Investors always try to diversify their investments and lower their risk. They especially look for so-called safe haven investments that perform better when the rest of the market down. Of these safe-haven investments – treasury bills, francs, and others, investors consider gold to be the best. That’s why you’ll find that investors often include some gold in their portfolios.
Gold Investment as a Commodity
Like any other commodity, the price of gold is determined by supply and demand. The most of the world’s gold comes from the hard rock mining, but it can also be produced using placer mining methods or as a by-product from copper mining. China, Australia, and Russia are the largest producers of gold in the world.
When it comes to demand, the main use of gold investment is for jewelry production.
But, it’s also used in the aerospace industry, medicine, dentistry, and electronics. Governments and central banks are buyers of gold. Currently, the U.S. is the largest gold holder, while Germany comes second and the International Monetary Fund is in the third place. Private investors are also interested in buying gold and they treat the purchase of gold as an investment.
Why are Private Investors Interested in Gold Investment?
Instead of holding a cash position, investors may buy gold when they expect a recession, geopolitical uncertainty, inflation or a depreciation of a currency. Sometimes they hold it as insurance from the market decline. You can’t always forecast unwanted events, so it makes sense to hold assets that do well as protection from a market decline.
In the last 40 years, gold recorded significant gains from 1978 to 1980 and from 1999 to 2011. It struggled during the 90’s and after 2011. Fears of inflation and recession led gold to its 1980 highs, while several events caused gold to trade higher after 1999. The September 11 attacks and the war in Iraq held the price higher until 2003. Insurance buying was behind gold’s move higher going into the 2007 recession. It continued its uptrend as the market traded lower, with economic uncertainty as its main theme. Problems in Europe, weaker U.S. dollar, concerns over economic recovery kept the gold price high until 2011.
Gold for the sake of gold investment is not always performing well. It has struggled during the 90’s due to growing U.S. GDP, interest rate hikes in 1995, and a tight fiscal policy. After 2011, the strength of the US dollar and the US economy hurt gold. The stock market broke out of a downtrend and turned in the uptrend and investors were not as interested in owning gold as insurance.
How to Start on Gold Investment
Now you know a little more about gold and why people may invest in it.
Here’s how you can start investing in gold:
1) Buy Physical Gold (Most Recommended)
If you want to get exposure to gold, one way to do it is by purchasing gold jewelry, coins or bullion. Gold bullion trades very close to the price of gold and it can refer to gold bullion bars or gold bullion coins.
Bullion doesn’t have any artistic value, which makes it different from jewelry or numismatic coins. To buy gold bullion you have to pay a premium over the gold price which can be in a range from 3 to 10 percent. You will also have to use a vault or a bank deposit box to store it.
You can buy physical gold online, in a jewelry store, or another gold storefront. Before you purchase, make sure the price is fair, the gold is real and tested, and that you aren’t paying a higher premium for collectors coins if you’re just looking for pure gold. Be prepared to walk away if these standards cannot be met, especially if an online store or storefront feels shady. The best way to store them is by storing them as an self-directed individual retirement account (IRA) by rolling over your current retirement account or putting your resources directly into purchasing physical gold coins and/or bullion.
One trusted online store with a 4.9 rating on TrustLink is Regal Assets, who will not only allow you to buy gold, but will also store it, and buy it back should you chose to sell it for a profit.
Rolling over your existing retirement account or purchasing a precious metals SDIRA (self-directed individual retirement account) via Regal Assets (#1 on our List of Top 10 Gold IRA Companies) is a safe, fast and easy way to buy precious metals like gold and silver bullion, if this is the way you want to approach gold investment.
We list popular and up to date 999+ bullion coins, rounds, wafers and bars. Our quick and secure checkout has easy payment options: Bill Payment, Interac, PayPal and Wire/Check. Pricing is literally up to the minute so investors can buy the dips when they happen 24/7. As a bullion dealer we provide a return market so customers receive good value when they’re ready to sell.
Once you buy gold, you have to store it properly. You could store it at home, but some security issues could arise from this approach. If you decide to purchase and keep it at home, make sure you have a proper safe and take the necessary measures to protect your assets.
2) Buy Gold Futures
Futures contracts for gold investment are standardized contracts that trade on organized exchanges. They allow a holder to buy or sell an underlying at a specified time in future and at the price from the futures contract.
Gold futures contract at Chicago Mercantile Exchange covers 100 troy ounces. To trade it, you need to deposit an initial margin, which is a minimal amount necessary to open a position. Every day your position is going to be marked-to-market. This means that if the price goes in your direction, you’ll make a profit, but if it goes against you, you’ll lose money.
