Perhaps you’ve seen those WE BUY GOLD billboards along the side of highways. Or the South Park episode making fun of those places.
Either way, you’re probably wondering if there’s an air of legitimacy to buying and storing gold as an investment — and how to do it properly.
I’m here to tell you there definitely is, and buying physical gold bullion is just one of the three main ways to invest and profit from the rise in gold prices.
So let’s explore all three, the pros and cons of each, and discuss whether you should invest in gold in the first place.
Gold bullion
First up is gold bullion. You know, literal gold. The stuff Goldmember and Scrooge McDuck loved to bathe in, back when shameless billionaires were still funny.
Anyway, the term “bullion” refers to precious metal that’s melted into bars, ingots, or coins. Basically, bullion is the fungible, transferable, “currency” form of a precious metal, with its weight etched into the metal itself.
And, according to Gold Bars Worldwide, gold bullion has to be 99.5% pure to be considered a true investment — meaning anything shy of that might be hard to sell back to the market, so be careful not to buy any “fool’s gold.”
Bars, ingots, and coins of 99.5% purity are considered bullion. Jewelry is not.
Oh, and an “ingot” is just a gold bar shaped into that classic trapezoid shape you see in movies (or in real life, if you’re a baller).
So that’s bullion — physical gold melted into bricks or coins that are easy to buy and sell.
So how do you buy bullion?
How to buy gold bullion
Between 1879 and 1933, you could actually trade in your USD for gold with the Federal Reserve. But FDR did away with that in 1933 and Nixon closed the “gold window” for good in 1971.
Today, investors can buy bullion from reputable dealers online. JM Bullion is like the Amazon of precious metals, and investments above $199 ship for free. APMEX is their closest competitor, and definitely worth hitting for some price comparison shopping.
Some folks buy their gold at pawn shops, although you’re much more likely to find jewelry than bullion which is harder to appraise. So it’s probably best for newbies to stick with trusted retailers.
Now, which bullion should you buy?
Many experts recommend American Eagles, which are guaranteed by the federal government — that means dealers have to buy them and can’t pull any shenanigans.
“If you buy Eagles they’re very liquid, they’re internationally recognized,” wrote Mike Clark, president and general manager of Diamond State Depository, to CNBC. “If you go retrieve them someday and take them to a coin dealer they will buy them over the counter, without exception.”
Finally, storage. To keep things brief, don’t try to keep your gold at home — it’s just too likely to get lost or stolen, and poof! Your whole investment is gone. Instead, consider a safety deposit box at your local bank branch. They’re typically just $20 to $50 a year, and the peace of mind will be worth it.
Buying gold bullion: Pros and cons
Pros
- Easy to buy online
- Objectively the most direct form of investing in gold
- You get to hold your own gold
Cons
- Shipping, insurance, and storage can affect your bottom line
- Physical gold can get lost or stolen
- Driving to the bank/dealer reduces liquidity
Gold Futures
A gold future is an agreement to buy gold at a set price on a set date in the future.
Let’s say you pay $10 for a futures contract that lets you buy one ounce of gold at $1,000 on September 10. If the price of gold rises to $1,500 before then, another investor might want to buy your futures contract off you for $100 so they can buy the gold at $1,000. So you 10x your investment without having to buy any physical gold. Nice!
That being said, futures trading can be immensely risky and complicated. Like the black diamond of trading, futures tend to chew up a lot of newbies since a single bad trade can result in steep, tumbling losses. So before considering futures, gold or otherwise, talk to your financial advisor.
How to buy Gold Futures
Generally speaking, if a brokerage platform supports futures it will also support gold futures.
Specifically, gold futures are traded at the COMEX division of the New York Mercantile Exchange (NYMEX). The most popular contract size is for the future purchase of 100 troy ounces ($173,390 in today’s prices), although contracts also exist for 50 and 10 troy ounces. (Troy ounces are a special metric for precious metals. 1 troy ounce = 1.09714 traditional ounces).
Hopefully the above figure illustrates why futures get folks in so much trouble — they’re cheap to buy, but obligate you to pay as much as $173,390 in the near future. Approach with caution!
Gold Futures: Pros and cons
Pros
- Low cost of entry (some contracts trade for as little as $2.25)
- Broader market hours (most futures trade 24 hours a day, M-F)
- Doesn’t require you to hold physical gold (at least, not until the contract expires)
- Can generate high returns in a short amount of time
Cons
- Steep learning curve
- Widely considered speculative and extremely difficult to time the markets
- High risk of failure for newcomers
Gold stocks and ETFs
“Gold stock” is an umbrella term for a stock or ETF whose value is somehow tied to the current market value of gold.
