Investing In Gold Bullion
How to Invest in Gold: Safely Kick Start Your Gold Bullion Investing
This page examines how to source and buy the right kind of investment gold bullion, how this compares with other ways of buying gold and how to ensure you only deal with trustworthy bullion dealers.
As well as the how what and where, we look at the pros and cons of using gold bullion as an investment, the risks involved and the ethical side of investing in gold.
Ways of Investing in Gold
How Investing in Gold Works
Benefits of Investing in Gold
How to Invest in Gold
For anyone wanting to know how to invest in gold – at it’s most basic level it’s very similar to making any investment or profitable trade. You buy at a price that’s lower than you sell.
Although many markets and investments are prone to high volatility, sharp rises and even deeper plunges, gold has always been a safe-haven investment and store of wealth, with gold rising steadily across tens, hundreds and even thousands of years.
It has kept a broadly similar value in relation to goods services since it was very first taken out of the ground and it’s this safe reliability which has seen gold act as solid financial foundation for the wealthy, for nations and for empires across time.
Although gold can fluctuate on a weekly, monthly or yearly basis, making gold a highly popular commodity for trading, gold’s overall trend as an investment has been and remains upwards.
This means that if you buy gold today, you know on average it’ll be worth more in 5 years, 10 years or 50 years than it is now. It’s like it has long-term profit built in – and so simply buying the metal and holding it tends to be a sound investment decision.
Where gold has a significant extra benefit over other investments is where it can develop a sudden volatility during a stock market crash with pricing heading steeply upwards.
During a market crash as paper stocks dive, investment money takes flight from the rapidly dropping shares and looks for a safe harbor. Gold being one of the best known haven investments sees a sudden influx in buyers which causes gold’s price to rise and rise sharply. In the crash of 07-08, gold climbed 25.5% to an all-time high while the S&P 500 tanked 56.8%.
Those with the foresight to own gold were able to sell, take substantial profits and put these back into the now decimated stock market ready for the next inevitable stocks climb and gold’s equally inevitable correction to it’s normal more relaxed rising trend.
How to invest in gold isn’t so much a question of timing – although buying during a correction certainly helps – it’s more one of simply making a decision to buy.
After this it comes down to selecting the way of investing in gold that appeals most.
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Ways of Investing in Gold
There are three principal ways of investing in gold:
- buying the physical metal – investing in bullion bars or coins
- buying a paper derivative of gold such as an Exchange Traded Fund (ETF)
- buying shares in gold mining and exploration companies
The first method – buying gold as physical bullion bars or coins is both the most straightforward and the only true way to directly invest in gold. While the other methods are certainly related to gold, or they track gold’s price they are a mere paper or digital proxy, which may or may not be supported by a vault of physical gold.
The second and ever popular as a gold investment proxy, gold ETFs are usually backed by physical metal however this typically covers only a fraction of the value of all released certificates.
Some funds are backed by more gold than others while there exist “gold” funds with literally no gold behind them at all. In the case of any gold ETF this means that should more people wish to sell their ETFs at once than the fund owns in gold, then there could be trouble.
The third and other non-gold gold investment is gold mining shares (called miners) an often high-risk investment with an opportunity for extraordinary profit in the event of a large new gold find, but also a very real chance of loss where a heavily-funded mine exploration strikes out. A few big misses for a mining company and it’s lights out.
Miners are particularly at risk when gold prices are weak and the cost of mining and refining is greater than or close to the current market price.
Mines may reduce staff , limit their output or even close their mines for a time in order to reduce overhead – but if gold’s price stays below, at or only slightly above the market price for any length of time as it can and does, then the mining companies can be at risk of bankruptcy and with that your mining shares becoming worthless.
Of course even if a miner closes, the physical gold continues to exist and the land will hold it’s value waiting for a new miner to take advantage of changes in the market.
Your shares however will remain worthless paper.
Which brings us back to real gold: physical gold bullion bar or coins, which whether as part of a tax-advantaged retirement account, an asset in your diversified investment portfolio – or a beautiful metal sitting in your home safe, will help safeguard your wealth no matter what markets may do.
How Investing In Gold Works
Assuming you’ve made a decision to concentrate on buying physical bullion as opposed to paper assets, how to start investing in gold is a very simple question to answer.
