Breaking Into Gold Investing
Gold is a precious metal that has been sought after since the beginning of time. In fact from civilizations far back in time to the modern day gold is considered to be the currency of choice the world over. The way it works today is that most investors purchase gold to act as a hedge against such things as inflation and political unrest. As well investment advisors often recommend that a portfolio that is allocated in commodities should include gold as a means of lowering the overall risk to a portfolio.
Here we will look at some of the opportunities that are available to you in terms of investing in gold. These opportunities involve bullion which is gold bars and gold coins, futures and mutual funds. There are a few exceptions but in general it is bullion, futures and a couple of specialty funds that pave the way towards a direct investment opportunity when it comes to gold. Many of the other investments garner a portion of their value from other types of sources. For example, jewelry and mining companies which we will not touch on here.
Gold Bullion
When you think of the direct ownership of gold the most well known type is gold bullion. While gold bullion is most often thought of as gold bars it is actually any form of pure (or almost pure) gold that has been certified in relation to its purity and its weight. This would take into consideration gold coins and gold bars of any size, among other things. Most gold bars have serial numbers for security reasons.
Gold bars that are heavy might make the eyes open wider but their large size which can equal as much as 400 troy ounces is often a drawback. Heavy gold bars are illiquid and that makes them costly to both purchase as well as sell. Think of it this way, one large gold bar may be worth a lot however you cannot sell a percentage of it because you cannot simply cut it up in pieces. Bullion that is made up of bars that are smaller in size as well as gold coins has a higher level of liquidity. In fact small bars and coins are a popular method of owning bullion.
Gold Bullion in the Form of Gold Coins
Remember the gold coins you used to buy when you were a kid that had chocolate on the inside and were oh so yummy? Well the real gold coins are so much better and are for the grown up investor! For a number of decades now sovereign governments have issued large quantities of gold coins around the globe. For investors who wish to purchase gold coins they must do so from private dealers. They can buy the coins at a premium of approximately one to five percent of their underlying value.
Bullion gold coins have some advantages that are worth mentioning. First of all, the price of them is generally conveniently available in financial publications that are distributed globally. Another advantage is that gold bullion coins are most often minted in smaller sizes such as one ounce or in some cases smaller. This makes them easier to invest in as compared to the larger gold bars. Another advantage is that reputable dealers are easy to locate in most medium to large sized cities so you do not have to spend a lot of time searching for them in the area you reside in.
Be aware that some of the gold coins that are the most widely circulated the world over include the U.S. eagle, the Canadian maple leaf and the South African Krugerrand. All of these coins are very popular and sought after by investors.
Gold bullion does come with its share of problems. Insurance costs are a concern as is storage. Another issue is the relatively large markup from the dealer which can hinder the potential that comes from the profit that can be earned. As well when you invest in gold bullion you are making a direct investment in the value of the gold but you must bear in mind that every change of the dollar in relation to the price of gold will automatically proportionally modify the value of your holdings. The smart gold investor should keep all of these things front and center in his or her mind.
Gold ETF/Mutual Funds
As opposed to making a direct investment in gold bullion you may decide to turn your attention to a gold-based exchange-traded fund (ETF). Each share of these instruments represents gold in a fixed amount. For example, the fixed amount may be one-tenth of an ounce. You may buy or sell these funds in a brokerage or an IRA account in the same way that you would buy or sell stocks. Doing this is often simpler and easier, as well as more cost effective than directly owning gold coins or gold bars. This is especially the case if you are investors who does so on a small scale. The minimum investment in this instance would be approximately the price of a single share of the exchange-traded fund. These funds generally have an annual expense ratio of less than 0.5 percent. This is a great deal less than the expenses and fees that come with other investments such as mutual funds.
It is important to be aware that there are only a few mutual funds out there that focus entirely on gold investing. Most of them own a selection of other commodities as well. Gold-only mutual funds are good though as they are low cost and require a low minimum investment. There is ease of ownership in an IRA or a brokerage account. It allows for diversification among different companies. It also does not necessitate any individual company research. In other words, they make investing in gold as basic and as simple as can be. This appeals to many investors.
You need to read the prospectuses of each fund before you decide to invest. ETFs have a tendency to be connected to a passive index-tracking strategy and have low expense ratios while traditional mutual funds are more actively managed. For the investor who wishes to invest in gold and wants to be responsible in doing so ETFs and the best mutual funds are a basic way to invest in gold as well as a safe way to do so.
Gold Futures and Trade Options
Futures are contracts that are drawn up to purchase or sell a given amount of a particular item on a specific date in the future. In this instance the item is gold. The amounts can be large which is why futures tend to be best suitable to the most experienced of investors. Many people like to use futures because the margin requirements are low (such as less than five percent of the value of the contract) and the commissions also tend to be lower than that found in traditional equity investments. Not all contracts are the same. Some can be settled in dollar amounts while others can be settled in gold.
Options on futures offer an alternative to purchasing a futures contract. In this case the option owner has the right to purchase the futures contract within a specific frame of time for a price that has been preset beforehand. One of the benefits inherent in an option is that it leverages the original investment as well as limiting losses that come with the price that is paid.
When a futures contract is purchased on margin it may require more capital than you initially invested if the losses begin to build up rapidly. A futures investment is based on the present value of the gold.
The disadvantage of options is that the investor is expected to pay a premium for the value that underlies the gold in order to become the owner of the option. Both futures and options have a tendency to be very volatile in the market. For this reason they are not right for every investor who desires gold for their portfolio. What you should take away from this however is that futures are one of the cheapest and most cost effective means of buying or selling gold when you wish to invest in large sums of it. It is the cheapest because of the commissions plus the interest expense