Investing directly in commodities, such as gold or oil, tends to be more difficult for investors than investing in stocks and bonds. A major reason for this is that stocks and bonds are readily transferable and easily accessible to the average investor. Traditionally, commodities have been more difficult to invest in due to the complex way in which they trade through the futures and options markets. In other words, an investor can't just buy a barrel of oil.
Gold is more accessible to the average person because an investor can easily purchase gold bullion (gold in its physical form), from a dealer or, in some cases, from a bank. However, with the advent of more advanced financial instruments, gold, along with other commodities, has become much easier to invest in without having to buy the physical metal. There are now exchange traded funds (ETF), that replicate the movements of the underlying commodity, giving investors direct exposure. While not every commodity has an ETF, both gold and oil have ETFs. For example, the SPDR Gold Shares (ticker symbol GLD) trades on the New York Stock Exchange and can be traded at any time throughout the trading day. Each share of the ETF represents one-tenth of an ounce of gold, so if gold is currently $600 an ounce, the gold ETF will trade at $60 per share. This investment product is one of the easiest and least expensive ways to access the gold market. (To learn more, see Introduction To Exchange-Traded Funds.)
In general, investors looking to invest in gold directly have three choices: they can purchase the physical asset, they can purchase an ETF that replicates the price of gold, or they can trade futures and options in the commodities market.
Most gold investments fall into three categories.
1. Physical gold in your custody. This usually will take the form of gold coins, such as the one ounce South African Krugerrand or the one ounce American Gold Eagle. You can buy the Gold Eagle directly from the US Mint, but at a substantially higher price than offered through gold coin dealers, so I would not recommend buying directly from the Mint. That said, be sure you are buying from a reputable dealer, either in person or through the Internet. There have been instances of counterfeit gold coins. Gold coins obviously require safekeeping - either a home safe or a safe deposit box. If you're holding gold for an "end-of-the-world" scenario, arguably you should not leave them in a safe deposit box that might be inaccessible in a crisis.
2. Gold ETFs (Exchange Traded Funds). Gold ETFs (such as GLD and IAU) are a special kind of mutual fund that invest directly in gold bullion. The physical bullion is held in safekeeping by an independent custodian, for example, in a bank vault in London. Independent accountants must annually verify the ETF's gold holdings as part of their audit. You can buy and sell gold ETFs through any brokerage firm. The shares are very liquid, and the transaction costs through discount brokers (Fidelity, Schwab, etc.) are minimal. The value of your shares will very closely track movement in the market price of gold. In addition, you can buy or sell call or put options on gold ETFs (and also sell short), meaning you can implement complex strategies for almost any market view. Gold ETFs are the easiest and most cost-effective way to invest in gold. However, as the ETF owner, you do not have (and are not entitled to) physical custody of the gold itself. If that's important to you, option 1 above is preferable.
3. Gold mining stocks. These are stocks of companies that are in the business of gold mining. Generally, gold mining stocks rise and fall faster than the price of gold itself, making these a higher risk, higher potential gain/loss way of investing in gold. In addition, individual gold mining companies are subject to risks unrelated to the price of gold, such as political, environmental, currency and labor relations risks.
Bottom line: if you are buying gold as part of a portfolio diversification strategy, the gold ETFs are the best way to go. If you are buying gold as a potential store of value in the event of a system-wide crisis, you will want to own and hold the physical gold yourself.
The simplest way of investing in gold is to buy a gold exchange traded fund. One of the biggest has the ticker symbol GLD. You can open an account at a discount broker like Schwab and buy GLD like you would any stock.
There are many ways to invest in Gold, here are some of the most popular
- Exchange Traded Funds (ETFs) The largest ETF is The SPDR Gold Shares (GLD)
- Closed End Funds
- Purchasing the physical Gold Bullion. The most common size is the 100 oz. bar and is the standard delivery size for the Comex Futures contract. For larger size the common format is 400 oz. ingot. Or for smaller sizes the industry standard is the American Eagle from the United States Mint and are available in 4 weights 1/10, 1/4, 1/2, and 1 Troy Ounce.
Joseph Carbone, Jr., CFP®, AIF®
The quickest and least costly way is to purchase Gold ETN's. IAU or GLD. You can buy these with minimal expense and transaction fees. They track the performance of gold but will not require that you store it.