In the past few years, gold has gained a bit more exposure in national and financial news. People are starting to wake up to the fact that gold is in a bull market. But since gold is an asset that is only owned by 1% of Americans, most people don’t know what kind of gold to buy.
There are a number of ways to invest in gold. One, is purchasing gold mining stocks or related gold equities. Second, is to invest in gold exchange traded funds or gold futures contracts. Lastly, you can purchase real physical gold.
Gold mining stocks can be a good option, but be careful because mining stocks carry big risks. First of all, they are generally more volatile. Secondly, it’s expensive to mine, so be wary of oil and labor prices as this can eat into gold mining profits. Third, each mining company is different and mines have varying degrees of ore grades. Lastly, there is country risk due to government and political issues such as nationalization of mines, taxation and labor issues (strikes). In summary, mining stock investment is a complex area that requires a lot of research.
Gold Exchange Traded Funds (ETF’s) such as GLD offer a way to easily invest in gold. The GLD generally holds gold to back the equity shares of the fund. The GLD does a good job of tracking gold prices. Gold futures contracts track gold more accurately and allow you to purchase gold on margin. This can be good and bad as leverage is a good way to lose money if you don’t know what you are doing, so trading futures should be left to professionals. But realize that there are some risks in owning these paper gold investments. Gold gains value when people lose confidence in paper currency. There may come a time when physical gold has the real value and owning paper claims on gold such as GLD may not provide you with the protection against a currency crisis. If you are forced to settle in paper currency that is rapidly losing value in a hyperinflation you may just end up with a bunch of worthless currency.
Real physical gold provides the best protection against a systematic collapse that could ensue from the global sovereign debt crisis. And the best way to invest in gold is by buying gold bullion. Generally bullion comes in bars and coins. It is best to buy bullion from recognized private mints or governments have mints that produce gold bullion coins. The most popular recognized government minted gold bullion coins are the Unites States Gold American Eagle, the Canadian Gold Maple and the South African Gold Krugerrand. Though not as well recognized it is safe to buy Chinese Panda’s, Austrian Philharmonics and Australian Kangaroos. They may be preferable depending on your location.
There are other older coins that were minted many years ago and used as money. Many of these coins are considered numismatic, which means they have collector value. It’s a better idea to stay away from these coins as numismatics are an entirely different type of investment and require a lot of knowledge and study. Also, mints will make low mintage proof coins which are minted with a special press to give the coin a deep mirror finish. Proofs are also best left to collectors and not ideal for investment in just the gold value.
There are some older coins that are common date, high mintage that are generally sold only for their gold value. Old French and Austrian Francs, U.S. gold liberty coins and British Sovereigns are often purchased by gold advocates for their gold content. Unfortunately, there are some gold companiesthat trick naive investors by selling these coins at high premiums. So it’s advisable to do your research.
Some people claim that physical gold is cumbersome with storage issues. This is true to some extent though it’s fairly easy to secure gold by hiding it in your home or purchasing a safe. You can also get a safe deposit box at a local bank.
Others will claim that physical gold has a high premium. This is true as mints and wholesalers have to ask for a premium above the spot price of gold. However, the premiums tend to go up as the price of gold goes up. Only a few years ago you could buy a 1 ounce gold coin for $750 with a $25 premium. Now it’s not uncommon to see gold eagles selling for $1900 with a $100 premium.
In the end, it’s important to realize that the main driver of the gold bull market is currency debasement and owning physical gold is one of the few ways to mitigate the risk of a currency crisis that would hyperinflate the dollar, euro, pound and other major currencies.