Your complete guide on the best way to buy gold, ensure the protection of your wealth, and make money off your investment
Investing in commodities, such as gold, used to be more difficult than investing in stocks and bonds. This was due to the complex way in which gold trades. But now, gold is more accessible to the average person because an investor can easily purchase gold bullion (gold in its physical form), from a dealer or an online broker. But that’s not all; with the advent of more advanced financial instruments, gold has become even easier to invest in without having to buy the physical metal. So you don’t have to wonder how to buy gold any longer.
How to buy gold: the different ways you can purchase gold
There are about six ways of purchasing gold; each has a different attractiveness, safety level, and practicability:
- Gold coins
- Gold bullion bars to take home
- Gold bullion bars held in escrow
- Gold exchange-traded-funds (ETFs)
- Gold mining stocks
- Gold futures
How to buy gold – Method #1: Gold coins
Gold coins are very liquid (you can buy and sell them easily at a local dealer or online), portable and easily stored, as well as being a collectable. Beware though, there will be security issues and insurance costs to consider. Selling numismatic coins (rarer coins that are favorites of collectors) can be a hassle as well…
So if you want to hold physical gold, stick with the most popular 1-ounce bullion coins minted by governments: American Gold Eagles, Canadian Gold Maple Leafs, and South African Krugerrands.
Photo credit to oliworx
If, however, your primary goal is to store up gold in case the economy goes awry, or you just hope that gold will go up in value and you’ll be able to sell for a profit someday, then you should stay clear of collectible bullion coins, since you don’t want to pay the premium commissions they carry, and buy gold bullion bars instead.
How to buy gold – Method #2: Gold bullion bars
The case for buying gold bullion is strong:
- Gold bullion carries no corporate risk at all.
- It is not dependent on people’s efforts (unlike mining stocks)
- It is considered as the real money in many parts of the world.
- It is considered as an important reserve asset by central banks.
- It is a ‘counter’ to the risks inherent in currencies.
- It is money, ‘in extremis’.
Unless you are prepared to invest in larger bars, you should be looking at the 1 gram up to 100+ gram bars available from current dealers. At the time of this writing, a 1 gram Swiss gold bar costs between $65 and $78, a 10 gram gold bar about $573, and a 100 gram bar between $5,410 and $5,510, including freight. The smaller bars carry a higher margin because of the production costs, and therefore you pay a higher premium for these than if you purchased a larger bar. For example, the premium for a 1 gram Credit Suisse gold bar is 22.5%. For a 10g Credit Suisse gold bar, it drops to 7.7% and for a 100g bar, the premium is only between 1.5% and 2%.
In comparison, the margin for a 1 ounce American Buffalo gold coin varies between 1% and 7.8% depending on dealers, the one for a 1 oz Krugerrand gold coin between 1.75% and 5.75% and the one for a 1 oz Canadian gold Maple Leaf coin between 2.8% and 5.6%, also depending on dealers. As for gold bars, the smaller the coin, the higher the premium it carries (a tenth oz Canadian Maple Leaf coin has a premium of between 13% and 15%).
The 10-ounce gold bullion bar (which is at least .995 fine purity, and can go up to .999 purity) and the one kilo bar (about 32 ounces) of at least .999 purity are the industry standards and would be the best buy, as the premium is a lot less. Each of these bars is hallmarked by a leading refiner to certify weight and purity.
The most popular and established gold refineries include:
- PAMP (Produits Artistiques de Métaux Précieux), a gold metals refinery based at Castel San Pietro, in Switzerland.
- Johnson Matthey, which is one of the leading producers of gold bullion.
- AGR Matthey in Australia.
- Midwest Refineries in the US.
Photo credit to BullionVault
Like gold coins, storage and insurance is also a problem when buying gold bars. Theft or natural disasters could destroy the very security you’ve tried to achieve by investing in gold. Thus, holding several thousand dollars or tens of thousands of dollars worth of gold in your home is not a wise idea, as. This is where buying gold bullion in escrow comes in.
How to buy gold – Method #3: Gold bullion held in escrow
When you purchase gold bullion held in escrow, you own the gold buy you do not actually possess it, which means you don’t have to store the bars yourself; you own the rights to it, as expressed in an account holding, and receive a certificate of deposit that state your ownership of the gold. So what you are actually doing is buying depository receipts, which mean you are buying the gold but the gold is kept in the same vault as before.
