How To Invest In Gold

There is every reason to make gold, and other precious metals, a part of your investment portfolio. Gold will always be the best insurance and hedge against inflation and currency devaluation, and will always be a commodity in high demand. However, there are many ways in which you could lose money, and knowing how to invest in gold is essential for success.

Portfolio Diversification

No one would suggest that you devote your entire portfolio to precious metals or any one asset class.  Diversification should really be a requirement for every portfolio, and precious metals are an important part of this. Most money managers recommend between 3% and 8% of your portfolio be placed into gold, but there are some contrarians that go as high as 25%. It really depends on how the balance of your portfolio is divided.  If you lean more towards semi-volatile investments that require a thrive in a healthy economy, a higher gold allocation will help balance this out.

Whatever proportion you decide on, you will most likely not purchase at one time, but gradually build your precious metals portfolio over time, which is a common practice.  Many investment strategists suggest this dollar cost averaging approach to reduce the impact of price volatility. This approach requires buying a fixed dollar amount of an asset on a regular schedule, regardless of the price, and meaning you purchase more of the asset when prices are low, and less when prices are high.

Several Options

When considering the actual method of gold investment, there are several options available. Your choice will depend largely on your investment priorities; whether you are more interested in holding gold as a safe haven, or whether you are looking for high and immediate returns, with the risks that come with doing so. Liquidity also needs to be considered; do you intend to hold your gold for the long term, or want to be able to convert it quickly into cash?  These are a few of the questions you need to ask yourself.

Why Actively Hold Gold Bullion?

The most liquid form of gold available is the actual physical product in the form of gold bullion. Many investors consider this to be the only really reliable method of investment, as holding the physical metal in hand is the only way you can be certain that your gold really exists.

When buying gold bullion in the form of coins or bars, ensure you buy as close to the gold spot price as possible.  The higher the premium you pay, the more the price will need to increase in order to see a profit. This means avoiding numismatic or collectors’ coins, which carry very high premiums and seldom regain their price. The coins with the highest liquidity are the South African Krugerrand, American Eagle and Canadian Maple Leaf, although this does vary somewhat from one dealer to another.  In the United States, the Eagles demand the highest premium, both buying and selling.

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Alternatives

gold etfIf you prefer to have direct exposure to the performance of gold without worrying about storage, an alternative may be to invest in one of the gold ETFs (exchange traded funds). These are similar to mutual funds, but trade on a stock exchange like an ordinary stock, and have a fixed portfolio. There are a few ETFs that are physically backed by gold and track gold’s spot prices, the best known being SPDR Gold Shares and iShares Comex Gold Trust.

A variation on the ETF is a closed-end fund, which gives you the option of trading in your shares for 400-ounce gold bars, which at today’s prices would be valued at over $1,000,000. These funds can trade at either a huge discount or a huge premium on the gold price, so if you find one trading at a discount and you think the gold price will rise, this could be attractive. Be aware though that fees are higher than those for conventional ETFs.

High Risk but High Reward

If you are more interested in investment with much higher risk but potentially a higher reward, you may want to look into gold mining stocks. These stocks can leverage as much as 3:1 on the spot price either way, which means that if the gold price rises by, say, 5%, the stock price could rise by up to 15%, and of course the opposite should the price fall.  It can be a bumpy ride.

Unlike gold bullion, the performance of mining stocks depends on many other factors besides the spot price of gold, so when choosing gold stocks it is recommended to carry out due diligence on the company’s financials. Look for companies with solid management and strong production and reserve growth, and dig into the cost and ease of extraction, which will vary from one to another.  Geopolitical factors and currency issues need to be considered as well, and avoid small companies in the exploration phase.

When considering the best way to invest in gold, it’s important to review your priorities and to clearly understand the risk burden you want to take on.  If you are tempted by the prospect of high profits which are exceeding your level of risk tolerance, your investing will become a source of concern and a drain on you over time. There are several safe ways of investing in gold, which can still provide you with growth, and secure your financial future.  Gold IRA’s are one of the simplest, safest and most reliable means of investing in Gold, or any other precious metal.