Gold stocks may include, but aren’t limited to:
- Companies that mine and process gold
- Companies involved in “gold exploration” (i.e., searching for it)
- ETFs that contain companies that mine, process, and explore for gold
- ETFs that track the current price of gold (and are even backed by stores of bullion in some cases)
Here are a few examples of the best gold stocks and ETFs:
- Barrick Gold (NYSE: GOLD) is a mining company with gold and copper mines in 18 countries. Investors are bullish on the stock because the company has plenty of life left in their mines and was able to secure tons of raw materials (cyanide, explosives) before prices rose in 2022.
- SPDR Gold Shares (NYSE: GLD) is the largest physically backed gold fund in the world. Each share of SPDR represents one-tenth of an ounce of gold, so if you buy 10 shares, you effectively “own” 1 ounce of gold. You can’t touch it, but you can trade it just like real gold, and shares of SPDR are designed to stay within 1% of the price of gold bullion.
- The VanEck Gold Miners ETF (NYSEARCA: GDX) contains 56 different mining companies. They say that during a gold rush it’s better to invest in shovels than gold. If that’s a philosophy you agree with, GDX might be the best “shovel ETF” out there.
Broadly speaking, gold stocks and ETFs tend to follow the price of gold. Sometimes, they exceed it; when the value of gold rose 300% from 2008–2011, shares of GDX rose 400%.
But overall, buying shares of gold stocks offers a familiar, convenient, and indirect method of investing in the shiny stuff. You may not always benefit from the meteoric rise in gold prices, but the indirect exposure helps to hedge your risk.
How to buy gold stocks and ETFs
Convenience is one of the biggest appeals of trading gold stocks and ETFs. No gold to send in the mail, no safety deposit boxes, no messy futures contracts.
You can buy gold stocks and ETFs pretty much anywhere you can trade regular stocks and ETFs. If you’re new to trading, check out our best online brokerage accounts for beginners.
Gold stocks and ETFs: Pros and cons
Pros
- Easy to buy, sell, and trade on common brokerage platforms
- Allows you to hedge your risk with diversity and indirect exposure
- Enables you to invest in the “shovel makers,” which sometimes rise in value faster than gold itself
Cons
- Not as resilient or recession-proof as gold itself
- Shares of gold ETFs often become uncoupled to the price of gold
- Mining companies may not be the most ESG-friendly, socially conscious investments
Should you invest in gold?
Now that you’re aware of the options, should you invest in gold in the first place?
Well, the main reason investors buy gold is because it’s perceived as a safe way to preserve wealth during crazy times. Let’s say U.S. inflation wasn’t 9% this year, but 900%. What can you do to protect your life savings from losing value?
For hundreds of years, the answer has been “convert your cash into gold.” The value of gold has survived falling empires, crippling recessions, and more simply because humanity has assigned it artificial value for 2,500 years and shows no signs of stopping.
So to draw an analogy, many investors treat gold like a parking deck during a hailstorm — a place to park their “asset” (i.e., their car) to protect it until the storm blows over.
To illustrate, take a look at the value of gold since 1993 and see if you can spot when — and why — people started parking in the “parking deck.”
What’s interesting is that even when the hailstorm passed, people stayed in the parking deck. According to a study by the Federal Reserve Bank of Chicago, “In the early part of the sample, variation in inflation or inflationary expectations was the single most important consideration for the real price of gold. From 2001 on, however, long-term real interest rates and pessimism about future economic activity appear as the dominant factors.”
Basically, gold isn’t just a hedge against inflation or interest rates — it’s a hedge against pessimism. “Pessimism” is hard to measure, of course, which is why timing the market for gold is so notoriously tricky.
To circle back, should you buy gold in 2022?
If you’re pessimistic — or if you think everyone else is pessimistic — a little gold might make sense. And even if you’re more optimistic than most, some investors still keep a little gold in their portfolio just for the sake of diversity. It doesn’t hurt to have something that’s relatively stable in value and doesn’t collapse with the markets.
Pros of investing in gold
- It’s a potential hedge against inflation
- Gold and mining stocks and ETFs offer convenient, indirect methods of investing
- Buying physical gold is undeniably cool
Cons of investing in gold
- Gold does not generate interest
- Market timing can be extremely difficult and speculative
- Physical gold can be difficult to purchase, store, and convert back into liquid
The bottom line
At the end of the day, gold is just one of the potential building blocks for a diverse, healthy investment portfolio.
To take a step back and survey all of your options, check out our essential advice to help you start investing.