As we already mentioned gold is an excellent mid to long-term investment, both as a form of insurance against market crashes and as a store of value because gold tends to rise over the long term, outperforming many markets.
How to Start Investing in Gold Begins With Your Funds
You look at the funds you have available for investment, but also work out the likelihood of needing some of those funds in the short term.
The funds that are safe can go into a long term investment and the money you may need to access in a hurry can go buy into some quick access metals.
If you have $100,000 earmarked for your gold investing purposes but you’re worried about maintenance issues on your home or you may need to help out your child with his or her college fund – or any other number of potential 4 or 5-figure emergencies, then make an allowance.
In this example you could allow $20k for emergencies and take the safe $80k for investment in your longer term metals.
The $80,000 would buy larger gold bars where prices are far closer to the market price than smaller bars. They can be stored in a vault, or better yet vaulted as part of a tax-advantaged gold IRA and sit there with no stress or management worries for 3, 5 or even 10+ years, growing in value and ready to protect you in the event of any major stock market crash, or geopolitical event.
This is especially true if we’ve not had a crash for several years as these tend to be cyclic with big crashes occurring approximately every 10 years give or take.
The $20k would still be invested in precious metals but would be held in smaller bars, coins or bullion rounds. Although they are slightly more expensive in terms of cost per weight, they make up for it by being easily divisible or fungible. What this means is it’s far easier to sell a couple of 1oz gold bars to cover a $2500 emergency than a 10oz bar or a giant 400oz good delivery ingot.
It’s also easier to replace a 1oz bar or coin after the emergency has passed than buying a beast of an ingot. Small bars and coins are available from local coin and gold dealers in almost any city, whereas a 400oz good delivery bar is somewhat less common on main street!
Note: because you may need access our example $20,000 worth of gold it shouldn’t form part of a Gold IRA due to early withdrawals triggering tax penalties. That’s not to say it can’t be held in a secure vault by the same gold dealer who arranges your Gold IRA – just not held within the account.
And talking of vaulting, for a smaller amount such as our $20k, nothing can quite beat home-storage.
One of the joys of investing in gold is the sheer beauty of the metal and if you’re so inclined and have a suitably insured safe then your $20k could be held at home and be used to buy a range of attractive bars and coins from different mints and refineries.
Although these are still stock bullion items and should be bought as close as possible to the market price, there are some truly beautiful coins and bars available and the fact that they’re both enjoyable to look at and hold can’t be underestimated.
One brief warning here: Buying coins and bars can rapidly become addictive and you’ll soon come across collectable, rare or special coins and bars at a price considerably higher than gold’s spot price. Do not buy these unless you are doing so as a fun hobby, not as an investment. Profiting from collectable or numismatic investments is a field best left to experts with years and years of deep market knowledge. Many so-called collectables are not at all what they are marketed as and are simply bullion dealers looking to increase their profits.
With your money earmarked for longer term and potential short term investment, now it’s time to make your purchase.
The US is blessed with several thousand precious metals dealers from small one-man operations to multi-billion dollar national and international dealers (we cover selecting a dealer below)
As soon as you’ve picked a dealer you’re comfortable with, it’s just a case of selecting the bars and coins you wish to purchase, deciding whether you’re taking advantage of government tax-breaks, and work out where you’d like to store your gold.
Most reputable dealers can give impartial advice on all of these investment decisions, something that’s especially important if you’re dealing with a gold IRA.
With your metals and vaulting choices made, it’s a case of opening an account with your bullion dealer and transferring funds.
This account opening and purchase is subject to Anti Money Laundering laws so your identity will be both verified and checked (you will need ID for any gold purchase over $10k) something that’s a simple formality and has never in our experience led to any investigations.
As soon as your funds clear, the bullion dealer will transfer ownership of the bullion to you if it’s in stock, or purchase bullion on your behalf and ship it to your vault of choice, home or other address as requested.
Selling is simply a reversed version of buying and if you’ve vaulted with the dealer and are selling back to the dealer it can take minutes to go through and deposit funds toy your bank whether you’re selling everything, or just a percentage of your holding.
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Benefits of Investing in Gold
1. Gold Helps Offset Inflation
As covered earlier gold is an excellent store of wealth and value, being perhaps it’s most significant benefit, and one taken advantage of by sovereign states, nations, corporations, and the super rich as much as regular small-scale investors and gold bugs.
