Investing in Gold? Here's What You Need to Know

When the market tumbles or investors are afraid of what's going on in the world or people are afraid of inflation, interest around investing in gold goes up. You'll hear folks lament over-priced stocks or express distrust in the Federal Reserve to unwind from their quantitative easing without printing money and causing hyperinflation. Whatever the reasons, investors will often ask: How can I invest in gold?

Whether or not you think that you saw Chicken Little yelling about the sky falling or just believe, as I do, that you need to be diversified and have many different eggs in many different baskets, gold should be a part of almost everyone's portfolio.

Why Invest in Gold?

In many ways, gold can add some diversity to a portfolio. Generally, when inflation fears resurface, or there is some sort of crisis reported on the news, or there is volatility in stocks (which may be caused by both), investors will tend to flock toward gold as a "safe haven." Besides the ability to dazzle, there is nothing magical about gold. Unless used in a manufacturing process like to make electronics, gold has no special powers beyond its mythical allure. (Think leprechauns and rainbows here).

Other times folks feel better about actually having some tangible form of wealth instead of relying on bank statements or screenshots showing that you "own" a piece of a company's stock. And in other times people use gold as a way to hide away assets. When it comes to divorce planning for clients, I've come across situations where a spouse converted most of the family's liquid assets into gold bars that were stored in a bank safety deposit box without the other spouse knowing it.

Gold is heavy, hard to move, and its price is based as much on fear and sentiment (about the economy or your own personal situation) as supply and demand. But regardless of the reason or motivation, it can serve a purpose in a well-diversified investment program. (For that matter, the same may be said for almost any rare metal which may also serve an important role in economically critical electronics and computers.)

Gold, in particular, and precious or rare metals in general that are used in specialty electronics, are an alternate asset class to use to further diversify your investments. Investors typically buy gold as a hedge against inflation or macro events that may lead to market volatility or stock market corrections. (For more, see: What Drives the Price of Gold?)

Different Ways to Hold Gold

You can buy gold in the form of bars through a dealer. You can buy gold coins through numismatic brokers. You can also buy gold in the form of jewelry. Each of these options has its own costs for acquisition, holding and storage. Each may also have liquidity risk. You may not be able to convert or sell the gold coins, bars, or jewelry easily or have to sell them at a discount. Imagine walking into a pawn broker for example. And if you physically own gold, you'll have to arrange for a way to secure it and insure it whether in the form of jewelry, coins or bars.

An easier option that provides readily available access and liquidity is to buy physical gold exchange-traded funds or ETFs. These types of ETFs actually represent your ownership in a physical piece of the shiny metal. You can access ETFs through any custodial trading platform. These securities may be held in a taxable or tax-deferred (i.e. IRA) account. To own precious metals like gold in an IRA, you'll need to follow some special rules. You'll need to have your physical gold held by a special authorized custodian. You can find a list of the largest physical gold ETFs on ETFdb.com.

Everything noted here can also apply to other metals.

The Next Steps for Investors

Holding gold coins or jewelry may be an emotional thing. Whether or not you should also invest in gold depends on the rest of your financial picture and your fears. To determine how best to include gold in your total investment program, you can also reach out to a qualified financial planner and investment advisor. (For more from this author, see: 5 Ways to Save More After Maxing Out Your 401(k).)