However, there are markups to consider. The money it takes to turn raw gold into a coin is often passed on to the end customer. Also, most coin dealers will add a markup to their prices to compensate them for acting as middlemen. Perhaps the best option for most investors looking to own physical gold is to buy gold bullion directly from the U.
Mint , so you know you are dealing with a reputable dealer. Then you have to store the gold you've purchased. That could mean renting a safe deposit box from the local bank, where you could end up paying an ongoing cost for storage. Selling, meanwhile, can be difficult since you have to bring your gold to a dealer, who may offer you a price that's below the current spot price. Another way to get direct exposure to gold without physically owning it, gold certificates are notes issued by a company that owns gold.
These notes are usually for unallocated gold, meaning there's no specific gold associated with the certificate, but the company says it has enough to back all outstanding certificates. You can buy allocated gold certificates, but the costs are higher. The big problem here is that the certificates are really only as good as the company backing them, sort of like banks before FDIC insurance was created. This is why one of the most desirable options for gold certificates is the Perth Mint , which is backed by the government of Western Australia.
That said, if you're going to simply buy a paper representation of gold, you might want to consider exchange-traded funds instead.
If you don't particularly care about holding the gold you own but want direct exposure to the metal, then an exchange-traded fund ETF like SPDR Gold Shares is probably the way to go. This fund directly purchases gold on behalf of its shareholders.
Another way to own gold indirectly, futures contracts are a highly leveraged and risky choice that is inappropriate for beginners. Even experienced investors should think twice here. Essentially, a futures contract is an agreement between a buyer and a seller to exchange a specified amount of gold at a specified future date and price.
As gold prices move up and down, the value of the contract fluctuates, with the accounts of the seller and buyer adjusted accordingly. Futures contracts are generally traded on exchanges, so you'd need to talk to your broker to see if it supports them. The biggest problem: Futures contracts are usually bought with only a small fraction of the total contract cost.
This creates leverage, which increases an investor's potential gains -- and losses. And since contracts have specific end dates, you can't simply hold on to a losing position and hope it rebounds.
Futures contracts are a complex and time-consuming investment that can materially amplify gains and losses. Although they are an option, they are high-risk and not recommended for beginners.
One major issue with a direct investment in gold is that there's no growth potential. An ounce of gold today will be the same ounce of gold years from now.
That's one of the key reasons famed investor Warren Buffett doesn't like gold -- it is, essentially, an unproductive asset. This is why some investors turn to mining stocks. Their prices tend to follow the prices of the commodities on which they focus; however, because miners are running businesses that can expand over time, investors can benefit from increasing production.
This can provide upside that owning physical gold never will. However, running a business also comes with the accompanying risks. Mines don't always produce as much gold as expected, workers sometimes go on strike, and disasters like a mine collapse or deadly gas leak can halt production and even cost lives. All in all, gold miners can perform better or worse than gold -- depending on what's going on at that particular miner. In addition, most gold miners produce more than just gold.
That's a function of the way gold is found in nature, as well as diversification decisions on the part of the mining company's management. If you're looking for a diversified investment in precious and semiprecious metals, then a miner that produces more than just gold could be seen as a net positive.
The idea of owning assets that may go up with rising prices in general is comforting to some investors. Precious metals like gold and silver have been considered a store of value for thousands of years — Precious metals have a very long history of being a reliable store of value all over the world. Precious metals carry no counter-party risk — Precious metals can be transacted without counter-party risk.
Precious metals are tangible commodities and are not paper assets that must be guaranteed by governments or central banks. Precious metals can potentially hedge depreciating currencies — Precious metals can potentially help offset depreciating currency values. As currencies weaken, their purchasing power weakens as well, making everything more expensive.
Because gold, for example, is a dollar denominated commodity, when the dollar weakens gold prices may potentially rise. Gold, silver and other precious metals are natural resources with finite supply — Due to the finite supply of precious metals, as demand goes up prices will likely go up, as well.
Precious metals may be a great insurance policy — Some consider gold, silver and precious metals to be a world currency. Governments can fail, banks and financial institutions can fail, and currencies can fail.
