Investing in Precious Metals

Someone recently asked me how to get started investing in gold. Like silver, platinum, and other precious metals, investing in gold can be very lucrative if done correctly.

Historically Valuable

Some people believe gold and other metals are a safe investment because they have always been considered valuable. For thousands of years, civilizations around the world used their gold and silver as a measure of wealth and power. Today, it is still considered a benchmark in value and wealth. Even if the value of the Dollar or Euro falls, many believe gold will always be worth something.

Even until 1861, the United States government used a silver standard to ensure the value of its currency. At that time, you could trade in a dollar bill for its value in silver. Silver standards and gold standards. Through the Great Depression, many countries still used a gold standard to value their currency.

Fluctuating Prices and Risk

Like any investment, precious metals have a downside risk. Over the last ten years, gold has soared from less than $400 per ounce to a peak of about $1900 per ounce. However, if you bought in at the peak, you would have seen that value slide back to $1600 per ounce. That is a 15% drop in three months.

Some people blindly buy gold thinking it will go up forever. There are ads on the radio of famous personalities endorsing buying physical gold as an investment. I hope I am not the first to tell you that it might not work out and you can certainly lose money if you buy precious metals.

Over the last couple of years, gold has moved inversely to the stock market and economy. As news gets worst, gold rises. As the economy improves, gold falls. That creates a theory that you could use gold as a hedge to large losses in your portfolio, but there is always risk and speculation involved.

How to Buy

If I did not scare you off, you can buy precious metals several ways. The easiest (and my preferred method) is to buy an ETF that tracks the metal you want to buy. If you do buy into a metal ETF, make sure it has a high trading volume (good liquidity) so you can sell if you need to.

The most popular gold ETF is the SPDR Gold Trust (GLD) from State Street. You can buy and sell ETFs like stock and your investment gains and losses are treated similarly. A popular silver ETF is the iShares Silver Trust (SLV) from Barclays.

To purchase physical assets, you will need to go through a broker or dealer. In general, the transaction costs are high and you may have a tougher time selling for its actual value. You also have to worry about safety and insurance for physical assets, so I suggest avoiding this unless you are prepared to keep it for the long term in a safe deposit box at a bank.

Tips for Investing in Gold

Gold is the age-old hedge against economic catastrophe. When the stock market crashes, disease pandemics break out, terrorists attack, or the value of local currency plummets, people convert their paper money into gold. The basic reason is simple. Throughout history gold has been a highly valued and treasured commodity.

In many cultures, such as India and Africa for example, people have worn solid gold jewelry and ornaments for centuries not just for fashion, but also as a way to carry their wealth with them. If they encounter an emergency they don’t have to wait until the bank opens because anyone, anywhere, can easily trade gold for anything that money can buy.

The Recent Historic Value of Gold

The price of gold has remained relatively stable throughout history, and in fact, it took almost 120 years for an ounce of gold to double in cost since 1850. In 2005 you could buy an ounce of gold for around $450, but a year later the average price was more than $600. During the global economic crisis of 2008-2009, the price spiked past $800 and by 2010 it was over $1,200. One year later the price raised to nearly $1,600 and soon after, the highest price on record for gold in the USA – more than $1,900 – was achieved.

As interest rates began to rise from their all-time lows, however, investors began to shift from gold back into interest-bearing assets such as corporate or government-issued bonds. That reduced the demand for gold, and in 2013, Goldman Sachs lowered its forecast for the price of gold at the end of 2014 to $1,050 from $1,270. In July of 2014, however, events in Russia and the Middle East created nervousness among investors who began buying gold, pushing the average price back to $1,300 an ounce.

Investing in Gold

Bullion is the term used to describe gold sold in a refined manner that has the weight of the gold stamped on it, and typical bullion is sold today in the form of bars or coins. The price paid for bullion will include the current rate for gold, plus a markup or premium that covers the cost of fabricating the bullion and usually a sales commission for the dealer. Some of the most legitimate and popular forms of minted gold coins are American Eagles, South African Krugerrands, Chinese Pandas, and Canadian Maple Leafs.

You can buy gold for storage at a slightly cheaper rate from European banks and other sources because you don’t have to pay the premium for a handsome-looking coin engraved with a pleasing design. These generic gold bullion ingots and bars are sold for just a couple percentage points over the going price for gold. Purchasing bullion is a good way to buy gold that you intend to save, but can become a bit difficult if you try to liquidate your holdings.

Buying during times of great economic uncertainty and when interest rates are rock bottom may mean that you pay more since gold is in higher demand. Demand can also fluctuate and impact the price you pay based on how much gold is being removed from the earth by mining companies or how much of their inventory they are releasing to the public.

Buying and Selling Gold

When selling or trading gold it is usually easier to use gold in popular forms and weights, so most investors will benefit from paying a higher price in exchange for gaining ease of use and resale. Prices of gold are usually cyclical, though, which is something to consider when buying or selling. As interest rates rise, gold prices usually sink, so the best time to buy gold is usually when interest rates are high.

The Canadian Maple Leaf and American Eagle gold bullion coins are the easiest to buy and sell in North America, and the 22-karat American Eagle is generally the simplest way to go for an American investor. The U.S. government guarantees the weight and purity of American Eagle coins. They come in various face values such as $5 and $20 coins, but that is based on the official value the government establishes for the coin itself and does not account for how much it is worth if you melt it down and price the actual gold. For that reason you should expect to pay many hundreds or thousands of dollars more than the face value of the coin because the more attractive value depends on the weight of the gold inside the coin.

Shop around for a reputable dealer with the lowest markup to price your gold’s value. Gold values can fluctuate constantly, but you can determine what the current price-point is by referencing various financial sources, such as the Wall Street Journal. You can visit the website of the U.S. Mint and use their search tool to locate authorized sellers in your area. Just be sure to store your gold securely, such as inside a bank safe deposit box.

As with most investments, the best strategy is usually to buy as cheap as possible and then hold on to the investment for the long haul. That way you can average out market fluctuations and keep accumulating gold during the phases when prices drop, while the value of your assets grows when the demand for gold soars. At that time is when you may want to sell and turn your potential profits into cold cash.

Other Ways to Invest in Gold

Investing in gold does not always mean buying precious metal, so it’s important to understand the various options available before you stake a claim. Some investment options include:

  • Retirement accounts. Gold can also be included in a retirement account. This is a great way to really secure your savings since it can’t be debased or printed, but this method also diversifies your portfolio.
  • Exchange Traded Funds (ETFs). This is a type of mutual fund that trades on a stock exchange like typical stock. This is an easy way to invest in whole portfolio companies that mine, process, or sell gold to industrial customers as well as the retail public.
  • Mutual funds. Shares of many large domestic and international companies in the gold sector trade on the major stock exchanges, so it is possible to buy their stock directly. This is good for those who don’t want to invest in physical gold.

Keep in mind that when buying shares in a company that participates in the gold sector, you have no actual stake in their gold; instead, you are buying shares in the operation itself. As with any stock purchase, the value of the investment will depend upon a variety of factors and changes in the stock market.

Consider such things as how well the company is managed, how much of the market it dominates, what its profit margins are, how much revenue it generates, and whether or not it pays cash dividends to stockholders.

2 thoughts on “Investing in Precious Metals”

  1. I buy gold as an alternative savings and currency, and aim for about 10% of net assets in this category. I use both physical bullion and pool accounts, and I have no plans for short term trading or selling.

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