Once used as the basis of all money, first as literal gold coins and later with gold-backed paper currency, gold has since been replaced by slips of paper based on little more than a promise and trust. And yet as banks print more and more money out of nothing it becomes worth less and less thanks to inflation.
A one hundred dollar note from the early 1970’s put into a box and opened now would buy significantly less than it did back in the days of flared trousers and polyester. But had that same $100 been exchanged for a 1oz gold coin, it would have maintained it’s value relative to other goods at the time it had been boxed. While the $100 would now barely get a decent meal and drinks for two, the 1oz gold coin can still pretty much buy what it could have back in the day.
It’s value may have risen when priced in dollars, but in reality it’s buying power remains the same. Gold hasn’t gone up, it’s simply the dollar that’s gone down.
Having cash in the bank isn’t an asset any more – it’s a liability – as every day it’s value relative to spending power decreases.
It has ceased to be money and is simply currency, an easy to use system of payment. Gold is the only real money.
2. Gold has worldwide investment demand
Another key benefit of investing in gold is demand. An important factor in any investment is being able to sell your asset quickly. Gold is universally accepted as a valuable asset, both in monetary terms and culturally no matter where you are in the world.
For smaller investments this demand and competition to buy, means you can be certain you’ll be able to sell your gold quickly and for a fair price whether you’re in a cosmopolitan city or small town.
For larger investments, no matter what happens to the global economy, there will always be a market for gold.
3. Gold is Highly Liquid
Part and parcel to high demand, gold investments are highly liquid. You can buy and sell gold on global markets in minutes or transfer from one vault in one country to another elsewhere through a swap with a few mouse clicks. With well over USD $100bn flowing in daily trade, gold investments are one of the easiest assets for everyday investors to buy and sell.
For small-scale retail buyers, sticking with popular bullion coins such as Eagles or Maples ensures you can sell your gold at it’s true value over the counter at your local coin shop or straight back to the dealer you bought from.
Gold is also quite literally liquid. A kilobar in Switzerland can be melted down to tola bars in Dubai, exported to India, be transformed into fine jewelry, be bought in America, worn for years then melted down as scrap, refined and made into 1oz coins by the US Mint, bought in the UK and so on.
Because it’s so precious gold is rarely lost, just remelted and made into something else.
4. Gold is an Excellent Hedge and Portfolio Diversification Tool
In general when paper markets dive, gold climbs. Not always, but enough to be an accepted correlation and so investors hedge their bets on price movement. If they think stocks will rise, they buy gold just in case the stocks fall. If global markets seem jittery, they’ll buy gold as a safe-haven investment.
The only way to truly safeguard your investments against most scenarios is to diversify – as in the phrase don’t put all your eggs in one basket. After all Enron was once considered a safe investment – as were countless other collapsed banks and real estate funds, silicon valley unicorns and big-box retailers.
Gold just does it’s thing, sitting there like a sparkling insurance policy.
5. Gold is a Portable and Highly Concentrated Asset
Money is both bulky and heavy. $1m in cash weighs anything from 1.1 tons if stacked in $1 notes to 22lb in $100s. Even if packed tightly it takes up a lot of space and as anyone watching Narcos or Breaking Bad will know – with enough paper money you soon run out of places to put it.
When it comes to gold, $1m can be held in just two bars and while admittedly heavy it’s hard to believe that such value exists in two small golden bricks.
For anyone living in a geopolitically risky country there may be a need to exit quickly, leaving behind the bulk of your possessions. A few gold bars about your person and you can have rapid access to cash anywhere in the world and in fact there are bullion bars designed for this very purpose – made credit card sized and perforated into smaller bars for easy conversion to emergency cash.
The ultimate in traveling money.
6. Gold is Inert
Although not a major concern for most investors, gold is chemically stable – it only reacts to a few of the strongest of acids – meaning it doesn’t rust, crumble, break or even lose it’s shine. It’s the definition of a buy and forget asset, sitting without any risk of degradation for decades, even centuries.
Gold has been cast and beaten into ornate crowns and jewellery by ancient civilizations, buried and dug up 1000s of years later – still in the same pristine condition as it was when lost.
