There’s always a debate swirling about whether or not it's a good idea to invest in gold. Some people swear by gold and believe it's the answer to surviving the zombie apocalypse.
Others say it simply doesn’t have any cash flows and has produced poor returns. Whatever your view on gold, one thing is for sure, it does help in diversifying a portfolio.
We aren’t going to debate the merits of investing in gold for this article. There’s already plenty on the internet about it. In this post, we’ll focus on how to get started investing in gold. We’ll break down the investing avenues into two paths — paper and physical gold.
How To Invest Paper Gold
Paper gold means investing in gold indirectly through stocks, ETFs, options, and futures. There are a few reasons to go this route vs. investing in physical gold:
- No storage fee
- Lower transaction cost
- Potential dividends or cash flows
For investors who want exposure to gold without any of the hassles that come with owning the physical asset, paper gold products are an excellent choice. We mentioned four asset classes above. Let’s go through each one to understand what’s involved.
Invest In Gold Stocks And ETFs
Popular gold miner stocks include Barrick Gold Corporation (GOLD), Jaguar Mining Inc. (JAG.TO), and B2GoldCorp (BTG).
Well-known ETFs that are backed by physical gold include SPDR Gold Trust (GLD), VanEck Merk Gold Trust (OUNZ), and Aberdeen Standard Physical Gold Shares ETF (SGOL).
Invest In Gold Options
Gold options are a little more advance in that they use a lot of leverage. One options contract is equal to 100 shares of the underlying stock or ETF.
Specifically, if you're buying options, you’ll have to be careful about which strike you choose because they decay with time. Unlike a stock, where you can continue holding the shares indefinitely, an option will eventually expire, which can mean losing all of your investment.
Invest In Gold Futures
Of the paper gold choices listed in this guide, this is the most advanced. Futures are the closest you’ll get to trading physical gold without actually owning gold bars.
In the section on physical gold that follows, spot price is mentioned a few times. The gold spot price is based on the gold futures contract price.
Like options, futures are also highly leveraged and will eventually expire. You can also end up taking delivery of physical gold if you don’t sell out of the futures contract before expiration.
How To Invest In Physical Gold
Owning physical gold has a bit of a mystique to it. Unlike paper products, you can touch physical gold. You can put it in your vault, ship it off to be stored at a remote location, or trade it in secondary markets.
But owning physical gold costs more than owning paper products, both in obtaining and storing it. We break both down below.
The price of gold bullion or bullion coins is based on the spot price, which generally follows the gold futures contract. On top of the spot price is a markup by the gold dealer.
This dealer markup is basically the transaction cost although there may be a separate fee involved. These transaction costs are going to be much higher than any commissions you’ll pay online for buying paper gold products.
Next is the storage fee. You need to store your physical gold in a safe place. This means both a secure location and one that is safe from fire. Some people choose to store their gold in a home safe. While that will save money on storage cost, it does leave the gold susceptible to high heat in the case of a home fire.
Instead of storing gold in a home safe, some choose to store it in a safe deposit box at a bank.While that might seem like a step up, the problem with safe deposit boxes is that the contents are not insurable. Additionally, if something happens to the contents of your safe deposit box, the bank is not liable.
There are also precious metals storage facilities. They specialize in the storage of gold, silver, and other precious metals. Some of these facilities can even buy your gold when you’re ready to sell it. Some even offer insurance on your contents.
Vaulted is one example of a company that sells physical gold and offers flexible storage options. With Vaulted, you can choose to pay a 0.4% annual maintenance fee to have the gold held at the Royal Canadian Mint or you can have it shipped to you via FedEx. Buyers also pay a 1.8% transaction fee.
At some point, you’ll want to sell your gold. Now you need to find a buyer. Here too, you’ll incur high transaction costs. Also, nothing says the buyer has to pay the spot gold price, which means you might get a worse price.
Buying paper gold products through a low-cost stock broker is a simple, cost-effective way to invest in gold today. But once you've done your homework on purchase and storage options, investing in physical bars or coins could further diversify your gold holdings and overall portfolio.
Finally, you can also consider investing in silver!
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.