Gold Money and Bullion Vault enable you to do just this: you can open an account and fund it with unlimited amount of gold, from a few hundred upwards. The actual gold bars are held in banks around the world and depending on the size of your holding, you own a portion of one or more bars. The advantage with this system is that you do not have to concern yourself with storage and security issues, particularly if your holding is in the thousands. One can easily buy and sell gold by this method.
How to buy gold – Method #4: Exchange traded funds
Exchange-traded funds are a cost-efficient way to own physical gold. They reflect the price of gold bullion better than gold-mining stocks, without the hassle or markup that comes with buying the metal directly. Technically, ETFs are debt securities: a trust owns the gold, and you are a beneficiary of a debt owed by the trust and backed by its gold (vaulted Good Delivery bars).
With ETFs, you simple purchase certificates, each of which representing an amount of gold held in a bank. You buy these certificates on the stock market, at whatever the market price is. Each share of the ETF represents one-tenth of an ounce of gold, so if gold is currently $1,600 an ounce, the gold ETF will trade at $160 per share. This investment product is one of the easiest and least expensive ways to access the gold market.
Investors like gold ETFs because there is no handling of gold, storage or security issues to be worried about. Nevertheless, as a pure investment, there can be tax considerations that you might want to discuss with your financial advisor, especially if you are looking to embark on a ETFs buy & sell activity.
You have the right to withdraw – for a fee – but this option should be used only in the case of an emergency. This is because when you withdraw gold bullion, it will likely lose a substantial proportion of its value with the loss of its Good Delivery status.
The biggest and most liquid gold ETF is SPDR Gold Trust (GLD). To keep your trading costs down, buy GLD through a discount broker.
How to buy gold – Method #5: Gold mining stocks
Through this method, you buy stocks of gold mining companies. Gold mining companies are no different than any other corporation in terms of corporate risk. The risks involve employees, directors, unions, resources, production, cash flows, and dividend policies, to name the main ones.
Investing in gold stocks is not the same as investing in gold, since you are actually investing in paper assets representing an ownership in a business. These stocks don’t behave the same way as the price of the metal, since company shares are subject to stock-market moves, which greatly increased their volatility; as a matter of fact, gold stocks have underperformed relative to the price of gold in recent years (they still increased, but less than gold)
However, some gold shares have the ability to perform better that gold itself, for the good ones have a better profit capacity than the gold price (through profit margins) than gold itself.
To buy gold stocks, one usually goes through an online broker, like eTrade or Trade King.
How to buy gold – Method #6: Gold futures
Trading gold futures means you are buying gold on credit. Through a futures deal, you decide now on an amount and a price of gold that you are going to trade in the future, which means you don’t have to pay just yet and the seller doesn’t need to deliver any gold to you just yet either. The transaction will be settled on a future date you have agreed upon.
Delaying the settlement creates the need for margin, which is one of the most important aspects of buying (or selling) a gold future. Margin is the downpayment usually lodged with an independent central clearer which protects each party from the other party’s temptation to walk away. So if you deal gold futures you will be asked to pay margin, and depending on current market conditions it might be anything from 2% to 20% of the total value of what you dealt.
To deal gold futures you need to find a futures broker, who will be a member of a futures exchange. The broker will manage your relationship with the market, and contact you on behalf of the central clearer to – for example – collect margin from you. Your broker will require you to sign a detailed document explaining that you accept the significant risks of futures trading.
Succeeding in the futures market is not easy, quite on the contrary. Being successful at it requires strong nerves and sound judgment. Investors should recognize that futures are at their best for market professionals and short term speculations in anticipation of big moves. Individuals may not be able of holding a solid and knowledgeable analysis, and would be too tempted to make wild guesses.
What’s more, futures’ opaque and complex cost structure means the advantage almost always shifts to professionals who are sophisticated enough to see through the fog. Many individual investors who have ventured in this market have been surprised at the speed at which their money has gone. The large majority of people who trade futures lose their money because they are exposing themselves to unpredicted and temporary price blips. Even when a commodity such as gold is on a long-term growing trend line, it is almost impossible to guess where the price will be in a couple of month.
Verdict: What type of gold to buy all comes down to why you’re buying gold. A ‘collector’ would go for gold coins, but for most people, the best solution is to go with gold bullion bars held in escrow or ETFs, as those are the most cost-effective and safe methods. Gold mining stocks and gold futures should be used only by the more experienced investors and market professionals.