Investing in gold is often labeled a risky investment by financial media and institutions but when done properly, that presumption could not be further from the truth. The important thing to know about gold investment is that there are a multitude of ways to do it and choosing the right method is key to fulfilling your personal investment conditions and expectations.
We go through a list of the gold investing options and analyze the advantages and disadvantages of each, hopefully helping you get pick the best way to invest in gold. Note that when it comes to gold it’s not only what type of gold that you invest in that matters, but also how you invest in it, therefore some categories below can overlap in certain cases.
The gold investment pyramid below highlights (attached) the different ways to invest in gold depending on the risk appetite of the investor and their general purpose.
Gold bullion bars are the preferred form of investing for financial institutions, governments, and anyone with a lot of money. The reason is that the amount of gold in gold bullion bars must be above 99.5% in purity to qualify as investment grade and sizes are generally quite large (1 KG or 400 ounces are common) and therefore gold can be acquired with little to no premium over the spot price.
- Lowest price for acquiring physical gold.
- Bars usually come from large and trustworthy mints and refineries
- Premiums exist over spot price
- Many gold coin types exist, possibly causing confusion
- Buy/sell spread does not favor the retail investor
For smaller investors, bullion coins might be a more preferred gold investment method. Premiums for coins differ from location to location but these days with some smart shopping and online options, bullion coins can be gotten at small premiums.
A distinct advantage is that an investor can slowly accumulate possessions and spreads out the risk of any type of gold being counterfeit, stolen, lost, or other risk to many individual parts. Investors in this area should be cautious of what type of coin they are buying because different coins have different amounts of gold purity which can drastically affect the price.
The buy/sell spread for gold coins also can be large and therefore cost you if you don’t intend to hold the coins for a long time. Modern gold coins like the British Sovereign serves as legal tender.
Both bullion bars and bullion coins are capital gains tax free in most parts of the world (in the US they stand as 28% for most types of gold ownership).
- Easily acquired
- Potentially usable as money
- Premiums exist over spot price
- Many gold coin types exist, possibly causing confusion
- Buy/sell spread does not favor the retail investor
Allocated Gold Accounts
If you’d like to own physical gold (bars or coins) but would rather not deal with headaches associated with storing the precious metal yourself, then you can choose to invest in gold through allocated accounts which theoretically assures that the bank in question would keep your portion of gold in their vault somewhere attributable directly to you.
You do have to pay extra for this though and don’t expect to have a private storage box just for you as not all bullion banks or financial institutions have such private vaults but hallmark, weight and fineness are all recorded and your gold stays there and may not be used by the banks for other purposes. You actually own this gold and the banks job is to keep it safe.
- No need to worry about gold delivery transportation or storage
- Requires yearly handling/storage/insurance costs
Un-allocated Gold Accounts
For investment in gold but without the storage costs, unallocated gold accounts is usually shown as a preferred choice and represents over 90% of accounts at banks. This doesn’t mean that unallocated accounts are in fact better, to the contrary they invite a lot of risk which allocated accounts do not face.
In an unallocated account, the bank maybe do with your gold as they please and the bank in this case is in a position of debt to you. So if the bank faces problems they will likely sell the gold invested by its customers to meet its reserve requirements. If something were to happen to the bank, unallocated gold accounts are usually not covered by governments who only provide a guarantee for its sovereign currency.
Unallocated accounts can come in many forms and sizes and are offered through a variety of institutions through different names like gold pool accounts. Both allocated and unallocated gold accounts involve gold certificates that you hold that symbolizes your ownership position.
- Cheap and easy way to invest in gold
- The safety of ‘your gold’ is at the fate of the bank that holds it with no mechanisms in place for protection
An even easier way to get into gold investing is through ETFs (Exchange Traded Funds) – or a variant of it like ETCs (Exchange Traded Commodities), CEFs (Closed-end funds) or ETNs (Exchange-traded Notes).
These are not ‘funds’ in the most traditional sense because they usually don’t have a collection of different securities but instead only exist in the purpose of tracking the price of gold and they have managed to do that nearly flawlessly to this point (some funds contain a more general mix of commodities or derivatives of gold but are less popular).
The funds are said to be backed by gold, but the legitimacy of these physical gold holdings has been a source of controversy among gold investors. Regardless, for speculative or short term investors, it’s hard to beat the convenience of ETFs which have gained huge popularity over the last several years.
The most famous among them is the US based ETF with the ticker “GLD” (streetTRACKS Gold Trust) and also “IAU” (iShares COMEX Gold Trust).
There is a small administration/handling fee associated with these funds of around 0.4% per year and also commission fees might apply in some countries of up to 0.4%. The tax implications might also be different depending on your country compared to investing in physical bullion.
- Very convenient and hassle free way to get exposure to gold
- Useful tool for gold traders
- Additional fees & capital gains taxes might apply
- Some funds might not have the amount of gold they claim
Digital Gold Currency (e-Gold)
This is a relatively new way of owning gold and is similar in principle to Paypal. Gold is stored in an online account (and backed by gold) and can be used as a form of payment or can be transferred to make payments.
E-gold also has the benefit of being redeemable into physical gold. Criticisms have engulfed this type of online gold currency due to cases involving fraud, hacking risks, and little protection in case of anything going wrong.
- Utopic in ideal
- Useful in certain cases
- Transactions are non-reversible
- Hacking, phishing, and other risks associated with online services
Gold Accumulation Plans (GAP)
GAPs are a type of saving plan which allows individuals access to incremental saving in the form of gold. This allows individuals access to small sized gold investing without the associated premiums. Each month a specific amount of money is deposited by the investor which in turn is used to buy gold in the account.
