Since the beginning of recorded history, gold has been a universal symbol of wealth. Ancient civilizations coveted the metal as a manifestation of status and power, because of its beauty and scarcity. Ornaments, jewelry and early forms of money were all crafted from gold.
TUTORIAL: Commodities 101
The fascination with gold has not diminished, over thousands of years. While most monetary systems are no longer tied to a gold standard, it's still viewed as insurance against fiat currencies that rely on faith, to sustain their relative values. Gold has maintained intrinsic value because, unlike currencies, it has a limited supply that can't be artificially increased.
The allure of gold has made it a desirable alternative for those looking to diversify and spread their risk. There are many ways to buy gold, both for enjoyment and as an investment. To many it's also a hedge against economic upheaval, war, inflation and global uncertainty.
Gold as an Investment
Before buying gold, it's important to understand the consequences of such an investment:
- Newly minted coins are typically 90-99% gold.
- Jewelry is typically 14k (58%) in the United States or 18k (75%) internationally, but other karat values can be found all the way up to pure 24k (100%).
- Gold provides no income stream, unless you own stocks or mutual funds that pay dividends.
- Owning gold stocks does not entitle you to possession of the metal.
- You may incur a cost to store physical gold.
- While the current supply is limited, as the price rises it makes more mining economically feasible, which could increase the supply.
- Demand is not a function of the "true" need for the metal, since much of it is not used for any commercial purpose, other than jewelry.
- Gold holdings are heavily concentrated among a limited number of governments and central banks, exposing gold to extreme price fluctuations, as these institutions buy and sell.
Uncirculated gold coins are currently being minted by several countries. While they are all legal tender, their face value is far exceeded by their meltdown value. Many numismatic (collectible) coins have market values that are even higher. Collectors are attracted by the potential for rising values, based on rarity and demand for the coins they buy.
Newly minted coins are easy to buy and their purity is guaranteed by the government mints that produce them. Some popular choices are the American Eagle, Canadian Maple Leaf, South African Krugerrand, Vienna Philharmonic, Mexican Gold 50 Pesos, British Sovereign, Australian Kangaroo and U.S. Mint 24K Gold Buffalo. Some of these coins are available in multiple sizes to accommodate both large and small investors. For example, the American Eagle is minted in weights ranging from 1/10 ounce up to one ounce.
Liberty coins minted prior to 1933 were the only coins produced at all seven U.S. mints in operation, at that time. Minting of these coins ceased that year, when President Franklin Roosevelt signed an executive order calling in gold held by Americans, exempting only coins of recognized numismatic value, in response to gold hoarding during the Great Depression.
Many American investors prefer old coins, because they fear another government confiscation of gold and assume that collectible coins may again be exempt. The $5 Half Eagle and $10 Eagle are popular coins that are readily available from coin dealers. The $20 Double Eagle is probably the most recognizable and desirable of the early gold coins. One of the most striking is the Saint Gaudens, commissioned by President Theodore Roosevelt and designed by famed sculptor Augustus Saint-Gaudens. Old coins minted by other countries, including Great Britain, South Africa, China, Spain and Mexico, are also attractive collectibles. (For more, read History of Coinage In The U.S.)
Bullion or Bars
While many people think of bullion as the large bars held in Fort Knox, bullion actually refers to a stamped weight and fineness of gold. It can be in bar form, round like a coin, or any other shape that represents a tradable and practical size and form. The price of bullion typically includes the cost of the metal, plus the costs related to refining, shipping and the dealer's premium.
The bars are available in various weights, starting at 1 gram. Heavy bars are best suited for large investors, because they can be efficiently stored in an insured facility that specializes in precious metals. You also save on the add-on costs, when you buy the heavier bars. The disadvantage is that the large bars are more difficult and costly to sell and may be difficult to use as barter.
Bars are produced by several government mints, as well as private companies, such as Johnson Matthey, Wall Street Mint, Sunshine Minting, Credit Suisse, Engelhard and Produits Artistiques de Métaux Précieux (PAMP).
Gold Stocks and Exchange Traded Funds (ETF)
The primary advantages of stocks and ETFs are that you don't have to store the metal and there is potential for earning dividends. Besides individual mining stocks, there are also mutual funds available that invest partially, or exclusively, in mining companies. These can provide diversification into other precious metals, such as platinum, palladium and silver. You can also purchase options on gold futures contracts, at an established strike price.
ETFs hold bullion on your behalf. The symbol for the Standard and Poor's Depository Receipts (SPDR Gold Trust or "Spider") is GLD. These trade intraday like stocks and benefit from relatively low expense ratios. There is also a brokerage commission applied to each trade, so they aren't good candidates for gradual accumulation. (For more on exchange-traded funds, read 4 Ways To Use ETFs In Your Portfolio.)
Gold stocks don't necessarily move in concert with bullion prices, because mining companies succeed or fail based on their individual operating performance. You don't have the security of physical possession of the metal, if the companies you buy are unsuccessful.
Jewelry allows you to invest in gold and have the enjoyment of wearing it. It can also be combined with other precious gems and metals to enhance the overall value and appearance. Jewelry can be passed down to the next generation, as a family heirloom, adding sentimental value beyond that of the piece itself.
Jewelry is not the best option if it's strictly an investment, because the price will usually far exceed the meltdown value. This is due to the workmanship involved and the retail markup. Always determine the gold purity before buying jewelry, so that you don't pay for 18k when you are only getting 14k.
Jewelry is covered by most homeowner insurance policies, so that's an advantage, should it be lost or stolen.
GOLD to go™ ATM machines are available at the Burj Khalifa in Dubai, offering point-of-sale:
- Gold Bars – 1 gram, 5 gram, 10 gram and 1 ounce
- South African Krugerrand – 1/10 ounce, 1/4 ounce and 1 ounce
- Australian Kangaroo – 1/10 ounce and 1 ounce
- Canadian Maple Leaf – 1/10 ounce
If these machines are profitable, they are likely to expand to other affluent countries.
The Bottom Line
Gold is available from private dealers, online dealers, jewelry stores, coin shops, private mints, vending machines and government mints. It's best to buy from a reputable source to ensure that what you are buying is exactly as represented.
While it's true that "gold has never been worth zero," there's risk associated with every investment. Do your own research and prepare yourself for the price volatility of the commodities markets. Unless you're an experienced trader, gold should be viewed as a long-term investment and safe haven for the future.
Rising demand and limited supply both contribute to higher prices. However, with the exception of some industrial uses, such as electronic components, most gold sales are driven by jewelry production and investment demand. For most people, gold should be viewed as a way to achieve portfolio diversification and balance risk with equities and other currency-based investments. (For more on gold, read Does It Still Pay To Invest In Gold? and What Is Wrong With Gold?)
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