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Roughly seven in 10 people invest in some form or another, according to a survey by FinanceBuzz. Investing in gold is an excellent way to diversify your investment portfolio. In general, stocks and gold have an inverse relationship, which means that when the stock market experiences a downturn, gold prices go up, and vice versa.
If you're thinking about investing in precious metals, here's what to know about how to buy gold for your portfolio.
How to buy gold: What are your options?
There are several ways you can buy gold, but they all fall under two umbrellas: investment vehicles and physical gold. Here's what to know about your options for purchasing this alternative asset.
Investing in gold
Investors can purchase a handful of different securities that allow them to take advantage of gold's price movements without actually owning the precious metal in its physical form.
Those options include a gold individual retirement account (IRA), gold exchange-traded funds (ETFs), precious metal mutual funds, and gold mining stock.
Invest in a gold IRA
A gold IRA is a type of self-directed individual retirement account that involves investing in and owning actual gold coins and bullion. These accounts are also called precious metals IRAs because you can also invest in other metals, including silver, platinum, and palladium.
You typically need to work with a bank or brokerage firm to manage your account and act as a custodian for the gold you purchase. Then you can buy the actual assets from a precious metals dealer like Gold Alliance.
Although you'll own physical gold in this retirement account, the actual gold bullion will typically be stored on your behalf with a depository service.
You can open a new gold IRA or roll over an existing retirement plan, such as a 401(k) and other employer-sponsored retirement plans, as well as other individual retirement accounts.
Gold IRAs can offer the chance for investors to hedge against potential stock market volatility. But as with any other investment security, it's good practice to avoid putting all your eggs in one basket, so you could choose to plan to invest in stocks, bonds, and other options to maintain a diversified portfolio.
Invest in gold ETFs
An exchange-traded fund is effectively a basket of different investment securities. In this way, they're similar to mutual funds, but the primary difference is that ETFs are traded on exchanges like stocks.
A gold ETF is a type of commodity fund that allows investors to purchase securities backed by gold without actually owning the precious metal itself. Because the cost of storing gold can be expensive, an ETF is a lower-cost alternative. Also, because you can buy and sell ETFs on exchanges, the trading process may go much more quickly.
The SPDR Gold Trust ETF, which was first launched in 2004, is a popular option for investors who want a security that tracks gold prices. Investors can purchase SPDR gold shares, and other options include the GraniteShares Gold Trust, the iShares Gold Trust, and the VanEck Vectors Gold Miners ETF.
A gold ETF is also typically a more affordable way to invest in gold, albeit indirectly. For example, as of Dec. 12, 2020, the price of 1 troy ounce of gold is roughly $1,838. In contrast, the SPDR Gold Trust ETF closed at about $172.
Invest in precious metals mutual funds
Mutual funds work similarly to ETFs in that they invest in a variety of securities, which helps diversify your portfolio. However, mutual funds don't trade on the market as ETFs do.
Precious metals mutual funds may include a mix of gold and silver bullion (and possibly also other precious metals), as well as mining stocks. The fund is run by an investment manager, who buys and sells securities to help increase your rate of return.
As a result, you can expect to pay a fee to cover the cost of that service.
If you're planning to go this route to invest in gold, some of the top options include the Wells Fargo Advantage Precious Metals Fund, the Fidelity Select Gold Portfolio Fund, and the Gabelli Gold Fund.
Purchase gold mining stock
Investing directly in gold mining companies instead of investing through an ETF or mutual fund doesn't expose you directly to the price of gold. However, gold mining companies can leverage increases in the price of gold to benefit their shareholders.
For example, if the price of gold increases, these companies may ramp up production to take advantage of the higher prices.
Of course, it's a good idea to do your research on individual stocks before you start trading. As in other industries, not all gold mining companies are created equal. Because their share prices are indirectly tied to gold prices, you may want to consider diversifying your portfolio with stocks in other sectors, as well as in different types of securities.
There are hundreds of different gold mining companies you can invest in. Some of the popular options include Barrick Gold, Agnico Eagle Mines, and Kirkland Lake Gold.
Buying physical gold
Some prefer the idea of investing in physical gold rather than gold-related securities. Physical gold is also sometimes referred to as gold bullion, and you can purchase it in the form of coins, bars, or ingots. You can also invest in gold via jewelry.
Owning physical gold can be satisfying for some investors, but storing and insuring your gold bullion can be pricey. Also, gold dealers tend to charge premium prices, and liquidity is an important consideration because it can be challenging to sell quickly when you need the money. That said, here's a quick summary of each option that's available to you.
