reason is simple—it doesn’t produce cash flow.
Meaning, the reason to own gold is a speculative one: You buy it because you think at some point in the future you’ll be able to sell it to somebody else for more than you paid today.
However, I do believe that owning gold is an incredible hedge (meaning, insurance) against the severe inflation that paper currencies can periodically experience.
Historically, paper (fiat) currencies do experience catastrophic inflation from time to time, typically when major events effect the economy, such as war, pandemics, or geopolitical unrest. Were there ever to be an erosion of the value of the currency used within your country, then gold would be an extremely savvy and strategic way to preserve your wealth.