You may have seen the WE BUY GOLD billboards on the sides of the highway. Or an episode from South Park that makes fun of these places.
Either way, you’re probably wondering if it’s legal to buy and hold gold as an investment — and how to do it the right way.
I am here to tell you that this is definitely the case and buying physical gold bars is just one of the three main ways to invest and profit from rising gold prices.
So let’s take a look at all three, the pros and cons of each, and discuss whether or not you should invest in gold at all.
First of all, these are gold bars. You know literal gold. What Goldmember and Scrooge McDuck liked to swim in when shameless billionaires were still funny.
In any case, the term bullion refers to precious metal that has been melted down into bullion, ingots or coins. Essentially, bars are an interchangeable, transferable, “currency” form of precious metal, the weight of which is engraved into the metal itself.
And according to Gold Bars Worldwide, gold bars must be 99.5% pure to be considered a true investment, meaning anything less than that can be difficult to sell back to the market, so be careful not to buy “gold”. for fools.”
Oh, and a “bar” is just a gold bar, shaped like the classic trapezoid you see in movies (or in real life, if you’re a ballerina).
So, these are bars – physical gold melted down into bricks or coins that are easy to buy and sell.
So how do you buy bullion?
How to buy gold bars
Between 1879 and 1933, you could actually trade your dollars for gold at the Federal Reserve. But Roosevelt ended that in 1933, and Nixon closed the golden window for good in 1971.
Today, investors can buy bullion from reputable dealers online. JM Bullion is like the Amazon of precious metals and investments over $199 are delivered free of charge. APMEX is their closest competitor and definitely worth visiting for a price comparison.
Some people buy their gold from pawnshops, although you are much more likely to find jewelry than bullion, which is harder to value. So for beginners, it’s probably best to stick with trusted sellers.
Now which bars should you buy?
Many experts recommend American Eagles, which are guaranteed by the federal government – meaning that dealers have to buy them and can’t pull any shenanigans.
“If you buy Eagles, they are very liquid, they are recognized all over the world,” Mike Clark, president and general manager of the State Diamond Depository, wrote in an interview with CNBC. “If you ever pick them up and take them to a coin dealer, they will buy them without a prescription without exception.”
Finally, storage. In short, don’t try to store your gold at home – it’s too likely to be lost or stolen, and poof! All your investments are gone. Instead, consider a safe deposit box at your local bank branch. They usually cost between $20 and $50 a year and the peace of mind is well worth it.
Buying Gold Bars: Pros and Cons
- Easy to buy online
- Objectively the most direct form of investing in gold
- You can keep your own gold
- Shipping, insurance and storage can affect your bottom line
- Physical gold can be lost or stolen
- A trip to the bank/dealer reduces liquidity
A gold futures contract is an agreement to buy gold at a set price on a set date in the future.
Let’s say you pay $10 for a futures contract that allows you to buy one ounce of gold at $1,000 on September 10th. If the price of gold rises to $1,500 before that time, another investor may want to buy your $100 futures contract from you so they can buy gold for $1,000. Thus, you increase your investment by 10 times without having to buy physical gold. Good!
That being said, futures trading can be extremely risky and complex. Like a black diamond in trading, futures tend to suck up many newbies as one bad trade can result in huge losses – like this trader who had to take delivery of 50 metric tons of eggs. Therefore, before considering futures, gold, or anything else, talk to your financial advisor.
Read more: Should I Get a Financial Advisor?
How to buy gold futures
Generally speaking, if a brokerage platform supports futures, it will also support gold futures. Two companies come to mind: Schwab and TD Ameritrade (check out our full TD Ameritrade review).
In particular, gold futures are traded on the COMEX division of the New York Mercantile Exchange (NYMEX). The most popular contract size is the future purchase of 100 troy ounces ($173,390 in today’s prices), although there are also 50 and 10 troy ounce contracts.
(Troy ounces are a special unit for precious metals. 1 troy ounce = 1.09714 traditional ounces).
I hope the picture above illustrates why futures give people so much trouble – they are cheap to buy, but in the near future they will oblige you to pay a whopping $173,390. Approach with caution!
Gold futures: pros and cons
- Low entry cost (some contracts trade as low as $2.25)
- Wider market hours (most futures are traded 24 hours a day, MF)
- Does not require you to hold physical gold (at least until the contract expires).
- Can generate high profits in a short amount of time
- Steep learning curve
- Widely considered speculative and extremely difficult to time markets.