If your account drops below maintenance margin, you will have to transfer money to your account to meet the amount of initial margin. Futures contracts are leveraged instruments. You need to only need your account balance to be equal to the initial margin, which is lower than the value of the whole contract.
Most brokers do not have the delivery option, so the contract is settled in cash when it expires. The expiry is also standardized feature of the gold futures contract and investors can choose their time horizon while keeping standard expiration in mind. Later expiry contracts prices can be higher than the spot price and earlier expiry futures. When this is the case, we say that the market is in a contango.
On the other hand, when the spot price or the prices of early expiring contracts are higher than the price of later expiring futures contracts, we are in a backwardation. If you are buying gold for Gold investment when the market is in a contango, you will also have to pay a premium for later expiry contracts.
All in all, this is a risky venture if you are seeking to gain money for the short-term, and is definitely not nearly as recommended as owning physical gold bullion for long-term investment options. (See Article: Are Gold Futures a Good Hedge Against Inflation?)
3) Invest in Gold ETF’s
If you are not a fan of investing in gold futures, you can try gold ETF’s. Instead of owning futures contract and paying attention to maintenance margin, you can buy shares of ETF’s and get an exposure to gold. If you’ve never invested in ETF’s before and want to start, check out Benzinga’s Best Online Brokers for ETF Investing to get started. Once you pick a brokerage, you just have to open an account and pick your preferred gold ETF.
4) Invest in Gold Mining Companies
An investment in gold mining companies offers exposure to gold, but the exposure is sometimes limited. These companies carry operating risks, which can break a correlation to the gold price. Gold miners are at risk of a default and their shares can trade lower in case of an operating problem with the company regardless of the price of gold. (See Article: Gold Stocks as a Hedge Against Inflation).
Some Important Knowledge Points of Gold investment
Question: When Should I Buy?
The short answer is “When you need it.”
Gold, first and foremost, is wealth insurance – you cannot approach it the way you approach stock or real estate investments!
Timing is not the real issue. The first question you need to ask yourself is whether or not you believe you need to own gold. If you answer that question in the affirmative, there is no point in delaying your actual purchase, or waiting for a more favorable price which may or may not appear.
Cost averaging can be a good strategy for gold investment. History tells us that panics, mania, crashes and collapses are as common to financial history as thunderstorms to placid summer afternoons. The real goal is to diversify so that your overall wealth is not compromised by economic dangers and uncertainties like the kind generated by the 2008 financial crisis.
Question: Why Not Wait for the Necessity to Arise, then Buy Gold?
Consider this: over the past few years, as concern about a financial and economic breakdown spread, there were periods of gold coin bottlenecks and actual shortages. In 2008-2009 at the height of the financial crisis, demand was so great that the national mints could not keep up with it.
The flow of historic gold coins from Europe was also insufficient to meet accelerating demand both there and in the United States. Premiums shot-up on all gold and silver coins and a scramble developed for what was available. There is an old saying that the best time to buy gold is when everything is quiet. I would underline that sentiment.
Question: Can You Give Us a Profile of the Typical Gold Investor?
According to his book, “The ABC’s of Gold Investing,” Michael Kosares confesses that the owners of gold “are a group of people I have come to know very well in my 40+ years in the business:”
“Contrary to the less than flattering picture sometimes painted by the mainstream press, the people we have helped become gold owners are among those we rely upon most in our daily lives — our physicians and dentists, nurses and teachers, plumbers, carpenters and building contractors, business owners, attorneys, engineers and university professors (to name a few.)”Michael J. Kosares, Author of “The ABC’s of Gold Investing”
In other words, gold ownership is pretty much a Main Street endeavor. A recent Gallup poll found that 34% of American investors rated gold the best investment “regardless of gender, age, income or party ID. . .” In that survey, investors rated gold higher than stocks, bonds, real estate and bank savings.
Question: Do High Net Worth Investors Get Involved in Gold Investment?
Traditionally, wealthy, aristocratic European and Asian families have kept a strong percentage of their assets in gold as a protective factor.
The long term economic picture for the United States has changed enormously over the past several years. As a result, that same philosophy has taken hold in the United States particularly among those interested in preserving their wealth both for themselves and for their families from one generation to the next.
In recent years, we have helped a good many family trusts diversify with gold coins and bullion at the advice of their portfolio managers. Few people know that the United States is the third largest consumer market for gold after China and India.
Question: I Frequently Hear that Gold is Insurance – What Does That Mean?
Gold’s baseline, essential quality is its role as the only primary asset that is not someone else’s liability.
That separates gold from the majority of capital assets which in fact do rely on another’s ability to pay, like bonds and bank savings, or the performance of the management, or some other delimiting factor, as is the case with stocks.
