Investing in Gold

Why Invest in Gold?

Gold is an alternative investment to stocks, bonds, and cash, but one that is often overlooked. Many see gold as inaccessible.  Partly this is because of the high relative price and the fact that it is quoted in US dollars. The price of gold is stated per troy ounce (about 31.1 grams), and many investors compare this price directly with the price of shares. Psychologically, shares appear cheaper (perhaps prices in the 10’s, rather than the 1000’s). For non-US investors, there is also the risk and cost of trading in a foreign currency.

Gold Investment Guide for Beginners:

Our editors and in-house staff have written a number of useful guides and articles for first-time gold buyers.  Take a look at some of them here.

Advanced and Editorial Articles:

Another problem for investors is how to store gold. Again, the investor looking at gold for the first time might consider the cost of installing a safe, or using a safety deposit box at a bank, to be prohibitive.

But such considerations should be taken into context. There are costs involved with any investing. For example, trail commission is often payable by fund investors to the investor’s broker or advisor. Over a period of time, these charges can add up to a lot more than the cost of storing physical gold.

Whilst currency movements are a mystery to many, it should be remembered that currencies move up and down against each other on a daily basis. The move of an international currency against the US dollar could just as easily see extra profit as potential loss on a gold holding.

Though the cost of a ‘unit’ of gold might be off-putting for many, there are an increasing amount of investment products that mean a small investor can trade in gold in far smaller amounts than an ounce.

Reasons to hold gold in your investment portfolio

As well as diversifying your investments, gold is a great store of value. When inflation is higher than the interest rate you can get on your cash in a bank, your money loses purchasing power over time. In other words, it loses value. Gold is used by Central Banks and Institutional investors to keep the value of their money.

Gold can be volatile. In times of economic or political crisis, the gold price can move a long way very quickly in reaction to policy and political decisions.

Gold is also a finite resource and as such, whilst the short term price might fluctuate, the long term price is likely to trend higher (just like oil).

Ways to invest in Gold

You can invest in gold in a number of ways. Whatever your investment amount, or preference for style of holding gold, the investment markets have a method that will suit you and help you profit from the yellow metal.

Coins and Rounds

The value of a coin is dictated by factors like rarity and condition that will have a greater effect on price than gold content.  Many of the world’s mints produce hold collector coins, which would be sold at a higher premium than rounds or bars (see below). You can buy coins at auction, from mints or accredited dealers, or high street dealers. You can even buy them at online auction houses such as eBay, though extra care must be taken here to avoid conterfeiters.

Rounds, on the other hand, are valued as to their gold content. They are, effectively, coin shaped ingots. Rounds are available from private mints or online dealers.

Gold Bars

A traditional way of investing in gold, bars are easily stored because of their shape and now come in a range of sizes to suit most investors. Increasingly they are bought online, and bullion bars can be held in safe custody by many large dealers at secure vaults (often in London or Zurich). This negates the need to for self-storage expense.

Company Shares

Investors can take a view on the price of gold by buying shares of companies that mine gold. Often these companies will mine other metals and minerals also, so this isn’t a pure play on the price of gold. Investors should also note that other factors, such as employment costs, and taxes, will affect the share price of such companies as well as the price of gold. One of the attractions of investing in the shares of gold mining companies is that they often trade at a large discount to the relative price of gold. Shares can be bought through a broker, or online trading facility.

Gold ETFs

Exchange Traded Funds offer investors a way to trade with the simplicity of buying shares, but the advantage of a direct investment in gold. They are flexible, bought and sold through a broker or online trading facility just like company shares, and can be based on gold itself, or mining companies, and can be used to speculate on the price of gold or hedge against an existing position.

The Bottom Line

Whatever your investment preference, your profit will be determined not just by the purchase and sale price, but also by costs and taxes.

Costs to factor into your calculations would include dealing charges (eg broker fees), mailing costs (if dealing in physical gold online, for example), and storage fees (levied by banks for deposit boxes or dealers that store your gold for you).

Taxes that might affect your final return vary from country to country, but might include VAT, income taxes, and capital gains tax.

Overall gold is still an underused investment that offers a great way to diversify a portfolio and an excellent hedge against inflation. Whether you decide to invest in physical or non-physical gold, or in turn diversify your gold holdings, is a matter of personal choice. Whichever you choose, investment in gold could bring an extra shine to your financial future.

 

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