Introduction
Many people see investing in gold as an enticing alternative to stocks and bonds. This is because gold is considered a safe-haven asset, an asset whose value is likely to remain steady if the market fluctuates.
But, as with any other investment, you need to do your research before you commit to investing in gold. In this guide, we’ll cover what you need to consider and avoid when buying gold, and what to look for when selecting a gold investment company.
What to Consider When Buying Gold
When investing in gold, first consider how you’re going to buy it. There are different ways to own gold, each with its own risks and benefits. Let’s dive into the five common ways of investing in gold.
Gold bullion
Gold bullion refers to any gold in pure form, and the most common type of bullion is gold bars. You can purchase gold bullion through an online dealer, a local dealer, or a collector.
While owning gold in physical form can provide a lot of emotional satisfaction, you’ll need to find a place to safely store it, and you’ll also need to insure it.
When selling gold bullion, you’ll need to find someone willing to purchase whatever size bar you own. That said, many investors find this form of gold investing highly rewarding, even if it takes some extra time to lock in a purchaser.
Gold coins or jewelry
Investing in gold coins or jewelry can give you the emotional satisfaction of owning physical gold. It’s slightly more convenient than purchasing gold bullion, too. Coins and jewelry are smaller than bullion, and you can purchase them in smaller quantities.
Plus, gold jewelry has utility, in that you can wear it until you’re ready to sell.
Gold futures
Gold futures are contracts that allow you to buy and sell gold at a specific time, and each future contract represents a specific amount of gold. Depending on contract specifications, you can be paid out either in a dollar amount or in physical gold.
If your futures move in a positive direction in relation to the gold price today, for instance, you have the potential to make a lot of money. If the price of gold moves against your futures, you’ll need to put up a substantial sum of money to maintain the contract. Otherwise, your broker will close the position and you’ll need to take a loss.
Gold ETFs, mutual funds, and IRAs
Gold exchange-traded funds (ETFs) and mutual funds are accounts that buy gold on behalf of an investor. The shares that make up the funds represent a certain amount of gold, and you can buy and sell them like stocks. This is one of the best ways to buy gold, as ETFs and mutual funds allow you to work with gold without the effort or cost of physical ownership.
Most ETFs and mutual funds invest in other commodities in addition to gold, so you may have trouble finding a firm that strictly deals with gold. However, this can be beneficial for diversifying your investment portfolio.
Another option is to invest in a gold IRA, or individual retirement account, which allows you to transfer part of your individual retirement account into gold and precious metals investments. A gold IRA is an IRS-approved retirement account that operates just like a regular IRA and comes with the same tax-deferment benefits.
Gold mining companies and stocks
Investing in gold mining companies allows investors to combine their interest in gold with their interest in the stock market. You can purchase shares in a company that works with gold, and can have access to the profits without needing to buy or sell any physical gold.
What to Avoid When Investing in Gold
While gold can be a lucrative investment, there are a few things you should avoid when investing in gold. Here’s what to keep in mind.
Buying too much or too little
Hedging against inflation and diversifying your portfolio are the main objectives of investing in gold, but if you invest in too much or too little, you could throw your portfolio off. As a general rule of thumb, financial experts recommend investing around 5-10% of your investment portfolio in gold.
Hiring the wrong storage company
If you choose to invest in physical gold, one of the biggest things to consider is storage. If you decide to have a company store your gold for you, investigate them thoroughly and ensure they’re legitimate. Make certain the storage company has an airtight insurance policy as well, so you’ll be protected in the event of an emergency.
Paying too much above spot price
You should be wary of buying too high above the spot price of gold, meaning the price of gold available for immediate delivery. Generally, you should aim to purchase gold for no more than 2-5% above the spot price. Most reputable gold sellers won’t charge you over 5%. Some smaller dealers may ask for more, as they may have a monopoly on gold if they live in a more remote area.
You may also pay higher than the spot price if the gold has a numismatic value, which means it’s a rare coin valuable to collectors.
Buying as a short-term investment
Gold is generally more stable than other asset classes, and it can be a valuable hedge against inflation, but its value does fluctuate. Investing in gold with the hope of making short-term gains may not pay off, as gold usually performs best in the long term.
Buying when the price is high
It can be tempting to invest in gold when everyone’s talking about it. However, people normally buzz about gold investment when the price is high, not low.
The best time to buy gold is usually when it isn’t a hot topic of conversation, as this is typically when you can lock in a better price.
How to Pick the Best Gold Investment Company
Another thing to consider when buying gold is which gold investment company you’re going to work with, or which retailer you’re going to purchase from. Gold investment companies are different from physical gold retailers, but no matter which route you take when investing in gold, you’ll want to pick a company or retailer that feels right for you.
If you’re interested in buying gold coins, you can do so through pawn shops, individual sellers, or online retailers. As always, do your research to ensure the dealer is reputable. You can purchase gold jewelry through a jewelry store or pawn shop, but again, make sure to do your research to determine the company’s reputability.
When purchasing physical gold, you’ll also want to look into storage options. With pawn shops and some online retailers, you’ll need to find your own storage facility. However, some retailers offer physical storage that comes with insurance, though this is an additional fee.
Otherwise, if you’re looking to set up a gold IRA, you’ll need to work with a gold investment company. Here’s what to keep in mind when deciding which gold investment company is best for you.
Fees and expenses
Some gold investment companies have extra charges, such as annual maintenance charges, depository charges, and tax deductions. We recommend looking for companies that are upfront about any extra charges, and double-checking paperwork before opening your account.
Before purchasing, you’ll also want to look into the current price of gold and its projected prices to make sure you’re getting a good deal. We recommend checking inflation rates, too, as gold prices are usually higher during times of inflation.
Stability and earnings increase
We also suggest looking into a gold investment company’s net income growth over time when deciding which company to pick. Even if the company hasn’t made spectacular gains, steady growth could be a sign they’re a reputable firm.
It’s normal for a company’s shares to lose value sometimes (especially in times of economic struggle), but if there’s a lot of fluctuation in its growth, that may be a sign the company isn’t for you.
Holdings
Lastly, we recommend looking at the holdings of the gold investment company so you can determine how much it holds in physical metals. This will also clue you in on how much of the holdings aren’t in precious metals, so you can evaluate whether the company meets your personal criteria for investments.
Conclusion
Investing in gold can be a great way to hedge against inflation and add diversity to your investment portfolio. To get started, determine what kind gold investment you’d like to make, whether it be gold bullion, jewelry, coins, ETFs, mutual funds, or a gold IRA.
After you consider the pros and cons of each, watch out for some pitfalls—such as buying too much or too little, or paying too much above the stock price of gold. Then, before making your actual investment, research the company you’re working with or the dealer you’re purchasing from, so your long-term gold investment can be worthwhile.