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.

For more on the gold market, read The Gold Standard Revisited and What Is Wrong With Gold?

The Advisor Insight

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 higher-risk way of investing in gold, but there’s appreciation potential.

Donald P. Gould
Gould Asset Management
Claremont, CA