Your Questions About How To Invest In Gold

Chris asks…

what is the best way to invest in gold?

I’m a believer in investing in gold right now in this market. I’m new to investing and do have an online stock trading account. Some people said the way to do it best is to get it in coins so it’s liquid if I ever need to. Which is actually better? Is investing online risker? I know by buying coins I would have to invest in security and/or storage of it somewhere.

John answers:

There are a few possible ways to invest in gold: Gold ETF’s, gold mining stocks, gold bullion, gold coins, and gold futures. There are a few other possibilities like call options on gold futures and ETF’s and swaps on gold that are just not appropriate for new investors so are not discussed below.

There are a bunch of things to consider (but the answer is ETF’s):

Carrying costs: ETF’s will cost you about 1/2% per year in management fees. You could conceivably pack a safety deposit box with gold and pay less than that. Gold mining companies will not cost you any fees directly.

Tracking gold price: ETF’s, futures, and physical gold will track gold exactly. Gold mining companies contain equity risk so they contain risk of how well the company is doing exploring and extracting gold as well as discount rates on future earnings. In terrible inflation, gold and gold ETF’s would almsot certainly outperform gold miners.

Trading Costs: Physical gold trades at a 5% spread or so. ETF’s and big gold mining stocks like Barrick and Newmont trade at much smaller spreads. Futures trade at very small spreads.

Taxes: Earnings on physical gold is taxed at higher rate than ETF’s and gold miining stocks. If you are in the 28% marginal tax bracket or higher physical gold earnings are taxed at twice the rate of ETF’s. Futures are taxed as 60% short-term gains and 40% long term gains so are ideal for trading gold.

Privacy: If you don’t want someone to know about your holdings, bullion or coins in a safety deposit box is hard to beat.

Leverage: You can make an argument that investing in gold mining stocks can give you a leveraged investment in gold, in that the mining company has debt. It’s hard to buy bullion using leverage. You can also use brokerage margin to buy gold ETF’s and mining stocks at 2:1 leverage. The clear winner for leverage is futures which you can trade at 10:1 or so (I’m too lazy to look up margin requirements right now).

Short-term trading: If you are going to trade these short term, all three suck because you get short-term capital gains taxation. Futures contracts count 40% of the gains as long term even if you hold them for 5 minutes.

End of the world: If the governement shuts down leaving us in total anarchy, gold coins and bullion may be more valuable than paper claims on gold. The rate of appreciation on bottled water will be infinitely greater though.

For most real investors – ETF’s are the way to go for direct exposure to gold. Gold stocks are the way to go for a hybrid gold/equity bet. Bullion in a safety deposit box for privacy. Futures contracts for leverage and short-term trading.

Investing online if you are smart about it is not risky. If you buy an ETF at eTrade, a futures contract at Interactive Brokers, or bullion at, I promise you that you will get exactly what you wanted to buy at a price reasonably like the market price (there are other fine places as well).

Edit: @Fred: “The exchange traded funds like GLD or SLV hold mostly derivatives and not real gold ”
I will bet you $10,000 that this is not true (I’ll actually extend this bet to anyone). Have you ever even glanced at the prospectus? GLD and SLV hold almost entirely bullion.

Edit: @Jay “the US once seized all gold (during the Great Depression) ” No, that didn’t really happen now did it? The govt made people sell their gold back to the government at the official gold rate. They prosecuted exactly one person for not doing it and that was unsuccessful. They did it to devalue the currency which was then tied to gold. Guess what? The currency isn’t tied to goid anymore so the govt has no need to do this. The govt doesn’t give a rat’s ass if you own gold.

Gold bugs are absolutely the stupidest class of investors. There may be reasons for owning gold, but most of the idiocy you read on the Internet ain’t it.

Susan asks…

What is the safest place to invest in gold?

We are going to start buyiny and investing in gold or gold coins. But there are so many places to buy we dont know were is a safe place to invest in

John answers:

Gold is very volatile. If you remove the volatility, you only have the rate of inflation as a return, that’s because it is a commodity, it is a thing, it has a value due to supply and demand that for the most part doesn’t change and this value will increase with inflation, the rest of the pricing is speculation and is volatile. Thing about volatility, it isn’t safe, it’s what will wipe out your portfolio. You are far safer investing in a conservative ( 25% equity, 75% bonds ) balanced fund than investing in gold and you should beat inflation. With gold, you’re just praying to meet inflation.

If you don’t believe that gold only returns inflation, remember that it reached $850 an ounce and then dropped to $300 an ounce in the 80’s. Had you bought at $300 thirty years ago and sold today at $1,555 an ounce, your annual returns would’ve been ( 1555/300 )^( 1 / 30 ) – 1 = 0.0564 which is 5.64% per annum. Had you bought at $850 thirty years ago, your annual returns would’ve been 2.03% per annum. Note that Coca Cola would’ve given you 12.5% per annum returns over those years and the rate of inflation averages 4.5% per annum. Your groceries have gone up as much as gold has.

David asks…

Is it good time to invest in gold righ now or it will go down?

Is it good time to invest in gold righ now or it will go down?

John answers:

I think gold price will go down futher soon so wait for it

Donna asks…

What is the smartest way to invest in gold?

I would like to diversify my financial portfolio by purchasing gold (actual ingots, bars, coins, etc.) What is a good vehicle to accomplish this. I would like to avoid extremely high markup and fees in the transaction to maximize my investment. Advice form people who have invested in gold would be most appreciated.

John answers:

Gold bullion, if you want to hold gold in the physical format, or you can invest in ETFs (exchange traded funds) that trade in gold instruments.

Remember that gold is a natural hedge against inflation and has a proportionate relation to crude oil prices.


Lizzie asks…

When I invest in gold, do I have to wait until the third generation to sell to make a profit?

If you read this, do not invest in gold…You only live to regret what a scam it is. The price of gold; what you pay over the market prize; shipping; Money transfer fees… VS. the price they will be paying you for the gold is too little. Even if you sold an object you only purshase with no intention to sell in an emergency… Still, do not match a good price years later. Only gold buyer make money with gold. And you do not have the connections. So our government lies obout such investments and that you can travel with such valuables, because it is not true. And fvck YUD PREZIOSI in ROME!

John answers:

I think gold is not a good investment. Silver will be much better. How soon? I don’t know. But I am expecting it to be really hot within 30 years. That’s less than 3 generations. 😉

I am sorry that you found out the hard way that you shouldn’t buy gold and silver from these catalogues they send you in the mail or from companies that advertise on radio. The best way to buy physical gold and silver is locally though coin and bullion stores. You visit all local gold and silver stores in your city and pick the one that charges the lowest commission. In my city, there are several stores. There’s even one on the flea market. And their commissions are really insignificant.

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