How To Invest In Gold: 4 Best Ways to Buy and Sell

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Gold has long held a fascination for investors. Whether it was a 19th century prospector panning for nuggets or a modern-day financial whiz scanning the computer for buying opportunities. Nowadays, you can buy gold in many different forms, including:

• Coins
• Bullion
• Exchange-traded funds
• Derivatives

How To Invest in Gold

When it comes to investing in gold, you have plenty of choices. You can:

• Purchase physical gold in several different forms
• Invest in companies that mine gold
• Invest in contracts to buy or sell gold

The best option for you depends on factors such as budget, risk tolerance and experience. It’s helpful to explore each one, along with its pros and cons.

Investing in Physical Gold

Many people think of buying and storing physical gold when they imagine investing in gold. There are a few ways you can invest in physical gold.

Gold Bullion

Gold bullion is probably the most popular way to invest in gold. It might be the best for investors who have the cash and want to own physical gold.

Bullion is the purest form of gold. It’s sold as gold bars that might range from a few grams to 400 or more ounces. The most common sizes are one- and 10-ounce bars.

Holding gold in this form appeals to investors who want to see and feel their investment. Bullion is also easy to trade. However, it can get expensive. The price of gold on August 8 was $2,463.20 per ounce. Unlike stocks, you can’t buy fractions of a gold bar. Plus, you need a safe place for storage.

Gold Jewelry

Gold jewelry might be the most familiar form for casual buyers. It offers certain advantages over gold bars, including:

• It’s fun to wear.
• There’s a large resale market of jewelry enthusiasts.
• It can be passed on to loved ones.
• It is covered under most homeowners insurance policies.

That said, purchasing gold jewelry as an investment isn’t always the best option because of the difference between scrap value and retail prices. For example, you might pay $500 for a 14-karat gold bracelet. But its scrap value — the value of the gold in the bracelet — is a fraction of that price.

Gold Coins

Most gold coins weigh one or two ounces. However, you can find half-ounce and quarter-ounce coins. The most widely available gold coins are collectibles such as:

• South African Krugerrands
• Canadian Maple Leafs
• American Gold Eagles

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One thing to keep in mind is that gold coin prices don’t necessarily align with their gold content. In-demand collectible coins tend to trade at a premium. Prices on certified coins are influenced by their gold content and fineness, but rarity is also a factor.

How To Invest in Physical Gold

The most important thing to remember when you purchase physical gold in any form is to do your homework and make sure it’s legitimate. Here are a few options for investing in physical gold.

• Bullion: Use a reputable dealer and stay current on gold prices so you can choose the right time to buy. Most dealers update their prices based on spot prices — i.e., the current value of one troy ounce.
• Jewelry: You can get gold jewelry from a variety of jewelry retailers, but you might find more valuable pieces at pawn or antique shops.
• Coins: There are companies that mint and sell collectible coins, but, like with jewelry, you might find better deals from pawn shops or local collectors.

Wherever you choose to buy gold, it’s safest to buy from a reputable, licensed dealer. Only buy gold bullion, coins or jewelry that has been verified by an expert.

You’ll also want to consider the costs of storage, insurance and shipping before you take the plunge into investing in physical gold.

Bullion Banks

A bullion bank is a precious metal dealer that operates online or in local establishments. Bullion banks typically deal with large quantities of gold. Their customers tend to be institutional investors and central banks rather than individual investors.

Bullion banks typically offer investors a choice between allocated and unallocated gold accounts. With an allocated gold account, the investor owns specific pieces of gold that the bank cannot use for other purposes. Owners of unallocated accounts are essentially unsecured creditors of the bank.

Investing in Derivatives: Gold Futures and Options

A derivative is a type of financial contract whose value is based on the underlying asset — in this case, gold. The parties to the contract are a buyer and seller who agree on the circumstances under which they’ll enter into a trade.

Gold Futures

Futures are a type of derivative contract. The buyer agrees to buy a specific amount of gold at a specific price, on a specific date. The seller agrees to sell that amount of gold under the stated terms. However, gold never changes hands. The transactions are executed in cash, not gold.

You buy gold futures when you think you know in what direction gold prices are headed.

Gold Options

Gold derivatives can also be traded as options contracts backed by physical gold. Futures investors commit to buying the gold, but options investors simply have the right to purchase it on the predetermined date, for a predetermined price.

Derivatives eliminate the hassles of owning physical gold. Because derivatives require in-depth market knowledge, they are best left to experienced investors.

Derivatives can result in impressive gains, but they also carry the risk of significant losses. Prices can rise and fall faster than the price of gold itself, and derivatives trade on margin, which means you trade with borrowed funds. If you make the wrong call or invest too much in one place, it can go wrong very fast.