Over time this amount builds up and can be cashed out for physical coin/bar delivery, jewelry, or even money if one wishes. Another advantage of gold accumulation plans is the diversification benefits it offers that most traditional savings plans are left without.
- Small incremental gold investing without premiums
- Buying over a long period ensures an average cost that shields the investor from buying at the peak of a bubble
- Slow & steady investment style could result in missing opportunities of buying more on dips in the gold price
Gold Bullion Pensions
Similar in mentality are gold based pensions, which are becoming more popular and widespread in an age of stagnant financial markets.
Citizens in the UK can invest in gold through Sipps (Self-Invested Personal Pensions) and Americans can do the same through Gold IRA investment opportunities (Individual Retirements Account).
These type of gold pension investments have the advantage of tax reliefs but certain rules do apply, such as the gold generally not being allowed to be in your possession. Therefore ETFs, allocated accounts, and e-gold would all qualify.
- Tax free gold (for US citizens)
- Needs to be arranged by yourself
Gold Mining Stocks
So far the gold investment types mentioned have more or less revolved around gold itself. Gold mining shares take a different approach for investors optimistic about the prospects of gold. If gold prices go up, then the ‘producers’ of gold will naturally benefit as well. Gold stocks generally have higher risk than gold itself because even if gold prices do go up, other things could go wrong related to the mining operation, management of the company, general stock market movement, as well as unforeseeable risks like nationalization of mines.
Investing in gold mining can be highly profitable however as they have been undervalued recently and those who are well operated can rise faster than gold does (up to 2 or 3 times higher gains). There is also the added benefit of investing in a company however as dividends can be gained (which gold itself does not) and a human element is present giving investors more control than investing in the same homogeneous commodity as everyone else.
Gold mining majors are the established companies who already have established operations and are actively digging gold out of the ground. Junior mining companies are the riskiest of the bunch with the most upside, because essentially they are prospecting and looking for areas which could contain gold and such discoveries, when they are found, can lead to huge profits.
- Can outperform gold in good times
- Diversification to other forms of gold investing
- Management and operational factors could result in decoupling (move in opposite direction) from gold price
- Risk of nationalization
Options, Futures, Forwards
Gold futures and options are probably the best way to make money if you know what you are doing. This realm of investing is reserved to experienced and often large size investors in the form of institutions or banks. Gold buyers, sellers, and speculators all partake in this market.
- The first two with hopes of locking in prices through contracts with made at future dates and hedging their costs in this way (miners and gold fabricators like jewelers). Others on the other hand speculate and try to make money from gold price movements and being able to anticipate the direction better than others. The main opportunity for speculative investors here is that leverage can be used (money can be borrowed to invest)
- Thereby amplifying any gain (or loss) made. Often in this market no gold actually trades hands as contracts are resolved monetarily before expiration
Gold forward contracts are similar to gold future contracts except that each contract is custom negotiated specifically by the two parties in question, and it is done in the over-the-counter market (OTC) which is off the exchange markets. Gold warrants are another form of options but are issued by private organizations and not necessarily exchange traded.
It should be reminded that options, futures, forwards are extremely risky and should only be conducted by advanced investors.
- Potential for exponential gains
- Can speculate future prices at fraction of cost of underlying asset
- Highly risky
- Physical gold often isn’t in the equation and paper gold contracts don’t guarantee gold ownership
One of the best ways to invest in gold in India is in the form of jewelry. Gold buying traditions run strong in the country and jewelry especially is in high demand. Gold Jewelry in India trades at a low premium over spot prices, which gives it a distinct advantage over other countries where the creation costs can be significant.
- And therefore makes gold jewelry a fine form of investment. Other advantages of gold jewellery as an investment include the fact that you can give it as a gift if necessary (and this is always useful in Indian culture), it shows material wealth openly, and is easily transportable.
- Flexible uses
- Higher cost than bullion, especially in western markets
- Unlikely to get equal value when trying to sell due to person preferences
Certain types of gold investors like to own historic or rare gold coins, these are called numismatic coins or semi numismatic coins. They often trade at much higher prices than the value of gold inside them and are attractive to collectors. Selling or buying gold coins on eBay of this type is certainly an investment technique worth exploring for those interested in it.
- Can be acquired for cheap from uninformed sellers
- Holds additional worth beside its gold worth
- Pre-1933 coins are immune to government confiscation risks in the US
- Illiquid and imperfect market, resulting in possible losses if one wishes to sell even during times of static gold prices
- Requires extensive knowledge.
Investing in scrap gold is an alternative route, often for smaller investors who can trade in their time and expertise to make modest profits.
Using services like eBay, Craigslist, or directly asking friends and relatives around them, it is possible to buy gold plated items or broken gold jewelry at a discount to what they are actually worth. Gold refineries or cash
- For gold shops can pay you their value in gold near spot prices if negotiated properly
- Possibility of making money without gold prices going up
- Low risk
- High effort
- Hard to assay the amount of gold in the item
There are plenty of options to make money from gold investing but one must choose the right type of gold investment depending on their background and personal goals. An individual investor’s opinion on the future of gold and coming economic developments is also key when choosing the right type of gold investment method.
In short, if you are the type that believes a huge financial crisis is coming, its best to have the physical gold in your possession or at least in an allocated account from a trustworthy organization.
Instead if you believe gold is just riding a bull market and only wish to make money from it while its a hot asset to own, then trading it through ETFs, or futures contracts, or gold options will be the most convenient way to go about it.
This article only aims to provide you the gold investing options available, the decision and eventual profits/losses are ultimately yours and yours only.