Gold is a symbol of wealth, prosperity, and security. Everyone has heard of it, but did you know there are dozens of ways to utilize gold for your portfolio?
How to Invest in Gold
Gold has served a monetary or symbolic role in nearly every human civilization over the last 5,000 years. However, few modern investors know how to best include the commodity in their portfolios today. Gold investing has traditionally come with a whole host of challenges, including large fees and spreads and large upfront investment requirements.
We’re going to show you how to evaluate the best gold investing strategy and put you on the path to becoming an expert.
In this article, we will cover all 7 of the traditional gold investing methods. The 4 factors we will use to compare different strategies are:
- Ownership (Do you actually own the physical gold?)
- Exposure (What risks are impacting the value of your investment?)
- Transparency (What fees are you paying?)
- Security (What safety measures are protecting your assets?)
If you need clarification on any of these factors, refer to the article The 4 Factors to Evaluate a Gold Investment Strategy.
Gold IRA
An IRA, or individual retirement account, is an investing tool that allows investors to invest money for retirement in a tax-advantaged way. Regular IRAs can be allocated to cash, stocks, and bonds, whereas gold IRAs offer physical gold exposure in the form of coins or bullion. McAlvany Precious Metals was one of the first to offer precious metals IRAs to investors when the tax laws shifted in 1986.
Gold IRAs have surged in popularity since the financial crisis in 2008, which decimated portfolios that were unprepared for the market downturn. Like regular IRAs, gold IRAs have traditional or Roth options, depending on when and how the investor wants to pay taxes.
- Traditional IRA: The investor gets a tax break up front and pays taxes when the money is withdrawn from the account.
- Roth IRA: The investor pays taxes up front on deposits and then gets a tax break when the money is withdrawn after the age of 59½.
Gold in a gold IRA must be stored in an IRS-approved depository, whereas physical gold bought directly from a dealer can be stored anywhere – in a depository, bank vault, or under a mattress. As a result, gold IRAs give investors less autonomy over the storage location of their assets.
A brokerage company must serve as the intermediary between the investor and the depository. Brokerage companies charge a commission for purchasing precious metals, so finding a reputable broker that communicates fees and spreads with full transparency is a paramount concern.
Pros
- Physical and allocated asset
- Direct gold exposure
Cons
- High commission, insurance, and storage fees
- Requires large up-front investment
- Difficult to liquidate
Gold Bullion/Collectible Coins
Gold bullion derives its value primarily from the product’s “melt value.” The heavier the product, the lower the premium. For example, a 1-ounce gold coin may have a wholesale premium of 10%, while a 32-ounce kilo bar might carry a premium of 3%.
Collectible coins have some historic or aesthetic value to coin collectors, which makes them more valuable than their raw metal content. Premiums can change drastically over time based on demand, giving investors the opportunity to profit when premiums rise.
Investors usually purchase collectible coins and gold bullion through a precious metals broker. Investors can choose to store their assets at home or pay for external storage.
Modern technology, like the Vaulted app, has made it easier for investors to purchase real precious metals virtually through their devices.
Pros
- Physical ownership
- Direct gold exposure
- Beauty and aesthetics
Cons
- High product premiums and commissions
- Requires large up-front investment
- Must find a personal storage location and secure the assets, or pay additional storage and insurance fees
- Difficult to liquidate
Jewelry
Jewelry serves many purposes in addition to investing. For that reason, you will pay a high premium on the metal’s raw value. The higher the purity, the higher the jewelry’s melt value, with 24 karats designating 100% gold. Design and manufacturing also have a big impact on price. Authenticity is a concern for all physical gold products, but it is often harder to verify in jewelry.
As an investment, gold jewelry carries many additional risks as compared to other investment strategies.
Pros
- Serves many purposes
- Wide variety and availability
- Beauty and aesthetics
Cons
- Expensive (high premiums)
- Exposed to many risks in addition to gold natural volatility
- Uncertain resale value
- Uncertain liquidity
Stock in Gold Mining Companies
Gold miner stocks do not give investors exposure to gold, but rather partial ownership of companies who mine gold. Gold mining is the first step in the gold supply chain. Newmont Mining (NEM), Barrick Gold (GOLD), and Kirkland Lake Gold (KL) are all popular mining stocks.
These stock prices are correlated with gold prices because each company’s profitability increases when the price of gold rises. However, prices are also impacted by other factors such as mergers and acquisitions, management decisions, and company finances. When investing in individual mining companies, investors can expect the same risks and rewards as any other stock.
Pros
- Different upside potential based on company performance
- Access through your brokerage account
Cons
- No physical gold ownership
- No direct exposure (introduces counterparty risk)
- Low diversification
Gold ETFs
If you don’t want to own physical gold, you can invest in exchange traded funds that track gold. SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) are two of the largest gold ETFs.
Each share of a gold ETF represents a fixed amount of gold. The goal of an ETF manager is to track the price performance of gold. Expense ratios are typically lower than most mutual funds.
However, you don’t own the physical metal when you buy shares of an ETF. Not owning the asset outright opens you up to counterparty risk.
Pros
- Access through your brokerage account
- Easy to buy and sell
Cons
- No physical gold ownership
- No direct exposure (introduces counterparty risk)
Futures and Options
Futures and options are both forms of speculative investing, making them riskier than other methods. Both allow you to predict which direction the gold price is going to move, and then make bets accordingly. The upside and downside potential are both very large for speculative investing – high risk, high reward.
A futures contract is an agreement to buy or sell a particular asset at a particular price at a certain time in the future. For example, you could choose to buy an ounce of gold in exactly 3 months for $2,000. If the price of gold is $2,150 in 3 months, you win! But, if the price of gold drops to $1,850 in 3 months, you’re stuck overpaying.
An options contract gives the investor the right, not an obligation, to buy or sell a particular asset at a certain price.
Pros
- High liquidity
- Large upside potential if speculations are correct
Cons
- No physical gold ownership
- Very risky
- Highly leveraged
- Requires extensive expertise and attention
Is Investing in Gold a Good Idea?
Gold provides a vital role in a diversified portfolio. It provides a hedge against inflation, protects your purchasing power, and can provide superior returns. With the right strategy, you can get rich investing in gold. However, you do need to know how gold functions in order to invest in it the right way.
Vaulted
The founders of Vaulted noticed gaps in the gold investing industry and designed a platform to fill them. Exposure, liquidity, and affordability should not have to be mutually exclusive.
Vaulted leverages cutting edge technology and over 50 years of precious metals expertise to provide full liquidity, direct gold exposure, physical and allocated assets, and incredibly low commission/storage fees. Consider Vaulted as an alternative to traditional investing methods.
Vaulted helps you access the benefits of gold on your terms.
