Gold has been a store of value for thousands of years. Despite its long standing history, the idea of gold as an investment has its detractors. Warren Buffett argued that gold is inferior to stocks as an investment, because gold doesn’t produce any income. However, gold has risen in value over time and has a safe-haven status to protect against loss of confidence in the financial systems, something stocks do not have.
If you want gold as part of your portfolio, there are several ways to go about acquiring gold. Below, we’ll go through five ways you can invest in gold and give you the information you need to decide the best one for you.
For many gold investors, there is no alternative to having physical metal in your personal possession. A variety of gold coins and bars are available from government mints and private sellers, and you can typically purchase them from coin dealers and other precious-metals retail specialists. For low commission, large purchases, you can buy one hundred ounce bars on the Comex and take physical delivery.
The biggest benefit to owning physical gold is that it cuts out the middleman. It doesn’t depend on another entity or intermediary to perform.
Absent an intermediary, physical ownership requires you to take personal responsibility for its safekeeping, which is something that isn’t possible for everyone.
For those who don’t wish, or cannot hold their gold directly, gold ETF’s offer direct exposure to the price of gold, without the need for physical possession. SPDR Gold Trust (GLD) has shares that represent a tiny bit less than one-tenth of an ounce of gold. The ETF owns and stores physical gold in warehouses to support the price of its shares.
The benefit of gold ETF’s are their liquidity. You can buy and sell multiple times per day when the stock market is open, and the transaction costs are typically much lower than when buying physical bullion.
However, some gold investors don’t like ETF’s because they are still a financial asset that give you no actual claim to the physical metal that the ETF owns, and therefore there is an intermediary between you and your gold. This intermediary is a potential weak link that could deprive you of your investment should things go sour.
If you want to have control over a lot of gold, futures contracts are a low-expense alternative. Gold futures contracts come in one hundred ounce bars worth north of $150,000 at today’s prices. However, to open a position, all you need is a much smaller initial margin investment, (currently $4,500) and you also have to maintain a minimum margin level. By only paying the minimum margin to purchase gold, you are given significant leverage to the price of gold. By using futures contracts, you get to control what is currently worth approximately $150,000 worth of gold for only a $4,500 initial investment.
The downside of buying futures is that leverage works both ways. You are also responsible for the losses up to the full value of the futures contract. If the price declines enough, you will be required to make additional cash deposits to cover losses.
While direct gold ownership has its advantages, the problem for some investors is that it doesn’t produce any income. This is where gold mining stocks enter the investment realm. Although gold mining stocks are active businesses that can rise and fall in value based on their own performance, their price is quite closely linked to the price of the commodity that they mine—gold.
While gold mining companies typically offer leverage to the price of gold, the leverage is not a fixed amount, and it is possible that the individual stocks that you purchase could decline even if gold is rising. This removes gold stocks from being a pure play on the price of gold.
Until recently, there was no way to earn interest on your gold holdings. Monetary Metals is set to change that by offering interest on gold, paid in gold. To make it work, you store you physical gold at a well known warehouse, and with your permission, Monetary Metals makes gold loans (with your gold) to businesses whose direct source of revenue is gold. Examples of businesses that may be interested in acquiring a gold loan from Monetary Metals are refiners, jewelers, and bullion suppliers.
Although gold loans offer interest, they are not without risk. As with every other method of ownership besides physical possession, there are intermediaries that you must rely on to make your investment whole. These intermediaries could potentially go bankrupt in difficult times.