Buy gold coins
Gold bullion coins often have historical value, which makes them popular for investors and collectors alike. However, they may contain a lower quantity of gold than bars. For example, although investment-quality gold bars should be 99.5% pure gold at the very least, one gold coin offered by the U.S. Mint is made up of 91.67% gold.
What's more, because of their value as collectibles, gold coins often cost more per ounce than gold bars, even though they contain less gold. Some popular gold coins include the Canadian Maple Leaf, South African Krugerrands, and American Eagle coins.
If you opt to buy gold bullion coins, consider going through a well-known online dealer, such as APMEX, JM Bullion, or Kitco. You could also buy coins from collectors or pawn shops, but you'll want to do your due diligence to ensure the gold's purity, especially if you're dealing with a pawn shop. According to APMEX, gold is the most counterfeit precious metal on the market. To ensure it's priced fairly, it's also a good idea to compare pricing to the market price, or spot price, of gold before you buy.
Buy gold bars
Gold bars come in several different denominations and range from 99.5% to 99.9% in gold content, which can affect how much a gold bar is worth. You can purchase bars based on weight, price, and quantity. Once you receive it, you can store it on your own, in a safe deposit box at your local bank or with a storage company.
Like gold coins, gold bars can be expensive to store and insure properly. The purchase process is also similar. You can purchase gold bars from dealers based on your budget and how much you want to invest. You can also expect to pay a premium above the gold's actual price to the dealer, though it's typically not as high as with coins.
Buy gold jewelry
Buying gold in the form of jewelry is more than just an investment — it can also be part of your wardrobe. As with other forms of physical gold, you'll want to understand the purity levels — 24 karat is 100% gold, for instance. The higher the purity level of gold in the piece, the more valuable it will be.
However, something to keep in mind is that pure gold is a soft metal, so while wearing high-karat pieces can be tempting, try to do so sparingly. Instead, consider purchasing lower-karat pieces for everyday use. Some may choose to wear only gold-plated jewelry instead of gold-filled pieces.
Another thing to consider is that gold jewelry can come in many forms, including yellow gold, white gold, rose gold, and green gold. Some of these options combine gold with other metals to make the alloy stronger and also change their appearance.
Purchasing gold jewelry directly from jewelers or pawn shops is also an option. But again, it's important to compare prices to the spot price of gold and evaluate the gold's quality before you purchase it — don't take the seller's word for it.
FAQs about how to buy gold
As we researched the process of buying gold, we came across several common questions from investors and everyday consumers. Here are some of the more frequently asked questions, along with their answers.
What is the best way to buy gold?
It depends on your investment goals, budget, and preference. For those investing without much money, gold ETFs, mutual funds, or mining stocks could be a way to get exposure to gold prices without the extra costs associated with owning the physical commodity.
However, if you prefer the idea of handling the precious metal personally and can afford it, buying gold coins, bars, or jewelry could be a good move for you.
If you're planning on buying physical gold, the important thing is to make sure you're buying from a reputable dealer. You'll also want to verify the gold's content and purity to ensure you're getting the value you're paying for.
Should I buy gold bars or coins?
There are a few different things to consider if you're trying to decide between gold bars and coins. First, although gold bullion coins tend to be more expensive (all else being equal), they also command higher premiums when it's time to sell. Also, coins may be easier to store, and they're easier to sell when you're ready to do so.
However, if you're planning to buy large quantities of gold, you may want to go with gold bars because they have lower premiums. That said, it can be tougher to sell bars, especially lower denominations.
Do gold bars lose value?
The value of your gold bars will be based on the market price for gold. If that price goes up, your bars will be more valuable. In contrast, lower prices will make your bullion bars less valuable. It's also important to remember that you'll pay a premium to the dealer on your gold bar purchase, so they likely won't be worth what you paid for immediately.
You may also lose some value when you sell the bar back to a dealer, which reduces your investment rate of return.
The bottom line
Whether you're saving for retirement or simply learning how to invest money, investing in gold is an option to diversify your investment portfolio. However, there are several ways you can invest in this precious metal, so it's important to research your options and choose the one that's best suited for your budget and your investment goals.
For newer investors, ETFs and mutual funds may be worth considering because the fund manager does all the diversification for you. Gold mining stocks could also be a good way to leverage increases in gold prices, though you may want to consider diversifying with stocks in other industries, as well as other asset types. Many of the best brokerage accounts can help you access these gold-based assets. Just remember that all investments come with the risk of loss.
More advanced investors might consider opening a self-directed IRA to invest in physical gold as part of your retirement plan. You may also choose to buy physical gold in the form of coins, bars, or jewelry.
If you're unsure of the best option for you, a financial advisor can help you determine whether investing in gold is a good choice and how to fit it into your overall investment strategy.
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