4 Ways to Buy Gold

Since the beginning of recorded history, gold has been a universal symbol of wealth. Because of its beauty and scarcity, ancient civilizations coveted the precious metal as a manifestation of status and power. Ornaments, jewelry, and early forms of money were all crafted from gold.

Over the intervening millennia, the fascination with gold has hardly diminished. While most monetary systems are no longer tied to a gold standard, the metal is still considered insurance against fiat currencies that rely on faith to sustain their relative values. Gold has maintained its intrinsic value because, unlike other currencies, there is a limited supply of it that can't be artificially increased.

The allure of gold has made it a desirable alternative for those seeking diversification and spreading of their risk. There are many ways to buy gold, both for decoration 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 some of the factors that make gold unique:

• Newly minted coins are typically 90% to 99% gold.
• Jewelry is typically 14-karat (58.3%) in the U.S. or 18-karat (75%) internationally, but other karat values can be found, all the way up to pure 24-karat (99.99%).
• 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 gold supply.
• Demand isn't a function of the true need for the metal, because much of it isn't used for any commercial purpose other than the making of 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.

Coins

Uncirculated gold coins currently are being minted by several countries. While they are all legal tender, they have a meltdown value that far exceeds their face value. Many numismatic (collectible) coins have market values that are even higher. Collectors are attracted by the potential for rising values, based on the rarity of 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 1 ounce.

Liberty coins minted prior to 1933 were the only coins produced at all seven of the U.S. Mints that were in operation at that time. The minting of these coins ceased that year; in response to gold hoarding during the Great Depression, President Franklin Roosevelt signed an executive order calling in gold held by Americans, exempting only coins of recognized numismatic value.

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 U.S. 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 the U.K., South Africa, China, Spain, and Mexico, are also attractive collectibles.

Bullion or Bars

While many people think of bullion as the large bars held in Fort Knox, bullion actually refers to the stamped weight and fineness of gold. It can be in bar form, round like a coin, or of any other shape representing a tradable and practical size and form.

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 part of a barter.

Bars are produced by several government mints, as well as private companies such as JM Bullion, Sunshine Minting, Valcambi Suisse, All Engelhard, and Produits-Artistiques de Métaux-Précieux (PAMP).

Gold Stocks and Exchange-Traded Funds (ETFs)

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 SPDR Gold Shares ETF is GLD. The ETF trades intraday, like stocks, and benefits from relatively low expense ratios.

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

Jewelry allows the investor in gold to also experience the enjoyment of wearing it. Gold is often combined with other precious gems and metals to enhance the overall value and appearance of the jewelry. Pieces are often passed down to the next generation as family heirlooms, adding sentimental value beyond that of the piece itself.

Jewelry isn't 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 purity of the gold before buying jewelry, so that you don't pay for 18 karats when you are only getting a 14-karat piece. Jewelry is covered by most homeowner's insurance policies, which is an advantage if your jewelry is lost or stolen, though you might consider buying a jewelry floater to supplement your homeowner's insurance coverage.

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 in order to ensure that you are buying precisely what is represented.

While it's true that, as the saying goes, "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 in 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 the risk of investing in equities and other currency-based investments.