We know that paper money when stored in bulk without being correctly wrapped and in the right environment can crumble to dust in a matter of months. With gold, it’s a case of problem solved.
In fact this is one of the main benefits of investing in gold for “preppers” – a cache of gold coins buried underground will last indefinitely.
Silver may tarnish and eventually disintegrate but gold can be left unwrapped and directly in contact with soil until a prepper’s end-game, when the proverbial SHTF.
Disadvantages of Investing In Gold
1. Gold Has No Yield
This is the most commonly cited disadvantage laid at gold’s door – it’s lack of any dividends or interest paid. And while this is a valid if only partially true point, it’s just not a valid problem. Gold simply isn’t this type of asset class – it’s a real asset, as in real estate and other physical investments.
Houses don’t pay dividends. Works of art and antiques don’t pay interest. Neither does land, jewelry, intellectual property, investment wine, cases of whisky or any of a plethora of real assets.
Like gold, most can be rented to produce income and much like gold they typically trend upwards on a long term scale. Gold has averaged 9% annual returns over 45 years – and as a long-term asset it comes with numerous capital gains advantages and tax advantages.
These advantages more than offset a lack of paying interest when looked at against the inflationary devaluation of your dividend dollar.
2. Gold Comes With Storage and Insurance Costs
Again this is true – as a real asset and a valuable, concentrated and portable asset it has to be stored somewhere safe and insured against theft.
But thanks to it’s compact size and the scale and competitiveness of professional vaulting services, these fees are broadly comparable to the annual charges on a managed broker accounts or trading platforms.
And when you consider that paper assets don’t really exist anywhere other than on a computer then what are you actually paying for?
3. Gold Can Be Volatile
In the short term the price of gold can indeed be volatile, but this is mostly due to currency fluctuations and paper trades. Physical bullion is in reality a remarkably stable investment in the mid to long term.
For example gold priced in UK Pounds Sterling can be at an all-time high, and yet when priced in USD it appears to be lackluster and still far below it’s USD all-time best. The same differences can be found when comparing Gold priced in Euros, Australian Dollars or Japanese Yen.
When there are large differences between values in Pound and Dollar, Euro or Yen these local markets benefiting from the upside may start to rapidly sell their paper gold derivatives to take profits or set longer term short bets against the metal sending the price down not only locally but triggering algorithms on the global market. The same can happen when gold in one currency is negatively affected compared to others, and local traders buy or place long bets, sending their local signals global on the open market.
While this volatility of the Forex markets combined with large paper gold trades tend to drive the physical metal spot price this is seldom reflected in long-term demand for physical bullion.
Besides, it’s this short term volatility which leads to gold being a heavily traded asset on both the paper and global physical markets, making traders rich on both price drops and rises.
4. Gold is Not Environmentally Friendly
Is investing in gold ethical? While most Western mines operate to the highest of environmental standards, the same can’t be said for smaller artisanal mines operating in parts of Africa and South America.
Some of these mining methods do involve poison chemicals and can destroy whole rivers with the toxic sludge they generate. The problem doesn’t just affect the landscape, but also the health of the miners and although many of these are illegal and unlicensed mines, there are still enough of them to be a problem.
Added to this, there are a number of mines in war zones. Even though they are officially boycotted by the gold industry, thanks to lax security and a willingness of foreign officials to turn a blind eye, it is sadly inevitable that some conflict gold and other illegal gold will find it’s way into an otherwise well regulated supply chain – and once here, conflict gold is indistinguishable from properly sourced metal when it’s melted into ingots.
But on the other hand, as previously touched upon with gold being so precious – it’s rarely discarded.
Whole industries have been created getting every ounce of scrap gold out of discarded electronics, industrial scrap and broken jewelry. Gold being a pure element is the ultimate in recyclable material.
In terms of work at artisanal mines, there’s a growing fair trade movement sweeping the industry, with the “Fair Trade Gold” seal being applied to more and more pieces of gold jewelry where all parties in it’s production are both paid properly and work in safe conditions. Fair Trade bullion is just around the corner.
In our opinion the pros of investing in gold far outweigh the cons, many of which when looked at are barely disadvantages at all. We are in full agreement that the whole market must become better at self-policing and indeed massive headway is being made in ensuring ALL gold is capable of being tracked from mine to refined bar – along with far tougher action on law-breakers.
