Throughout the history of civilization, investing in gold has been a safe bet.
In the past, gold investing meant having gold on hand and protecting it from thieves. Today you have more options
Ways to Invest in Gold
Over time we have developed more and more ways to invest in gold. Some of the top choices include:
There are two ways to invest in physical gold, bullion, and coins.
Gold bullion described as gold for the sake of owning gold.
The image you should be getting in your head is of the gold bars we see in the pictures of Fort Knox. In reality, this can be any form of gold that is refined and stamped with specific weight and purity.
You can invest in gold bullion by getting and storing the gold or by paying someone else to store it for you who is insured against damage or loss.
Currently, one of the most popular options for purchasing gold bullion is Vaulted. They charge some of the lowest fees for buying and selling your gold, and their storage fees are near the bottom of the industry.
Also, Vaulted gives you the option to have the physical gold shipped to you.
Like bullion, gold coins allow you to own a physical form of gold where the weight and purity are known.
Where gold coins differ is that there is the potential for a higher value than just the gold weight by the coins becoming rare. The rarity of coins will make them more valuable to coin collectors.
Exchange-traded funds allow people to invest in a large number of investments in a single investment that is traded like stocks on the market.
Gold ETFs work like a stock, but instead of the value of a company, they track the value of gold.
You can purchase gold ETFs through Ally Invest with no transaction fees.
Futures contracts are an agreement for delivery of a commodity (gold in this case) for a predetermined price.
The futures exchange gives you a standardized contract that regulates the quality, time, place, and quantity of delivery.
The idea is to be able to have a contract for gold at a low price and then be able to sell that contract when the price of gold goes up — netting you a nice profit and the actual gold buyer a lower rate than they could get otherwise.
Mining stocks allow you to enjoy the growth of the gold industry without the limitations that owning physical gold presents.
The prices of these stocks tend to follow the value of the commodities that these companies are mining. On top of that, the business, if successful, will expand, and the increase in production is an additional benefit.
Finally, mining companies rarely focus on a single commodity. Companies that mine and refine gold will also mine and refine other precious metals like silver, platinum, and others.
This gives you a more diversified investment into precious metals instead of just gold. Like any stock, you can invest through an online brokerage account, and most have no fees at this time.
You can own gold through your retirement account. This means as the value goes up, you will not be taxed.
Most IRAs will allow you to invest in ETFs, or you can go through a gold specific IRA like Noble Gold. This type of IRA specializes in gold and precious metal investments.
Why is Gold Valuable?
Gold became popular as a form of currency because of how malleable it is and because it has a beautiful luster when polished.
It is also relatively difficult to extract from the ground, making it rarer than other metals. Anything challenging to obtain becomes valuable.
To keep monetary exchange easy, many early currencies were backed by a specific amount of gold, what we would call the “Gold Standard”.
While today’s currencies have broken away from gold, the value still holds in people’s minds.
How are Gold Prices Determined?
All commodities are traded based on supply and demand. Like any market that relies on supply and demand, the immediate price of gold is determined by the interplay of these two factors.
If supply drops, the price goes up. If demand drops, the price goes down, and vice versa.
Demand can be determined by the production of jewelry, investors in physical gold, and the use of gold in production like electronics.
How Much Gold is in the World?
There is a surprisingly large supply of gold in the ground. The problem is getting to it in a way that turns a profit.
For example, there is gold mixed into our ocean water. However, it is so small and hard to find that it isn’t worth the cost to try and harvest it.
Information from the world gold council gives us this information about available gold:
- 190,000 metric tons (418,878,298 lbs.) of gold we are currently using.
- 54,000 metric tons (119,049,642 lbs.) of gold we can mine affordably.
How do We Extract Gold?
While the old-time gold rushes usually had people panning for gold, we mostly extract gold through mining.
This process is frequently a by-product of mining for other metals like copper and silver. A vein of gold will be found in a mine that was created for other metals that are more reliably mined for a profit.
For mines that are strictly for gold, a multi-year process of building the mine and getting government approvals must be taken before any profits are seen.
Does Gold Hold its Value?
Gold tends to have an inverse relationship to the stock market. Investing in stocks in the short term is risky, and when people see their stock investments drop, they tend to turn to gold for stability.
A quick example was the stock market crash in 2008. Between November 2007 and June 2009, the S&P 500 dropped a total of 36%. During that same period, the price of gold rose by 25%.
With the turn around in the economy, gold has stabilized its value and held about flat over the last seven years.
When Should You Buy Gold?
As with most investments, it is best to buy small quantities over time. This approach is called “dollar-cost averaging”.
This means that if you happen to buy at a high point and the price drops, you would then buy another small amount at a low point in the price.
This means you get to take advantage of the long term increase in the value of gold instead of trying to time the price just right, and maybe making a mistake and losing a lot of money.
If you want to try and time the market, you can wait for a significant downturn in the price. This may or may not work. Remember that the price of gold was pretty flat from 1982 to 2003. It didn’t drop in price, but it also didn’t gain value.
How to Invest in Gold Final Thoughts
Gold is a good hedge against turmoil in the market and can be a valuable part of any portfolio.
If I were looking at investing in gold, I would make sure the investment does not surpass around 10% of my portfolio. This way, I can take advantage of the advantages of investing in stocks or real estate.
The only time I could see myself making a more significant investment would be if we had another significant economic downturn, and people were once again scared of a major collapse.
It might be worth a little stronger gamble at that point because the fear factor causes people to abandon stocks in favor of something tangible.
Even then, I would be mindful and ready to move money back into the stock market when it gets close to an all-time low.
In the Great Recession, the stock market bottomed out at 6,659.44 in March of 2009. Gold was at $923 an ounce.
If you had held your gold investment that whole time, you would have a tidy 60% gain in your investment today.
If you had moved all your money into a total stock market index fund, you would now have a 315% gain on your investment. So make sure that you are investing in gold regularly and not relying on it as your primary option.