- High risk of failure for beginners
Gold Stocks and ETFs
“Gold stock” is a general term for stocks or ETFs whose value is somehow related to the current market value of gold. You can think of gold holdings as stock market assets that Goldmember himself would invest in.
Golden Shares may include, but are not limited to:
- Companies that mine and process gold
- Companies engaged in “exploring for gold” (i.e. searching for it)
- ETFs, which include companies involved in the extraction, processing and exploration of gold.
- ETFs that track the current price of gold (and are even backed by bullion shops in some cases)
Here are a few examples from our list of the best gold stocks and ETFs to help you understand the concept:
- Barrick Gold (NYSE: GOLD) is a mining company with gold and copper mines in 18 countries. Investors are optimistic about the company’s shares because the company has enough resources left in its mines and was able to secure tons of raw materials (cyanide, explosives) before prices rose in 2022.
- SPDR Gold Shares (NYSE: GLD) is the world’s largest physically backed gold fund. Each SPDR share represents one tenth of an ounce of gold, so if you buy 10 shares, you effectively “own” 1 ounce of gold. You can’t touch it, but you can trade it just like real gold, and SPDR shares are designed to stay within 1% of the price of gold bars.
- ETF VanEck Gold Miners (NYSEARCA: GDX) contains 56 different mining companies. It is said that during the gold rush it is better to invest in shovels than in gold. If you agree with this philosophy, GDX could be the best spade ETF.
Generally speaking, gold stocks and ETFs tend to follow the price of gold. Sometimes they exceed it; when the price of gold rose 300% from 2008 to 2011, GDX shares rose 400%.
But overall, buying gold stocks offers a familiar, convenient, and indirect method of investing in shiny things. You may not always benefit from skyrocketing gold prices, but the indirect impact helps hedge your risks.
How to Buy Gold Stocks and ETFs
Convenience is one of the main benefits of trading gold stocks and ETFs. No gold to mail, no safes, no messy futures contracts.
You can buy gold stocks and ETFs almost anywhere you can trade regular stocks and ETFs. If you are new to trading, check out our best online brokerage accounts for beginners.
Gold Stocks and ETFs: Pros and Cons
- Easily buy, sell and trade on popular brokerage platforms
- Allows you to hedge your risks with diversity and indirect impact
- Allows you to invest in “shovel manufacturers”, which sometimes rise in price faster than gold itself.
Should you invest in gold?
Now that you know about the options, should you invest in gold in the first place?
Well, the main reason investors buy gold is because it is perceived as a safe way to store wealth during crazy times. For example, inflation in the US this year was not 9%, but 900%. What can you do to protect your savings from depreciation?
For hundreds of years, the answer has been “turn your money into gold.” The value of gold has survived the fall of empires, devastating recessions and simply because humanity has been giving it an artificial value for 2500 years and is not going to stop.
So, to draw an analogy, many investors treat gold like a parking lot during a hailstorm—a place to park their “asset” (i.e., their car) to protect it until the blizzard dies down.
To illustrate, take a look at the value of gold since 1993 and see if you can determine when and why people started parking in the “parking lot”.
Interestingly, even when the hail passed, people remained in the parking lot. According to a study by the Federal Reserve Bank of Chicago, “At the start of the sample, changes in inflation or inflation expectations were the single most important factor in determining the real price of gold. However, since 2001, long-term real interest rates and pessimism about future economic activity have become the dominant factors.”
In essence, gold is not just a hedge against inflation or interest rates – it is a hedge against pessimism. Of course, “pessimism” is hard to measure, which is why the timing of the gold market is so notoriously difficult.
To go back, is it worth buying gold in 2022?
If you are pessimistic or think that everything more pessimistic – some gold might make sense. And even if you are more optimistic than most, some investors still keep some gold in their portfolio just for the sake of variety. It doesn’t hurt to have something relatively stable in price and not collapse along with the markets.
Pros of investing in gold
- This is a potential inflation hedge.
- Gold and mining stocks and ETFs offer convenient indirect investment methods.
- Buying physical gold is definitely cool
Cons of investing in gold
- Gold is not interesting
- Market timing can be extremely difficult and speculative.
- Physical gold can be difficult to buy, hold, and convert back into a liquid state.
After all, gold is just one of the potential building blocks for a diverse and healthy investment portfolio.
To take a step back and review all your options, check out our essential tips to help you get started with investing, as well as our How the Rich Get Rich (and How You Can Too!) guide.
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