How can I invest in gold?

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August 2016
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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.

August 2016
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August 2016