Best methods to invest in gold

Baruch Silvermann

Man’s love for gold is for the ages. Gold traders have exchanged coins, gold bars and Krugerrands by the buckets and the investment market is always busy with investors buying and selling gold exchange-traded funds in record volumes. Websites have sprung all over the Net, offering to pay cash for unwanted gold jewelry. The uncertainty of the global economy has boosted the price of gold and experts are predicting for a continual rise in the years ahead.

The big question is: what is the best way to make a profit out of gold?

When it comes to method, you can choose from a wide range. Some would require you to buy actual gold in one form or another whether in coins, bars, jewelry, etc. For others, you won’t have to build your own vault because you will expose yourself to gold by buying various types of security.

You have to consider many factors when you make this choice. First up is knowing how accurately the investment reflects the price of physical gold. Then know the risks, and costs that come with it and of course, the security concerns. Using information from dealers and the World Gold Council, we will share with the major ways to own gold and their pros and cons in relation to the factors we enumerated above.

Another thing that you should be aware of is that because investors trade gold in U.S. dollars, you incur a foreign exchange risk in case you want to buy gold in another currency (such as the Euro). Whatever your motives may be, if you want to invest in gold, your options are growing. There are hundreds of investment products, jewelry or plain physical gold. The demand for the precious metal in all its forms remained consistent between 2013 and 2014 at 1,074 tons. This is according to the World Gold Council.

Here are 5 common ways to invest in gold:

1. Gold mining stocks

You can buy shares of gold-mining companies, big or small (junior gold stocks) ones. Remember that this strategy carries with it the regular risks of single-stock investing and some additional risks because it is a highly volatile sector. When it comes to gold mining stocks, follow the common rule that it can have as much as a 3-to-1 leverage to gold’s spot price to the upside up and down.

Picking which stocks to buy requires a lot of smarts and due diligence. You can see the best-performing ones through their strong production and reserve growth. They are well-managed and have good inventory supported by production. You can choose to own and hold shares in a mining company as your way of playing the gold market. While there is very little connection with the share price in relation to the quantity of gold the company holds in their reserves, this investment doesn’t wholly rely on gold. Aside from the actual gold prices, investors also have to look into issues about management, exploration, production, energy costs, government restrictions, and geopolitical risks. Barrick Gold, Newmont Mining, Goldcorp and Royal Gold are some of the well-known mining companies.

2. Gold coins

If you want to stash gold under the ground or lock it in a safe, gold coins are great for that purpose. This year alone, the U.S. mint has sold more than half a million pieces of gold coins they call American Eagle coins. If you want your share of these coins, you must buy them through a network of authorized dealers that include brokerage companies, wholesalers, precious metal firms, coin dealers and participating banks.

Among the 1-ounce coins that investors grab because of their popularity and liquidity are Krugerrands, Canadian Maples and American Eagles. You can check out the U.S. Mint for a list of authorized gold American Eagle bullion coin dealers. If you want to have a picture of the vast market, browse the online marketplace thru Apmex.com.

3. ETFs

When it comes to gold ETF, the oldest and most popular of them would be the SPDR Gold Trust (ETF) (NYSEARCA: GLD). Investing in a fund may not be the same as owning physical gold but GLD could be the closest you can get to gold futures. Gold futures are unique from other commodity futures because traders don’t settle them by physical delivery. This is where GLD has an advantage – they back their trades with real gold bullions. If you are a retail investor, don’t expect to be able to trade your GLD shares for actual gold because it’s only the authorized participants (ex. big banks) who have the authority for the creation and redemption of units. And they do this in 10,000-ounce increments. But at least you know that your company backs up your investment with actual gold bullion.

Gold ETFs carry the most benefits similar to gold futures. They are liquid, cheap to trade, convenient, etc. What’s more, you can have them in standard brokerage accounts and even in your IRA and Roth IRAs. The only thing you can’t do now is leverage. It would depend on your broker but you might be able to leverage a gold ETF for up to two to three times with portfolio margin. If you have an aggressive strategy, you can buy leveraged ETFs, such as VelocityShares 3x Long Gold ETN (NASDAQ: UGLD). But generally, the available gold ETFs are not very aggressive so they give you a less leveraged way to trade in gold.

Gold futures

This isn’t for the casual investor because there’s a little degree of technical knowledge one needs to be able to do well here. Gold futures give the investor the right to buy an agreed-upon amount of gold at a set date at a price that the seller and investor have agreed to. Investors arrange futures contracts through a broker and they should put up a margin, or cash deposit equivalent to a fraction of the total contract’s value. On the Comex division of the New York Mercantile Investment Trust Exchange, a single futures contract for gold trading is for 100 troy ounces and they list the prices per troy ounce. Futures afford investors the potential for incredible rewards and the best way to bet head-to-head with a volatile gold market. However, this is for traders who have the confidence that they are accurately predicting the value of gold throughout the contract term.

As you can see, most futures trading today set aside reducing risk but focuses a lot on speculation. Gold futures are highly liquid and cheap to trade, making them great options for short-term trading instruments. And since you’re trading a paper derivative that they have tied up to gold, you forego all the insurance and storage costs that normally comes with gold trading. You can also short gold futures in case you get the urge to bet against gold at any time.

But the biggest attraction of gold futures (or detraction, depending on where you stand), is the leverage. A standard gold futures contract answers for 100 ounces of the precious metal and that’s about $130,000 at their current prices. However, you only need about $7,000 in collateral. So, if you’re a bit bullish (or bearish), you can leverage the trade by a factor that can go as high as 20 to 1. For smaller traders, they can trade smaller E-micro gold futures that represent 1/10 of a regular gold futures contract and within a comparable leverage range.

5. Gold jewelry

According to the World Gold Council, half of the gold demand is for gold jewelry so it remains to be the most popular way to hold gold. They measure the value of a gold jewelry item by the percentage of pure gold it contains (or karat number). They run from 24K for pure gold to 10K, which means there are 10 parts gold and 14 parts of one or more additional metals or just 41.7% gold.

When investing in gold through jewelry, understand the karat amounts and how it influences the price, quality, and durability of each item. Remember that dealers will weigh gold in grams – the higher the gram weight, the higher the price. To assure yourself that you are buying a quality piece of solid gold jewelry, always ask the dealer to give you a certificate of authenticity. Bottom line

We’ve learned that there are many ways to invest in gold but as in any other investment, you should look at all the different factors before choosing your preferred method. There is no doubt that investing in gold has many benefits. This has become clearer now when the economy is unpredictable and the monetary systems are encountering different sorts of risks. Stable gold investment can give you some solid footing in case of a global or national financial crisis.

Baruch Silvermann

Baruch Silvermann is a personal finance expert, investor for more than 15 years, digital marketer and founder of The Smart Investor. But above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.