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Investing In Gold Versus Silver
Although there are some ardent “stackers” who will only ever buy silver bullion and coins, it’s seldom a case of investing in gold vs silver – in choosing gold OR silver.
Silver is a useful diversification investment much as gold and can help create a precious metals portfolio that performs better in some circumstances than one that only concerns gold. It’s widely said to be hugely undervalued when looking at historic ratios of silver prices to gold prices and at it’s current prices is still a long way from it’s 1980 peak of $50/oz. We cover silver in much more detail here.
Notoriously volatile in price, especially in relation to rock-steady Gold, silver can easily be traded in physical form by small-scale investors, typically being sold to buy gold when silver peaks, or being bought when gold is in the doldrums.
And a very big plus for many: you get a lot more silver for your money. At the time of writing you can buy 85 ounces of silver for one ounce of gold.
On the negative it takes up much more space for a dollar equivalent amount and when you’re talking $50k or $100k in silver that’s a significant weight to find a place for, ship or otherwise transport.
This means there’s a need for a much larger home-safe or higher vaulting costs in relation to value.
Being an industrial metal there’s a greater real need for silver, and because it’s frequently consumed, destroyed or discarded in industrial processes it’s a diminishing resource, which in very real terms could be considered more scarce than gold.
As an industrial metal it’s treated much more as a commodity than an investment across many tax regimes and in these situations where investment gold would typically be zero rated for sales tax, silver does carry tax. This is the case across much of the US and Europe where silver buyers are disadvantaged due to this tax.
In short, silver regularly forms part of a wider precious metals portfolio which can also include platinum and palladium, all metals that perform differently in various situations, and when combined produce a well diversified and potentially potent mix.
As always, it pays to talk with a precious metals specialist to discuss your situation and learn what silver and gold can both do for you.
Where To Start Investing In Gold
The internet has been a godsend to gold investors, making it easier to find both the right information when making investment decisions and to track down trustworthy and reliable gold dealers.
Unless you have a very good local dealer, or even despite of this – we would recommend starting with a web search. First of all you’d be looking for free Gold Investment Guides which will help you not only learn more about investing but also give you some initial insight into what different bullion dealers are like to deal with.
There are currently over 1400 bullion dealers listed in the industry directory and hundreds more smaller companies who are not – so it’s not like you are ever stuck for choice.
Many dealers have excellent websites and free shipping so it’s not a difficult process making a small test purchase. A few silver bars and coins or a small gold bar if you’re nervous and would like to test the water.
Online auctions have become notoriously bad for selling fakes, as have a number of importer sites. It’s best to stick with a known national brand or a trusted local dealer for your first test buy – but if not remember if a product seems much too cheap, there’s a reason for that.
Precious metals are beautiful long-term investments and being a high-cost acquisition, it’s important you make sure your investment journey starts off on the right foot.
Gold Investment Companies
When buying gold as an investment you have a choice to buy through local coin shops, online e-commerce stores which offer a simple self-serve checkout – or through professional gold investment companies.
They will typically have a minimum investment amount, usually $25-$30k (this is due to the very small premiums in gold, with companies often making as little as 1% profit on any deals) and can carry out all elements of the investment process on your behalf, much as a concierge service.
These can offer excellent value for both new and seasoned investors and will often have reduced vaulting fees and special wholesale prices due to the enormous economy of scale on which they run.
Where coin stores may focus their expertise on special collector coins, not low-premium bullion – and e-commerce giant help desks are only concerned with assisting you with any checkout issues or website malfunctions, the key difference between them and gold investment companies comes down to quality of both service and advice.
The professionals that gold investment companies hire will know the gold investment market inside out and be able to advise on anything from current and future market conditions, to pending changes in legislation and will just as happily help with selecting items to best match your appetite for risk or help rollover your 401k to a gold IRA.
Although there are thousands of small-scale metals dealers, professional Gold Investment Companies are far fewer on the ground and will usually be centered around gold trading or vaulting hotspots like New York, Southern California, Texas and Miami.
For any investment over $25,000 we’d always recommend the expert help they provide over any other method of buying – especially for a newcomer to precious metals.
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