Precious metals may potentially provide one with some peace of mind as they may be transacted all over the globe and are recognized for their value in most parts of the world. Precious metals prices may appreciate — Although no one can see the future, it is plausible that prices for precious metals could go up as demand increases and supplies decrease. This price appreciation could potentially add value to a portfolio. There is no one size fits all when it comes to investing and allocating assets.
Gold, silver and precious metals may potentially provide added peace of mind, but may also come with an opportunity cost. One must weigh these issues and attempt to strike a balance. Some investors may want to hold precious metals simply for potential scenarios that will likely never come to fruition. These are scenarios like currency collapses and financial institution collapses. While events of this nature are few and far between, they are possible.
One must ask themselves how much investment capital they are willing to give up for this peace of mind. Here are a few questions one can ask themselves to try to determine if precious metals can play a role in their portfolio and, if so, how much:.
Of course, this list is by no means all inclusive, and there are other considerations to take into account, as well. In terms of what financial professionals may recommend, we have seen numbers that are all over the board from 1 percent to 20 percent. Where one may fall along this spectrum is dependent on a number of factors.
We are not financial advisers and, as such, we recommend that anyone looking to allocate precious metals to their portfolio do their own thorough due diligence and research and draw their own conclusions. In addition, we recommend that one discuss the pros and cons of such investments with their financial adviser or professional.
Some people may look askance to buy gold coins in this day and age, however. Gold and other hard metals have always been a time-honored part of traditional investment plans. If you decide to buy gold coins, get it from a reputable dealer or financial institution. You may pay a higher premium if you buy gold coins less than one ounce each.
They can sell at a very high premium, and their prices are dependent on more factors. Once you have the coins, you may be tempted to run the coins through your hands, like Ebenezer Scrooge. Thieves know where to look, or they can find it with a metal detector. Most investors want the majority of their portfolios to be in growth funds, stocks, or other investments.
In other words, the coins that were used as money simply represented the gold or silver that was presently deposited at the bank. But this gold standard did not last forever. During the s, there were several key events that eventually led to the transition of gold out of the monetary system.
In , the Federal Reserve was created and started issuing promissory notes the present-day version of our paper money that could be redeemed in gold on demand. The Gold Reserve Act of gave the U. In short, this act began establishing the idea that gold or gold coins were no longer necessary in serving as money. Even though gold no longer backs the U. It is still important to the global economy.
To validate this point, there is no need to look further than the balance sheets of central banks and other financial organizations, such as the International Monetary Fund. Presently, these organizations are responsible for holding almost one-fifth of the world's supply of above-ground gold. In addition, several central banks have added to their present gold reserves, reflecting concerns about the long-term global economy.
The reasons for gold's importance in the modern economy centers on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, cannot be said about paper-denominated currencies. To put things into perspective, consider the following example:. They would both buy you the same things, like a brand new business suit or a fancy bicycle. The idea that gold preserves wealth is even more important in an economic environment where investors are faced with a declining U.
Historically, gold has served as a hedge against both of these scenarios. With rising inflation, gold typically appreciates. When investors realize that their money is losing value, they will start positioning their investments in a hard asset that has traditionally maintained its value.
The s present a prime example of rising gold prices in the midst of rising inflation. The reason gold benefits from a declining U. There are two reasons for this relationship.
First, investors who are looking at buying gold i. This ultimately drives the U. The second reason has to do with the fact that a weakening dollar makes gold cheaper for investors who hold other currencies. This results in greater demand from investors who hold currencies that have appreciated relative to the U.
Whether it is the tensions in the Middle East, Africa or elsewhere, it is becoming increasingly obvious that political and economic uncertainty is another reality of our modern economic environment. For this reason, investors typically look at gold as a safe haven during times of political and economic uncertainty.
Why is this? Well, history is full of collapsing empires, political coups, and the collapse of currencies. During such times, investors who held gold were able to successfully protect their wealth and, in some cases, even use the commodity to escape from all of the turmoil. Consequently, whenever there are news events that hint at some type of global economic uncertainty, investors will often buy gold as a safe haven.
In general, gold is seen as a diversifying investment. It is clear that gold has historically served as an investment that can add a diversifying component to your portfolio, regardless of whether you are worried about inflation, a declining U. If your focus is simply diversification , gold is not correlated to stocks, bonds, and real estate.
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