How To Invest In Gold, Really

If you’ve been following along this financial crisis, listening to Common Sense investors like Peter Schiff and Jim Rogers; and keeping an eye on the commodity markets, you know that gold is where to be right now.

But it isn’t as easy to invest in gold as it is to invest in the stock market proper. Many people don’t even know where to start. And if you search online for information about investing in gold, often you’ll only find websites talking about benefits or disadvantages of investing in gold; without any black and white facts on how it’s done. Well, here you are:

How To Invest In Gold

Aside from the futures market, there are 4 major ways to invest in gold: 1.) Digital gold currency; 2.) Direct ownership in gold bullion, coins, or certificates of ownership; 3.) Owning stocks in gold mining companies, or mutual funds consisting of gold mining companies; and 4.) Owning Gold ETFs (exchange-traded funds).
Let’s start with the simplest method, and go from there.

Gold ETFs

Gold ETFs are the simplest and most attractive form of gold investment for many people. It’s basically an investment in gold that’s 100% backed by physical gold held in some allocated form, and traded on the market like a single stock. They were invented to give private investors the ability to own gold and gain exposure to the price of gold without the inconvenience of storing bullion or opening a futures account.

So Gold ETFs are the user friendly version of gold investments, but there are a few drawbacks. First of all, since it’s a fund, it needs to be managed by someone, and that person or company wants to get paid, so there are fees to these ETFs. The upfront commission is typically about 0.4%, and there are also storage fees, insurance fees, management fees, etc. Those added expenses can pile up and put a dent in your investment down the line.

A more frighting, although less likely, aspect of owning Gold ETFs (the funds based on the US, at least) is the prospect of having the allocated gold confiscated by the US government during a financial crisis. This actually happened in 1933, and can happen again anytime the government so decides.

Examples of Gold ETFs:
SPDR Gold Trust – GLD
Central Fund of Canada Limited – CEF

Gold Mining Company Stocks and Mutual Funds

Investing in gold mining companies and mutual funds made up of them is an indirect way of investing in gold. This type of investing is generally more complicated than simply investing in gold. You have to take into account all of the aspects of that particular company: Is it profitable? Stable? Does it offer dividends? etc. Investing in mining companies is inherently higher risk than buying gold directly. Gold mining stocks can be 3 to 4 times more volatile than gold itself, so many investors try to offset that volatility by investing in a mutual fund made up of many different mining companies.

Examples of gold mining companies and mutual funds:
Individual company stocks:
Newmont Mining Corporation – NEM
Barrick Gold Corporation – ABX
Mutual Funds:
Market Vectors Gold Miners – GDX

Gold Bullion, Coins, or Certificates

This option probably seems like the most difficult to the majority of regular investors, but it’s actually the least expensive way of investing in gold, since the brokers commissions are so low. Bullion coins are minted in inexpensive and easy to manage weights like 1/20 oz, 1/10 oz, 1/4 oz, 1/2 oz, and 1 oz (about 31 grams). But if you get gold coins, remember that the price isn’t the face value of the coin, it’s based on the spot price of gold and will change over time.

You can also get gold bars in very small sizes. In Europe, many regular retailers sell ChipGold, which is a small, vacuum-sealed gold bar in a credit card shaped package available anywhere from 1 gram to 1 ounce. The Union Bank of Switzerland offers the kinebar, which has a hologram imprinted on the reverse side of the bar, and is sold in a similar credit card shaped package as ChipGold.

Places to buy gold direct:
eBay
The Perth Mint
If you’re interested in gold certificates, then the Perth Mint Certificate Program is also essentially the only game in town.

Digital Gold Currency

This is the newest and most interesting form of gold investment. It’s a form of electronic money that’s based entirely on gold. Typically, each unit of currency is based on the gold gram or the troy ounce, although many other units can be used. Digital gold currency is backed by gold through unallocated or allocated gold storage, just like the US dollar was pre-1933.

I think this method has the highest potential for future use. It could potentially become a new gold-backed currency in widespread use. Highly recommended for Common Sense Investors.

Some Digital Gold Currency providers:
e-gold
GoldMoney