Ways to Invest in Gold, the Precious Yellow Metal
$GLD, $UGLD, $GDX, $CEF, $PHYS
When it comes to investing in Gold, there is more than one way to do it, and there is no best way to do it.
- You can buy Gold futures
- You can buy a Gold-linked ETF’s
- You can buy Gold Bars or Coins
- You can buy Gold CEF’s
- You can buy Gold Miners
Understand that Gold held for short-term speculation has different considerations than bullion held as a long-term hedge or as crisis insurance.
The form in which you hold this precious Yellow metal will depend on why you own it in the 1st place.
The way that is most sensible for you depends on a number of factors, including liquidity needs, tax status and privacy concerns.
Let’s take a look at the ways to own this precious Yellow metal and why one might choose one way over another, please note these are not recommendations.
The US Fed would like to raise interest rates, but with inflation muted, many are not Bullish.
Below are are 5 ways to invest in the the precious Yellow metal, as follows:
The oldest method for owning Gold is to own it.
Gold can be purchased in the form of 1 oz coins. Assuming the coins are not collector’s items, they will generally sell for a modest premium to the current spot price of Gold (COMEX) now at $1,318.40 oz. So, for a little over $13,000, you could walk out of your local coin store with 10, 1-oz American Eagles or Krugerrands in your pocket.
You can also buy Gold bars in various sizes. The most common is the 1-kilo bar, which will set you back a little over $43,000 a piece at today’s prices. The big bars at 12.4 kilo, will set you back over $500-K each, and they weigh about 30 lbs each.
The pros of owning physical Gold bullion
Owning bullion in physical form keeps it out of the financial system, so you have no counterparty risk. It can be owned anonymously, protecting your privacy from bankers, the government, and creditors. If you are buying Gold as a long-term allocation or as Zero-hedge, financial meltdown insurance, this is probably the best way to own it.
The cons of owning bullion
By keeping it out of the financial system, you expose yourself to the risk of theft, unless you pay to store it or insure it. It is bulky and illiquid in this form, and it is expensive to sell. So if you’re holding period is relatively short-term, owning physical Gold bullion is a question.
A Gold futures contract is an agreement between a buyer and a seller to exchange a set amount of a commodity at a set time and price.
Futures are a standardized, exchange-traded versions of forward contracts, which are as old as finance itself. Forward contracts were originally created as risk-mitigation tools for farmers, as they allowed farmers to lock in a future price for the crops they were growing. And Gold futures serve a similar purpose for miners.
Mining projects are expensive enterprises to undertake, and selling futures contracts allow miners to lock in prices that make the projects economical. However, today many efficient mining operations do not sell futures contracts, and are unhedged.
Today, most futures trading today has nothing to do with reducing risk and everything to do with speculation.
Gold futures are highly liquid and inexpensive to trade, which makes them great to use as short-term trading instruments. And because an investor is trading a paper derivative tied to Gold, there is no cost or worry about theft or about insurance or storage costs. One can also easily short Gold futures, making them a convenient way to bet against Gold prices if you wish.
The biggest selling point of Gold futures is the leverage.
One standard Gold futures contract controls 100 ozs of the precious Yellow metal, just over $130,000 at today’s prices. But you might need only $7,000 in collateral. So if feeling Bullish or Bearish a participant can leverage the trade by a factor of nearly 20 to 1. Smaller traders can also trade smaller E-micro Gold futures that represent 1/10 of a regular Gold futures contract and have comparable leverage.
Playing Gold like this is something you do with pure risk money. The biggest drawback to Gold futures is that is is easy to get “upside down” if you do not know what you are doing.
Gold futures are financial instruments used for short-term trading.
Gold exchange-traded funds (ETFs) are also an option, and backed by Gold bullion.
The oldest and most popular Gold ETF is the SPDR Gold Trust (ETF) (NYSEArca:GLD). While not the same as owning physical bullion, GLD gets you a lot closer than Gold futures. Unlike most commodity futures, Gold futures generally cannot be settled by physical delivery. A retail investor cannot realistically exchange their GLD shares for bullion, as the creation and redemption of units can only be done in 10,000-oz increments by authorized participants, read big banks.
Gold ETFs have most of the same benefits as Gold futures eaning liquid, cheap to trade, and have the added benefit of being available in standard brokerage accounts and even IRAs and Roth IRAs. The available Gold ETFs are a less aggressive, less leveraged way to play Gold.
ETFs are an easy way to get exposure to the precious Yellow metal, and can be held in an IRA account for tax reasons. The only real downsides are the management fees and the fact that the ETFs are part of the formal financial system. For a Zero hedge, a Gold ETF is not the same as having bricks of Gold at hand.
There are management fees involved.
4.Gold Closed-End Funds (CEF)
CEFs are actually the oldest form of mutual fund in existence, predating both traditional open-ended mutual funds and ETFs. CEFs are an interesting instrument and can be best understood by comparing them to a traditional mutual fund.
When investing in a mutual fund, one sends money to the manager, and the manager takes your money and invests it. When you want your money back, they sell off part of the portfolio and send the proceeds to you. CEFs (NYSEArca:CEF) trade on the stock exchange like stocks making them seem similar to ETFs. Sprott Physical Gold Trust (NYSEArca:PHYS) is 100% invested in gold and generally trades fairly close to its NAV because, unlike most CEFs, it does allow for redemptions.
But there is a difference. ETF shares track their underlying indexes very closely because, should they deviate, institutional investors can create or destroy shares and generate an arbitrage profit. This forces the ETF’s market price very close to its index.
CEFs do not have that mechanism. So their prices can deviate from their net asset values.
5.Gold Mining Stocks
Before the introduction of Gold ETFs, the stocks of Gold mining companies were about the best you could do in a traditional brokerage account or IRA.
But they were never exactly a perfect match.
Gold is a commodity, an inert metal that does not actually do anything. Gold miners (NYSE:GDX), on the other hand, are real operating businesses with everything that means, so profits and losses, labor disputes, operational risks, are all backed into the mix.
This is not bad, it is different.
But the important thing with it is that Gold miners are not a substitute for the precious Yellow metal, and their stock prices can actually move in the opposite direction of Gold prices for significant periods of time.
If you want long-term exposure , then buying physical bullion or a Gold ETF is the best bet. If you want a more aggressive short-term trade, then I would say that Gold miners and Gold futures are a better bet.
Gold miners, which you can buy via funds like the Market Vectors Gold Miners ETF (NYSE:GDX) can be thought of as leveraged plays on the precious Yellow metal because their profit tends to spike when the price of Gold is high. As their operating expenses are more or less the same regardless of what the price is, so higher prices essentially flow straight through to the bottom line aka profit. Of course, the inverse is also true, as profits get crimped when the price of Gold is down.
Many large Gold miners tend to hedge at least part of their annual production in the futures market, so their revenue streams tend to be at least marginally more stable. But smaller miners are often unhedged, making them a bit riskier.
If you are looking to own Gold as a long-term portfolio allocation or as a crisis hedge, Gold miners really do not fit. But, if you are looking to speculate fairly aggressively, Gold miners stocks can be useful.
Latest posts by Paul Ebeling (see all)
- Experience the 68th Pebble Beach Concours d’Elegance August 26, 2018 - November 18, 2017
- F1: Schumacher Seen as Ferrari’s Greatest Driver - November 17, 2017
- Tax Cuts Do Boost Large and Small Business Investment - November 17, 2017