In general, investors looking to invest in gold directly have three choices: they can purchase the physical asset, they can purchase a mutual or exchange-traded fund (ETF) that replicates the price of gold, or they can trade options futures in the commodities market.

Key Takeaways

  • Three basic ways exist to invest in gold: buying the metal itself, buying gold funds, or buying gold options.
  • Investing in gold bullion for individuals takes the form of bullion bars or coins.
  • Mutual funds and exchange-traded funds that invest in bullion or bullion and gold stocks offer a more liquid and low-cost way to invest.
  • More sophisticated investors might trade options on gold futures contracts.

Buying Gold Bullion

Compared to other commodities, gold is more accessible to the average investor, because an individual can easily purchase gold bullion (the actual yellow metal, in coin or bar form), from a precious metals dealer or, in some cases, from a bank or brokerage. Bullion bars are available in sizes ranging from a quarter-ounce wafer to a 400-oz. brick, but coins are the usual choice for new investors. Not to be confused with vintage numismatic coins, these are new issues priced on their gold content, plus a 1%-5% premium. For maximum liquidity, most buyers stick with the most widely circulated coins: the South African Krugerrand, the American Eagle, and the Canadian Maple Leaf.

Buying Gold Funds

Although it's more feasible than, say, a barrel of oil or a crate of soybeans, owning physical gold has its hassles: transaction fees, and the cost of storage and insurance. Investors interested in a more liquid, low-cost, and diversified entry into the gold market might instead consider mutual funds and exchange-traded funds (ETF) that replicate the movements of the commodity. For example, the SPDR Gold Shares Gold Trust (GLD) (one of the oldest ETFs of its kind, initiated in 2004) trades on the New York Stock Exchange and can be bought or sold 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 $1,300 an ounce, the gold ETF will trade at $130 per share. GLD invests solely in bullion, giving investors direct exposure to the metal's price moves; other funds invest both in bullion and in shares of gold mining or production companies as well.

Buying Gold Futures Options

More experienced investors who don’t want to risk a lot of capital might consider gold options. Like any option on a futures contract, these represent the right—but not the obligation—to buy or sell an asset (gold in this case) at a specific price for a certain amount of time; they can be used whether you think gold is going up or going down, and if you guess wrong, all you’ve lost is the small amount you’ve paid for the option. Available in the U.S. through the Chicago Mercantile Exchange, gold options can be bought on gold bullion (each contact is for 100 ounces) or on gold ETFs.

Advisor Insight

Donald P. Gould
Gould Asset Management, Claremont, CA

If you’re buying gold as part of a portfolio diversification strategy, ETFs are the best way to go. If you want something in the event of a system-wide crisis, you’d want to own the physical metal, usually in the form of gold coins, like the South African Krugerrand or the American Gold Eagle. Be sure you are buying from a reputable dealer, either in person or through the Internet. Gold coins obviously require safekeeping – either a home safe or a safe deposit box.

Then there are stocks of companies in the business of gold mining. Generally, gold stocks rise and fall faster than the price of gold itself; individual companies are also subject to problems unrelated to prices (political, environmental, etc.). So this is a higher-risk way of investing in gold, but there’s appreciation potential.