Thinking of buying gold? Here are some things you need to know about investing in physical gold before you jump into the market.
Gold is universally known as an attractive investment.
For that reason, gold market analysts typically recommend that investors build a diversified portfolio with a portion of their wealth in gold bullion. Here the Investing News Network explains what is involved in building and managing a physical gold portfolio.
Gold as an investment: Spot prices and costs
Investing in physical gold is often oversimplified, and the misconceptions can begin with pricing.
A spot price by definition is the cost of immediate delivery, and is a way to gauge the legitimacy of an ask or retail price. A retail price is an amount that includes a markup, or premium. Unfortunately, it’s not until they conduct their first purchase that some investors realize that gold spot prices are not what one actually pays for physical gold.
In addition to premiums, there are numerous other expenses investors should be prepared to pay when purchasing pure gold, including shipping, handling and insurance. There may also be processing fees to own the yellow metal or fees for small lot purchases. In some instances, prices may be higher for individuals who choose to pay with a credit card. Then again, gold prices are sometimes lower for those purchasing larger quantities.
Gold as an investment: Choosing physical gold
Physical gold investors are generally looking for items that are 0.999 fine. Several products fit this description, and one of the most preferred is gold bullion coins, such as the South African Krugerrand or the American Gold Eagle.
Another option is gold rounds, which are similar to coins, but are not legal tender. Both gold coins and gold rounds come in various sizes, usually ranging from 1/10 ounce to 1 ounce, though other less common sizes are available.
Gold bars are another popular option. They also come in a variety of sizes, and as choices can range from a 1 gram bar to 400 ounce bar, this category of products can accommodate a range of investors.
When the objective is to get the most metal for the least money, it’s generally best to shop for gold rounds and gold bars, which tend to be cheaper than gold coins of the same weight. The premium for gold coins is higher because of the credibility that comes from being fabricated by government mints.
Another factor that may need to be considered is the amount to be invested. Bars may be the best option for large investments since bigger sizes are available. Further, it is often easier to manage large products than it is to manage an array of smaller gold items.
However, physical investors need to also give forethought to when they may want to sell their gold. Large products will require liquidating a more sizeable portion of one’s gold portfolio, and such products may be more difficult to sell in some instances. Individuals making ongoing or significant investments may therefore want to consider purchasing gold in various weights.
Gold as an investment: Where to buy gold
Gold buying can be done through government mints, private mints, precious metals dealers and even jewelry stores. Before making a purchase, investors should avoid numismatic coins or other gold items geared toward collecting and gift giving. These products are for play in a different ball game and are not what the average gold investor needs.
When choosing where to buy gold, it is again best to give thought to reselling it. Some businesses that sell gold will also buy it back. Some will even buy gold that they didn’t sell, but may pay lower prices.
Furthermore, premiums and fees are not one size fits all when buying physical gold. Different sellers may offer the same items at different prices, so investors should take the time to find the best deal.
Gold as an investment: Gold futures market
A gold futures contract is an agreement to buy or sell gold on a date in the future for a price that is determined when the contract is initiated. The futures market is often referred to as an arena for paper trading. Generally, the bulk of the activity is just that, as metal is not actually exchanged and settlements are made in cash.
However, the futures market can also be an arena for purchasing physical gold. That is not to suggest that it is the best source of metal for all investors as it may not increase one’s purchasing power. Obtaining gold through the futures market requires a large investment and involves a list of additional costs. The process can be complicated, cumbersome and lengthy, which is why this option is considered best for highly experienced market participants.
Gold as an investment: Gold ETFs and other alternatives
Investors should clearly understand that purchasing physical metal is not the only way to gain exposure to the gold market. The popularity of exchange-traded funds (ETFs) underscores how easily people can get into the gold market without actually owning physical gold.
Gold ETFs provide exposure to the metal’s price by offering investors the opportunity to purchase shares that represent a quantity of gold. Neither that nor the fact that an ETF is physically backed brings an individual any closer to gold ownership. A gold ETF is not a vehicle to acquire gold.
There are, however, some programs designed to allow investors diversification of their portfolios without requiring that they take possession of the yellow metal or arrange for its storage and protection. Before investing in such a program, investors should become very familiar with the terms.
For one thing, it is important to ensure that participants are indeed allowed to take possession of their metal. Since it is not uncommon for the rules to include withdrawal minimums, investors should make sure they are comfortable with any such requirements. Other important details to pay attention to are the cited risks and costs, as well as the circumstances under which the gold is kept and the process for confirming its existence and taking possession of the metal.
Gold as an investment: Storing gold
Determining the best storage option involves weighing risks against costs. Paying for secure storage eats into profits from the metal’s gains, so some people choose to store their gold at home or in their office. In theory, that is the riskiest option as it involves the highest potential for loss due to theft or disaster. But in many instances these risks are not substantial enough to justify the cost of other storage options.
To stave off security risks, the metal can be stored in a depository or safe deposit box. Investors who do so should note that rates vary, so bargain hunting can pay off. Another aspect to consider is that some banks do not technically permit the storage of bullion, and this is listed in the terms and agreements that customers are required to sign. Also, not all security boxes are insured, so that is another factor to consider when selecting a banking institution for a safety deposit box.
Gold as an investment: Selling gold
Just as buying gold often provides investors with a pricing wakeup call, investors who decide to sell their gold are also sometimes surprised at the prices they receive. That is because the buyback price, or bid, is lower than the asking price. The difference between the two is referred to as the spread, and it is a loss that the seller initially bears.
For example, if an investor pays C$1,733 for a 1 ounce Canadian Maple Leaf and decides to sell it back the same day, the buying price may only be C$1,693.
Furthermore, there are usually other costs involved with selling gold, including shipping, insurance and liquidation fees. Some businesses have minimum purchase requirements, and depending upon payment arrangements, it may be necessary for the investor to pay bank wire fees or postage to receive a check.
Individuals who want to sell their gold quickly may consider “we buy gold” businesses as a convenient alternative. While these businesses can serve as a quick source of liquidity, they are usually not the best option. Often their underlying business strategy involves making lower-than-average offers.
The reality is that, given the spread and the costs associated with acquiring and selling gold, a sharp price move is generally needed to turn a profit. Investors are encouraged to consider building positions in physical gold as a long-term investment, possibly even for retirement savings.
Want more details? Check out these articles for more INNdepth coverage:
- How to Use Gold Investments as a Hedge
- Follow the Money: A Guide to Gold Technical Analysis
- Should You Invest in Gold Stocks or Gold Bullion?
Want an overview of investing in gold? Check out An Overview of Gold Stocks and Price.
This is an updated version of an article originally published by the Investing News Network in 2012.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.