How To Invest In Gold Explained For Beginners

by Nancy

Gold has long been considered precious and even today it is a sound investment. If you have never dabbled in stocks or equities or have little experience do not despair. Investing in gold is easier than you think. Gold is a good investment because it is in limited supply and this scarcity acts as a hedge against volatile stock markets and inflation. Tomorrow the dollar bill may lose its worth, but gold retains its value.

Knowing you want to invest in gold and actually doing it are definitely two different things. Most do not move forward from thinking it is a good idea to the realization of investing. It may be the only thing separating the did from the did not is knowledge. How do you invest in gold and what are the pros and cons? This short beginner’s guide to investing in gold shows you how and answers the most pressing questions.

The Gold Demand

Gold is utilized in the jewelry industry and accounts for around 50 percent of the demand. 40 percent comes from those who invest in gold, either through gold bars, coins, medals, and bullion (a gold bar stamped with the amount of gold in it). Many types of people and businesses invest in gold, including banks and exchange-traded funds (businesses that purchase gold for their clients). The remaining percentage of gold demand comes from the tech and medical industry who use it to create tech gadgets or fill teeth.


Gold Price Standards

Gold has a perceived value like any other commodity offered for sale. It is based largely on supply and demand. When you have more demand than there is a supply, the value of the item goes up. With a limited supply of gold being produced, it stands to reason that its value is always higher than other types of commodities. You can track the value of gold by going to the World Gold Council website.

If you examine historical values of gold relative to stocks and bonds between the years 2007-2009 and the recession that took place, you can see a great example of gold’s ability to hold its value. During this time the Standard & Poor Stock Index fell at least 36 percent, but gold’s value rose by 25 percent. Economic uncertainty drives the value of gold higher. It has earned gold the enviable title of a “safe-haven” investment.


How to Get Started Investing in Gold

Jewelry: Avoid the temptation to invest in gold by purchasing gold jewelry. Unfortunately, gold jewelry does not hold its value and its resell value is most likely to drop. Gold jewelry must be at least 10karats to be of any worth. If you purchase gold jewelry that is 24karats, then it may have more holding power since that is considered pure gold.

Gold Bullion: Your best option is to own the actual, physical gold. This is achieved by purchasing gold in bullion, coins or bars. If you opt to purchase a gold coin keep in mind that the process used for making the coin as well as the dealer’s fees will be passed on to you. One of the most sought after gold coins currently is the Government Issued 1 oz $50 Gold American Eagle coin. Purchasing gold bullion from the U.S. Mint is the most direct way to own gold and it comes with no dealer’s fees. Additionally, there is the safety factor when you purchase from the U.S. Mint. Most investors who purchase gold in this way opt to keep it safely stored in a safety deposit box at their bank. The downside to purchasing gold in this way is that it is more difficult to liquidate in physical form. You must find a dealer to handle the transaction and he or she may offer you a price that’s lower than the current reported value.

Gold certificates: Gold certificates are another way you can invest in the gold market. However, this is a buyer’s beware option. Gold certificates are notes issued to investors by a company that owns the actual gold. The certificates are only as viable as the business that is backing them. That is why if you decide to go this route you must do your research. One that has been historically safe thus far is the Perth Mint out of Australia. You can also purchase gold through exchange-traded funds using a stock broker.

Exchange-traded Funds:  If you want to invest in gold but do not necessarily need to hold it in your hands then exchange-traded funds could be for you. When you opt for this investment route you become a shareholder and an exchange-traded fund group purchases gold on your behalf. Expect commission fees and management fees. However, this is the way to invest in gold and still remain fairly liquid. The gold that is purchased on your behalf is spread across al the types, from gold coins to bullion and even bars. A reputable company is SPDR Gold Shares, but there are others out there.

Mutual Funds: If you like the idea of investing in gold mining operations then you can invest in a collection of different mines by using a mutual fund. Both Fidelity and Vanguard companies offer precious metals mutual funds. The company offering the mutual funds have already done the legwork for you and your mutual fund is a collection, called a portfolio, of many different mines producing gold reliably. Be sure that the portfolio you accept and purchase with these, or any other companies, does not stick in other types of metals other than gold. Sometimes they do this just to hedge their bets. If this does not bother you then full steam ahead. Just be aware that this is a common practice.

Each of these options comes with a tradeoff. Certain factors need to be addressed before you make a decision on which choice is best for you.  A good rule of thumb is to only place 10 percent of your discretionary money toward gold. The positive side to investing in gold, aside from its value, is that it offers diversification to a larger portfolio. When investing in gold, buy small amounts, or invest small amounts, over a longer period of time when gold is lower in value.