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How to Buy Gold

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  • Introduction

    • There's no question that gold has value: It's dazzling to look at, useful in electronic components and still imbued with a nearly magical aura from ancient mythology. Its monetary value, however, is determined by the laws of supply and demand, just like that of any other commodity (such as diamonds or fertilizer). Gold has shown to be a solid investment during times of economic instability, but it may or may not be the best place to put your money in the long run. You'll want to know the benefits and drawbacks of investing in gold, as well as the various methods of investing, before sinking your hard earned dollars into it.

  • Should You Invest?

    • You've probably heard radio ads touting gold as a fool-proof investment, but there's no such thing. While sinking your savings into precious metal can have certain advantages, it also has dangers.

  • Benefits

    1. Gold has historically kept its value in times when the dollar has been weak or declining.
      • For this reason, it could be a way to buffer your savings against the hazards of inflation.
    2. Unlike paper money, gold cannot be created: it has to be mined. This built-in scarcity helps it to retain its value.
    3. Depending on when you invest, you could come out far ahead—prices nearly quadrupled between 2001 and 2007.
    4. The growing affluence of China and India may insure growth in demand in years to come.
    5. In times of political turmoil and global instability, golden investments tend to perform better than stocks and bonds.

  • Drawbacks

    1. Gold's value is historically volatile. While it is currently on an upswing, it fell about 70% in the last two decades of the 20th Century.
    2. When the stock market and/or real estate markets rally, the value of gold may decrease.
      • This is because demand will decline as investors pursue other markets.
    3. As of January, 2007, the metal was valued at over $900 per ounce, a historical high.
      • While steady gains can suggest an auspicious trend, it could also represent a bubble ready to burst.
    4. Since industrial demand is lower than that of other precious metals, its value is based largely on the whims of investors.
    5. While gold can sometimes be an effective safe-haven in the short term, it's value has been dwarfed by that of the stock market in the long term.
      • According to the Wall Street Journal, if you had invested $1 in gold in 1969, it would have been worth about $20 by 2006, but $1 invested in the stock market (according to the S&P 500 index) would be worth more than twice that figure.
    6. Unlike many stocks, gold investments do not pay dividends.
      • Dividends are payments made to shareholders when a company makes a profit.
    7. Value has not always kept up with inflation.

  • Ways to Invest

    • Investing in precious metal isn't always as straightforward as it sounds. You'll need to decide exactly how you want to invest. Here are three of the most popular methods.

  • Physical Gold

    • If you'd like to sit around running your fingers through a pile of golden trinkets like a drunken pirate, you'll want to buy some actual, tangible supplies. The obvious drawback to this is the risk and expense of storing your golden treasures yourself. Nevertheless, if you're planning to buy only enough to fill a safety deposit box, consider buying the metal in these three common forms:
      • Numismatic coins are collectible (and sometimes very old) coins whose value surpasses that of their actual metallic content.
        • Numismatics can appreciate more rapidly than gold itself, but are often subject to a high mark-up from coin dealers.
        • NumisMedia is an online price guide for numismatics.
      • Bullion coins are recently minted coins—such as the American Gold Eagle or the South African Krugerrand—whose value reflects their actual weight and content.
      • Bullion bars are bars of pure metal—just like the ones that criminals are always flashing in the movies—whose value is reflected in their weight.
        • Though bars are often marked for authenticity, they are easier to counterfeit than coins, and because of their size, they're easier to pack with filler. When purchasing bars, it is very important to choose a reputable source.
    • Sources for Physical Gold:
    • Before buying bullion or numismatics, compare prices and read as much as you can about each seller to make sure it is reputable. In general, it is safer to buy from institutions than from individuals.
      1. The U.S. Mint, the official mint of the US federal government, offers bullion coins and collectible coins from its website.
      2. The following private firms have each been selling gold for over 30 years:

  • Exchange Traded Funds

  • Gold Futures

    • Futures are the riskiest way to invest in gold, but also bear the greatest potential for making a lot of money, with relatively little money down. When you sign a futures contract, you are essentially betting that a given commodity will gain or lose money by a fixed date.
      • The bottom line of investing in futures is that if things go your way, you can make pile of loot— and if things don't go as planned, you could be in debt for years to come.
    • Sources for Gold Futures:
    • If you feel smart, lucky and wealthy enough to play in the casino of futures investment, contact one of the following:
      1. Full service brokers like Merrill Lynch or Smith Barney offer futures contracts, but with a higher transaction fee than some more specialized brokers.
      2. Futures brokers, including discount futures brokers, are listed at Business.com.

  • Mutual Funds

  • How Much to Invest

  • How to Come Out Ahead

    • Even for a commodity as timeless as a precious metal, investing is not a passive activity. You're going to want to keep an eye on market trends at all times, with your finger on the "sell" button, just in case.
    1. Keep track of prices
      • MSN Money's US Commodities page monitors changes in golden value.
      • A banking group called the London Gold Pool posts current prices at this site, twice a day (at 10:30 GMT and 15:00 GMT).
      • If golden values are steadily rising, you may be on the road to riches, if it's slowing down or taking a dip, consider putting your cash elsewhere.
    2. Keep track of the value of the dollar
      • Check this page for an up-to-the-hour comparison of the dollar to other currencies.
      • The dollar often rises or falls inversely with the value of gold. If it's making striking ascent, it's worth it to at least consider selling your supplies.
    3. Keep track of other markets
      • When other investment opportunities start looking particularly attractive, a decline in the value of gold may be just around the corner. Make sure to keep an eye on other markets to stay ahead of the curve.
      • CNNMoney.com's real estate page keeps track of the real estate market.
      • Bloomberg.com's Market Snapshot summarizes the overall performance of stocks and commodities.
    4. Read The Wall Street Journal
    5. Read The Motley Fool
      • The Motley Fool is a less conventional, but also well respected, source of investing info. Its website is designed for the average investor and based on the idea that most people are qualified to guide their own investments, without the help of financial services.
    6. Consider using Yahoo! Finance

 


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