How to Invest in Gold

| by Michael Locklear

gold investments Regardless of gold prices, and the fluctuations in the market, it can never really be said that there is a bad time to invest in gold. Cost averaging should always be your first consideration whenever you are looking to include gold in your investment portfolio. It is always a good idea to adopt a strategy that spreads your risk over time to better improve your chances of riding out the inevitable growth and contractions in the gold market.

Depending on how bullish you are on gold and its projected price increases, you can spread your investment from 3% of your total holdings to as high as 20%, depending on how you see the market moving over time. Most investors seek protection in gold as a hedge against inflation, the instability of currency values, and general uncertainty in major global economies.

Investing in Physical Gold

There are wide and varying approaches to gold investing depending on your preferences. If you wish to buy physical gold it is readily available in multiple forms including, bars, coins, and jewelry. The American Buffalo, American Eagle and the Canadian Maple Leaf rank among some of the most popular US gold coins available. They can be stored at your bank any safety deposit boxes or at home providing that you have proper security measures and insurance. Companies such as Kitco will assist you in both trading in the market with them storing your gold. You can also purchase gold certificates which allow you to indirectly own gold where you don’t have it on hand; it is stored for you in a vault.

It’s important to avoid high premiums in your purchases of gold coins and bullion. When buying gold you want your purchase price to be as near to the spot price as you can get it and never pay more than a 10% premium at its highest. The reason for this is simple if you are paying higher premiums for your gold then gold will have to rise even more in order for you to realize a profit.

Investing in Gold Coins

Generally gold coins are produced by a national mint and normally carry a 4% price markup. In addition purchasing your coins from a dealer will add between 1% and 3% to the price. A good rule of thumb for calculating the price you are paying for your gold products is to first deduct the spot price from the amount you’re being quoted then you will want to divide that number into the spot price and then multiply by 100. If you purchase a 1 ounce bar with a 2.1% markup than the price of gold will have to rise 2.1% in order for you to reach a breakeven point.

When purchasing coins there are two things you should know. The first is you’ll need to decide what your ceiling is for the premium price you’re willing to pay. Experts generally advise that 10% should be your maximum limit. Beware of buying so-called ”rare coins” as they traditionally command a much higher premium. This will place significant limits on your ability to recover your initial investment. Your best approach is to leave these coins to the experts. If you are truly interested in these coins then it is best to consult the leading auction houses such as Christie’s whose experts can give you an accurate assessment of the investments quality and value.

It is also advisable to be cautious about coins that have a story. Some dealers will try to entice you with a tail of how rare the coin is and its antiquity. This is a red flag and most experts will not participate.

If you are expecting a real catastrophe to occur in economic markets and you are looking to use gold as a currency in the future you may choose to buy coins in small denominations such as 1/10 of an ounce, which will command a higher premium, but will allow you to pay for your daily survival needs, such as food, rent and gas. All government mints produce coins in various small denominations so it should be easy for you to acquire gold if you desire to use it for this purpose.

Investing in Gold Bars

Another highly preferred method of getting gold into your portfolio is through the purchase of Gold Bullion Gold. Gold Bars are available for purchase in a variety of different sizes. Government mints produce these bars in a range of sizes from one Troy ounce, 10 Troy ounces, bars in the kilos size of 32.15 Troy ounces as well as very large bars of 100 and 400 Troy ounces.

Additionally Some Gold Bullion Bar dealers may be able to provide you with bars of even smaller denominations then one Troy ounce. All of these bars are available in a fineness of .995 fine which is a standard industry. This is a guarantee of the highest purity and quality.

Generally the government mint that produced the bar will add 4% premium to the spot price to cover the cost of the manufacture process. The dealer where you purchase your bars will likely also add a premium of between 1% and 3%. Prices for premiums will vary and experts advise that you never pay more than 10% total premiums combined.

Investing in Gold ETFs

Certainly one of the most popular methods of including gold in your portfolio, just now, is Gold Exchange Traded Funds. There are several of these available to investors and among them the most popular is SPDR Gold Shares (GLD). Billionaires George Soros and John Paulson have these shares in their portfolios. iShares Comex Gold Trust (IAU), another of the gold ETFs, has the lowest fees at only 0.25%. The newest of the ETFS has its physical gold stockpiled in Switzerland and offers investors a wide variety of options in both gold and currencies. Formed in September of 2009, ETFS Gold Trust (SGOL) is another of the many options available to investors.

ETFS are gold shares, not physical gold. Each share represents the equivalent of 1/10 of an ounce of gold. Gold purchases are increased and converted into stock by the issuer when investor demands exceeds the available shares. Share values may diminish over the long term due to expense ratios of 0.25% to 0.50% for operating expenses of the fund. ETFS , in order to cover these operating expenses, will sell off some of its gold; the corresponding effect is that each share in the fund is reduced slightly in value. Nonetheless this method of investing in gold is extremely popular despite this minor offset.

How Much Should You Pay?

In some extreme cases there can be a premium as high as 75% or higher depending on what gold product you are purchasing. To be certain that you are receiving the highest value for the price you’re paying it is important to first decide what your reasons are for investing in gold in the first place. If it is your plan to hold your gold for the long-term than it is most desirable that the price you pay be as closely related to the spot price as possible.

Not all gold investments are created equal. Be certain that the product you’re investing in will keep pace with the price of gold as much as possible. Following these guidelines will give you a greater degree of security and improve your profit-making potential both in the short term and the long term.

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