Offbeat Offerings: Investing in Gold
by Cara Scatizzi
Historically, gold has been viewed as the ultimate store of value.
In uncertain economic times, investors often turn to gold as insurance against uncertainty and instability, and as a hedge against inflation or a falling currency. Gold is also viewed by some as a portfolio diversifier, since it has a negative correlation with the stock market.
How It Works
The prime indicator investors watch, not surprisingly, is the price of gold.
Because gold is a commodity in limited supply (it cannot be made artificially), the laws of supply and demand play a large role in pricing. Supply issues can vary based on the region where the gold is mined and the use of the gold.
Similarly, demand for gold is driven by its various uses, including its extensive usage in jewelry, its use in industrial processes, and its use as an investment.
However, for investors, there are many different ways to invest in gold, and for some of these investment vehicles, the price of gold is not the only factor that affects the value of the investment. Investing in certain types of gold securities (such as gold stocks, mutual funds and some exchange-traded funds) can be more risky than investing in the metal itself.
Types of Investments
Investors wanting to invest in gold have a variety of different options: They can actually hold the metal itself or they can purchase it indirectly, by buying the stocks of companies in the gold mining business, through mutual funds or exchange-traded funds (ETFs), or by investing in gold futures or options.
Possibly the easiest way to invest in gold is to buy the stock of companies involved in the gold mining business, or to buy the shares of a mutual fund that invests in these stocks.
Exchange-traded funds offer a similarly easy route. Some of these ETFs are based on indexes of stocks in the gold industry, while others are tied more directly to the actual price of gold itself, either by holding gold bullion in a trust, or by tracking the price of gold.
For those interested in holding actual gold, there are a few ways to do so. Gold coins are legal tender in the country of issue at their face value. For investment purposes, however, the market value of bullion coins is determined by the value of the gold content, plus a premium or mark-up that varies between coins and dealers. The premium tends to be higher for smaller denominations. Bullion coins range in size and most common weights are 1/20, 1/10, 1/4, 1/2 and one troy ounce. Small gold bars can be bought in a variety of weights and sizes, ranging from as little as one gram to 400 troy ounces.
You can also invest in gold through the use of futures and options contracts, although these are highly risky investment vehicles, particularly due to the leveraged nature of the investment.
How to Trade
Gold-related securities (stocks of companies in the gold industry), as well as exchange-traded funds, can be traded using a discount broker. No-load and low-load mutual funds can be purchased directly from the fund company. These securities can be traded intraday (stocks and ETFs) or end of day (mutual funds).
To purchase gold coins and bars, you must use a licensed dealer. Gold, and other precious metals, are traded throughout the day. A spot price (the price for immediate delivery) is quoted, usually not in real-time. Most dealers will update spot prices intraday. For up-to-the-minute prices you can call the dealer directly. To compare bullion prices, you can use Web sites such as www.goldprice.org that offer quotes from a number of dealers and links to dealer Web sites.
Once you have purchased the gold, dealers will give you a few storage options. Investors must pay for storage and insurance.
Gold futures and options are traded on regulated exchanges and can be bought and sold using a broker.
Gold investing is most suitable for investors who have a high fear of a major economic depression or other serious crisis. It is also suitable for investors who want to further diversify their portfolio holdings.
The use of futures and options is highly risky and requires extensive knowledge of options and futures trading, and should be viewed as an option only by the most risk-tolerant and speculative investors.
Tax implications for investing in gold depend on the type of investment vehicle chosen.
Gold itself is considered a collectible. Currently, gains from collectibles held over one year are taxed at the maximum rate of 28%, rather than the lower long-term capital gains treatment that is afforded to financial securities. Certain ETFs that invest directly in gold or the spot price of gold have a similar tax treatment.
The tax implications of other forms of gold investments vary with the type of investment vehicle. For example, gains and losses on the sale of a gold stock or gold mutual fund would be the same as any stock or mutual fund sale.
Whether you invest in actual gold bars or coins or in securities related to the gold industry, the market for gold is very liquid. Stocks, mutual funds and ETFs can be traded on a daily basis through a stock broker. Actual coins and bars are also liquid and can be sold easily through a dealer.
Stable With Diversification Benefits
Gold has a low correlation with the overall stock market, which means as the market goes in one direction, gold tends to go in the opposite direction. During times when the market has fallen, including a few market recessions and crashes, gold prices have remained stable and even risen in value.
Many investors will use gold to hedge against inflation and currency risks because gold will keep its purchasing power over time.
Commodity Investing Is Risky
Investing in any commodity can be risky, even gold. You are betting on a future price based on current information, and the future price is based on supply and demand considerations.
Investing in actual gold can be safe, but the guarantee of safety usually means lower returns. Investing in gold-related securities could yield a higher return, but you will be taking on more risk.
Mark Ups and Storage Costs
If you purchase gold directly, the dealer mark up can be costly (relative to other investments), and you must pay storage costs.
Additional Risks With Other Investment Vehicles
Investing in gold securities, whether it be through gold-related stocks, mutual funds or ETFs that invest in gold stocks, introduces stock market risk, and gold stocks in particular can be highly volatile.
World Gold Council
The World Gold Council is an international not-for-profit organization headquartered in London. Its investment research program provides information about gold including a wide range of research topics looking at golds investment characteristics, as well as a wealth of information on the structure of the market, demand and supply flows and regular updates on gold market statistics.
GoldPrice allows you to compare current prices of gold coins and bullion from various dealers. You can learn more about a specific coin, see a price chart, compare prices dealers are currently asking and link to dealer sites. The site also contains up-to-date commentaries on the gold market as well as tips on trading gold.