How To Invest in Gold Derivatives

You can buy derivatives through a broker. Note that not every broker offers derivatives, so make sure you have an account with one that does if you want to pursue this gold investment.

Investing in Gold ETFs and Mutual Funds

Gold exchange-traded funds and mutual funds are a good option if you want the expertise of professional fund managers. However, some are passively managed index funds that track industry trends or the price of bullion using futures or options. These are good options for beginner investors or those with a lower tolerance for risk.

Funds comprise a significant percentage of overall gold investments, even though they are a relatively new option for investors. ETFs are backed by physical gold and reflect the current price of gold in the market.

How To Invest in Gold ETFs and Mutual Funds

You can buy ETFs and mutual funds through most brokerages and investment apps. Make sure you choose one that best fits your needs — investment options, fees and ease of use are all important to consider — and create an account to get started.

One advantage of investing in gold ETFs and mutual funds is that they give you exposure to gold’s long-term stability. At the same time, they offer more liquidity than physical gold and more diversification than individual gold stocks. ETFs have the added bonus of trading like stocks. You can trade them for the going price any time the market is open. On the other hands, your mutual funds trade won’t go through until after the markets close.

Investing in Gold Mining Stocks

Buying shares of gold mining companies is another way to get exposure to the market without buying gold directly. The main advantage of this investment is that the return is tied to more than the current price of gold. For this asset, the company’s performance is the primary factor in the stock’s gains or losses. Here are some things to keep in mind:

• Some stocks pay dividends.
• Gold mining stocks tend not to fluctuate as dramatically as the price of physical gold because they represent an investment in a company.
• Stocks are not backed by physical gold, so you can lose your investment if the company’s performance falls.

How To Invest in Gold Mining Stocks

Just like with funds, you can invest in individual stocks through an account with a brokerage or investment app.

Which Type of Gold Investment Is Best?

If you’re looking to use gold as a hedge against inflation, buying physical gold might be your best option. Remember that you’ll have to cover the cost of storage and insurance.

If you want to test the waters, consider starting with a gold ETF or mutual fund. However, experienced investors interested in taking more risk might look into gold stocks or gold derivatives.

Is It Better To Buy Gold or Gold Stocks?

If you want to invest in gold and avoid the costs that come with physical gold, stocks might be the better option for you. However, they also come with more risk. If the company you’ve invested in fails, you’ll lose your investment even if gold prices have risen since you invested.

With physical gold, though the price may fluctuate, you won’t lose the gold itself. So when the price goes up again, you can make back your losses.

Whichever option you choose, it’s important not to put too much into any single investment. A diversified portfolio is the best way to protect yourself from losing too much at once.

Is Investing in Gold a Good Idea?

For many investors, gold is a good addition to your investment portfolio. But you should first learn about how to invest in gold and the types of gold assets you can invest in.

Because gold prices tend to be less volatile than stocks, gold is viewed as a comparatively safe investment. People use gold and other precious metals to diversify their portfolios and to serve as a hedge when other investments decline in value. Historically, gold’s value tends to increase during times of inflation, when the dollar loses purchasing power.

How Do I Start Investing in Gold?

As a first-time gold investor, your safest bet might be to buy physical gold — specifically, bullion. Gold jewelry and coins have value beyond their gold content for which you’ll pay a premium. However, bullion is the most straightforward gold investment. You can check spot prices yourself online and compare them with prices listed by dealers to make sure you’re getting a good deal. And in the event you need to sell the bullion later, it should be easy to do so. Although you won’t necessarily be able to get the price you paid for it.

If you don’t have a safe place to store your gold or you want to start with a smaller investment, a gold ETF or mutual fund might be a better option. The SPDR Gold Shares ETF, for example, closed at $224.01 on August 8, which means it’s less than 1/10 the price of an ounce of gold. It has gained over 22% year to date and nearly 10% (annualized) over the last three years, according to data from Yahoo Finance.

The Bottom Line

There are plenty of advantages to investing in gold, including the hedge it provides against other investments and the diversity it can bring to your portfolio. But gold also has certain downsides. One of the biggest is that its value is tied directly to its price.

Gold doesn’t provide a steady stream of income the way dividend stocks or other assets do with regular interest payments. And if you own physical gold, such as coins and bullion, you need a safe place to store it. You can use a safe at home or at a storage facility or safe deposit box. This adds an additional cost you won’t face with other types of investments.

Daria Uhlig, Vance Cariaga, and Amber Barkley contributed to the reporting for this article.

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