In the first chapter of his book, “The ABC’s of Gold Investing,” Michael Kosares ends with this:
“No matter what happens in this country, with the dollar, with the stock and bond markets, the gold owner will find a friend in the yellow metal — something to rely upon when the chips are down. In gold, investors will find a vehicle to protect their wealth. Gold is bedrock.”Michael J. Kosares, Author of “The ABC’s of Gold Investing”
Question: What Percentage of My Assets Should I Invest in Gold?
If you were to take a cross-section of advisors for gold investment who recommend gold as part of an investment portfolio, the level of diversification would range between 5% and 30%.
We recommend between 10% and 30%.
How high you go within that range depends upon how concerned you are about the current economic, financial and political situation.
Question: How Can the Average Investor Distinguish Between the Good Gold Firms and the Bad?
First, and most important: Check the Better Business Bureau’s profile on a company before you do business with it.
Check not only its rating but the number of complaints lodged against it and how those complaints were handled. A consistent record of complaints can be a warning sign even if the company has managed to keep an A+ rating. This is a simple and straightforward step every first-time gold investor should take, but it is amazing how many ignore it.
Second, choose a gold firm that has a solid track record. Ten years in business is good; fifteen years or more is even better.
Third, choose a firm with a commitment to keeping you informed, i.e., one that is interested in answering your questions now and keeping you informed in the future. If a sales person gives you short shrift or hits you with a heavy sales pitch take it as a warning. (View page: Top 10 Gold IRA Companies).
Question: What About the High Profile Gold Companies that Advertise on Talk Radio and Cable Television?
The same vetting rules outlined earlier apply: check them out.
Too often investors make the mistake of believing that the gold firm that sponsors their favorite political commentator is also the best place to make their gold purchases.
National media campaigns are expensive and those costs are usually covered in the prices paid by investors for their gold and silver coins. In some instances that mark-up can be twice the underlying metal value.
Take care that you are not paying too much for your gold and that you are buying the gold items best suited to meeting your goals.
Question: How Has the Very Low-to-Negative-Rate Environment Affected the Gold Market?
Positively. Most of the strong demand globally for gold investment since the beginning of 2016, has been driven by the low-to-negative-rate environment. At a time when fixed-yield investments pay little to nothing, gold and silver at least provide some upside potential.
In addition, these metals protect against the downside risks implied by the low to non-existent rates of return. Those two very persuasive arguments have translated to strong institutional and fund demand at the ETF’s as well as demand among individual investors for physical coins and bullion.
A mid-2016 Bankrate survey of investors is telling in this regard. One in six chose gold as the best place to park money they would not need for the next ten years, the same number that chose stocks.
Question: What About Gold Investment via Futures and Options Contracts?
Futures and options contracts are generally considered one of the most speculative arenas in the investment marketplace. The investor’s exposure to the market is leveraged and the moves both up and down are greatly exaggerated.
Something like 9 out of 10 investors who enter the futures/options market come away losers.
For someone looking to hedge his or her portfolio against economic and financial risk, this is a poor substitute for owning the metal itself (See Article: Is Buying Gold Futures a Good Hedge Against Inflation?).
Question: What About Gold ETF’s?
Since, for one reason or another, it is difficult to take delivery from any of the ETF’s, they are generally viewed as a price bet and not actual ownership of the metal.
Most gold investors want possession of their gold because they are buying as a hedge against an economic, financial or political disaster. When disaster strikes, it does not do you much good to have your gold stored in some distant facility by a third party.
For this reason, over the past couple of years the trend even with hedge fund operators has been drifting away from the ETF’s.
Final Thoughts on Gold Investment
ETF’s may seem to be the best way to invest in gold. If you don’t like to own futures and monitor initial and maintenance margins, you can just buy shares of an ETF and follow the price of gold bullion. GLD is a liquid instrument and it doesn’t have high transaction costs. Futures are sometimes tough to handle, so ETF’s may be the right move.
If you want to protect yourself against inflation, deflation, stock market weakness and potential currency problems — in other words, if you want to hedge financial uncertainties, there is only one portfolio item that will serve you in all seasons and under most circumstances – gold coins and bullion.
As we mentioned before, we recommend you store them in a self-directed individual retirement account via direct purchase or rolling over your current retirement plan and go with the most trusted company after you do your research.
You can skip to our best Gold IRA company (Regal Assets), but it may also be a good idea to see why we hold them in the highest esteem in terms of customer reviews, stockpiling options, lowest fee structure, and helpful administrative abilities. Make sure you do your homework on the company with which you choose to do business, and make sure that the gold ownership vehicle you choose truly reflects your goals and aspirations (See Page: Top 10 Gold IRA Companies).
Do you have any questions on what is the best way to approach gold investment? Ask below!