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If you’ve not yet decided to invest in gold, now is the time. If you feel a bit overwhelmed at the prospects of it, this overview should help. People all over the world are turning to gold as a place of financial refuge. Failing faith in fiat currencies is generating more profound interest in precious metals than ever before. Even countries like China are shifting reserves out of U.S. Treasuries and into gold.
Invest In Gold Bullion
The most foundational way to invest in gold is simply to purchase gold bullion. While bars and ingots are available, one ounce rounds are the most popular way to get gold. U.S. Eagles, Canadian Maple Leafs, and South African Krugerrands are the most prominent coins. Eagles and Maple Leafs usually carry a higher premium over spot upon purchase, but then can be sold for closer to spot when you unload your coins. If you’re looking for one of the cheapest ways to buy gold bullion, the Krugerrands are likely the way to go.
Invest In Gold Through ETFs
Those wanting to invest in gold have lots of options in the ETF arena if they prefer getting into precious metal as easily as buying a stock rather than buying and storing physical metal. Some even like to use leverage, and thus are pleased to use call and put options on exchange traded funds to enhance their returns. In any event, the numbers attributed to gold ETF products evince that plenty of people use these financial vehicles to invest in gold.
The most common ETF gold product is GLD, which seems to be a household name at this point. GLD is designed to move in tandem with the price changes reflected in the gold rate. GLD is supposed to use custodians in various places around the world to buy bullion with fund proceeds and warehouse it to back up the investment. Different ETFs use different custodians and different locales for housing the bullion. A bit of research allows the investor to select jurisdictions that are more tailored to your preferences. In addition, some of the ETFs allow for sub-custodians and other relationships that may seem a bit convoluted.
When you invest in gold through a bullion-based ETF, it’s important to keep in mind that there are expenses that have to be paid. Unlike keeping gold at home, somebody has to get paid for keeping all of this together. To pay the expenses, unfortunately, bullion has to be sold. What this means is that there is ultimately a trading error in that the gold ETF funds cannot fully mirror the price movement of gold.
Invest In Gold Miner ETFs
A more exciting way to invest in gold is to use a different form of ETF. Rather than being linked to the yellow metal itself, there are ETF gold vehicles that are tied to gold mining companies. These ETFs are also very easy to trade, since they function just like a stock. You can trade all day long, use options, get real-time quotes and all that good stuff. Popular ETF products are often anchored to a basket of pre-selected stocks that comprise an index. For instance, the GDX is linked to the Arca Gold Miners Index.
Whether you opt for an ETF tied to bullion or mining companies, when you invest in gold this way there are some drawbacks to be aware of. Beyond the expenses associated with a fund of any type, and the tracking errors that accompany the funds as a result, one of the drawbacks you’ll face is the lack of flexibility. In other words, an ETF tied to an index of companies is connected to those companies. This sounds obvious, of course, but the problem arises when the fund is thus invested in a company that it might be better to sell. If you had invested in each of the companies individually, you would be able to buy and sell at will.
Invest In Gold Mutual Funds
If you’re like me, you really don’t want to be stuck with a set group of companies. If nothing else, you could simply purchase the stocks that comprise the given index, and then you could buy and sell them, if only you had a basis for doing so. So, if you are like a lot of people, you either need some guidance as to when you should buy and sell, or else you need to have someone do it for you. Using a quality mutual fund is a simple, and effective, way to put somebody else in charge.
There are good mutual funds that, for all intents and purposes, function like an ETF for your purposes. However, they can offer some distinct benefits. With a good mutual fund, you can get broad exposure to quality companies. However, you get the flexibility of having a knowledgeable person always ensuring that you are invested in the best opportunities the market has to offer. If it’s time for a company to go, for whatever reason, it can be sold and cash moved to a more viable option. The company can even be sold and repurchased if it would ever make sense to do so.
There are some identifiable drawbacks, but the average investor would not be bothered by them. Mutual funds are only bought and sold after the market has closed and the net asset value has been established. However, the fact that they are not traded throughout the day is usually not an issue for most people. Likewise, the inability to trade options on the mutual fund is generally irrelevant to most people considering a mutual fund. The only other drawback would simply be if you either did not have the required minimum $5,000 investment, or else did not want to concentrate so much money in one area.
The U.S. Global Investors Gold and Precious Metals Fund, or USERX, comes to mind as a great fund for folks wanting to focus solely on producers. These are the companies that are already extracting and selling product into the marketplace. They simply continue to prosper as the price of gold goes up. A variant on this fund is the U.S. Global Investors World Precious Minerals Fund (UNWPX). UNWPX puts 20% of invested capital into the smaller exploration, or “junior,” companies. The balance is in larger producers just like USERX.
Each of these funds are a great way to invest in gold and they are both comparable in terms of other factors. For instances, they require a minimum starting investment of $5,000. This is not generally a problem unless one either does not have the funds or else doesn’t want to allocate that much to a given asset class. Additionally, these mutual funds carry a 1.5% expense ratio. This is notably higher than popular ETF products, but the active management can readily offset this thru superior returns. For those looking for a passive way to invest in gold, these are great options to look into.
