As CEO of the Hard Assets Alliance, I regularly receive questions from people looking to buy gold as an investment—and for a good reason.
Buying gold as an investment is not as straightforward as it sounds. Novice investors often get lost in a variety of options to buy gold: “Should I buy minted bars or sovereign coins?” “Maybe that limited edition coin would be a good investment?”
Sensible investors evaluate bullion options by the price and premium on the gold spot price. But the premium is only one part of the equation. It doesn’t necessarily mean that you’ll get that premium back upon the sale.
Not only that, there are unscrupulous dealers out there. They will try to trick you into buying numismatics and other collectibles that have a huge premium and won’t retain their value over time.
There’s much more I could tell you, but the point I’m making is clear. It’s essential to get an understanding of precious metals before dipping your toes into this market.
In this article, I’ll be answering some of the most frequently asked questions that I receive in relation to buying gold. I hope that after reading this, you’ll invest in gold with more confidence.
There are many reasons why gold is attractive from an investment point of view.
For a start, gold is a time-tested store of value. It’s durable, portable, and has been valuable since the dawn of civilization. It’s no wonder that gold has been used as a unit of exchange for thousands of years.
Another key feature of the precious metal is that it offers important portfolio diversification benefits. Gold’s price is uncorrelated to the movements of other asset classes such as shares and property. By adding gold to your portfolio, you can potentially reduce your portfolio’s overall risk.
Furthermore, gold offers protection against financial system risk. The metal has proven to be a reliable safe-haven asset during times of market panic.
When financial market volatility increases, investors tend to gravitate toward what they perceive to be the safest assets. Gold is one such asset investors move into. This means that gold’s price often rises when there’s fear of an economic collapse.
With governments around the world continuing to print money and debt levels dangerously high, gold provides insurance against financial market uncertainty.
Gold has also been an excellent investment over the long term. It has often outperformed the stock market. For example, over the 48-year period between the start of 1969 and the start of this year, gold rose from $35.20/oz to $1,283.30/oz, an annualized gain of 7.8%. In contrast, the S&P 500 index rose from 102 points to 2275 points in that time, an annualized gain of 6.7%.
Gold easily outperformed the broad US equity market over that time period, despite the fact the US market has charged higher in recent years, while gold has remained well below its 2011 highs of $1,920/oz.
And gold could continue to perform well in the future. There are certain key drivers that could push gold’s price higher in coming years. These include a rise in inflation, an increase in geopolitical risk, and further financial market uncertainty.
Another potential key driver is demand from China and India. With the wealth of millions of citizens across these regions growing at a formidable rate, demand for gold jewelry and gold as an investment could increase.
Gold has many attractive features as an investment. It offers:
Each method has advantages and disadvantages.
While investing in gold through ETFs sounds appealing due to its convenience, there are several key issues that investors need to be aware of in relation to this method of investment. If you invest in gold through an ETF, you don’t actually own the metal. You have no claim on the gold within the fund. This means that you cannot take delivery of the metal if the need arises.
In contrast, the key advantage of buying physical gold such as bars and coins, is that you own the gold. Furthermore, you own an asset that can be stored outside the financial system. Therefore, you’re not exposed to “counterparty risk.”
This is the risk that the other party in an agreement will default or fail to live up to its obligations. When investors buy gold ETFs, they are relying on financial institutions to deliver on their obligations.
In this regard, buying physical gold such as gold bullion bars or gold coins is a sensible option. Below, I’ll explain how to buy physical gold.
The best way to buy gold coins is through reputable precious metals dealers.
Within North America, two of the most popular gold coins are the American Eagle and the Canadian Maple Leaf gold coins. Both of these coins have high gold purity, are easily recognizable, and are easy to trade.
While there are many other gold coins available for purchase, such as commemorative coins, these are not recommended. These coins are not as liquid and are not as easy to trade. Therefore, they are not always good investments.
Investors looking to buy gold coins should stick to the most liquid sovereign gold coins. There’s more on how to choose the sovereign coin that best suits you, below.
While both gold and silver have attractive features, gold is the better investment for the average precious metals investor. Gold has a much larger liquid market that is driven mostly by investment and jewelry demand. The price of gold is less volatile than that of silver.
Silver is more speculative and has a stronger relationship to economic activity. This is because silver has many industrial uses. Silver does have the advantage of being much cheaper than gold. Therefore, it’s more accessible to small investors. Silver can be attractive during down cycles when the price of the metal is cheap.
Gold coins are the best way of buying gold for most investors. This is because coins can be bought in smaller quantities. Plus, sovereign coins are easily recognizable, easy to trade, and generally sell at higher premiums than bars.
For institutional buyers or those looking to buy very large quantities of gold, bullion bars are a more sensible option, due to the lower premiums.
There are two types of gold bars investors can buy: minted and cast bars.
Minted bars are smaller, easier to recognize, and are usually sold in sealed packaging. They generally do not need to be tested for purity if they are kept in their original sealed package.
Cast bars, which are more irregular in size and shape, are better suited for larger institutional or industrial buyers that will keep them stored in a vault or melt them to use in other applications.
For North American investors, American Eagle, American Buffalo, and Canadian Maple Leaf coins are the best gold coins to buy. For investors in Europe, Gold Eagles or Austrian Philharmonics are good coins.
The South African Krugerrand coin is another excellent gold coin for investors. This coin is minted from 91.7% pure gold alloy and contains one troy ounce of gold. It’s one of the most traded gold coins in the world.
Other good gold coins to buy that are reasonably liquid include the Australian Kangaroo coin and the English Britannia coin.
Investors should stay away from sovereign coins from lesser-known countries. They should also steer clear of special edition commemorative sovereign coins. These coins are usually more expensive to buy and resell for less than the better known coins.
Investors should avoid taking physical possession of their gold unless they believe there is an emergency. It’s much safer to have your bullion stored in a secure vault. It’s also much easier to sell gold that is stored in a secure vault because you don’t break the chain of custody.
The best time to buy gold is often during the spring and summer. History shows that gold prices have often increased more during the fall and winter months and softened during the spring and summer.
The main reason for this is that the jewelry industry is one of the largest consumers of gold. The jewelry industry builds up inventory from September until March for the holidays, Valentine’s Day, Mother’s Day, and the wedding season. The strongest gold jewelry demand in India and China is also in the fall.
That said, it is impossible to time gold purchases perfectly, as gold seasonality changes from year to year. There are also many other variables that affect the price of gold including inflation, stock market volatility, and geopolitical risk. A good way of buying gold as an investment is to buy gold at regular intervals. This is known as “dollar-cost averaging” and can reduce the risk of buying a large quantity of gold at a high price.
A number of banks sell gold coins. However, banks are usually not the most cost-effective way of buying gold. That’s because banks generally buy gold coins from specialized dealers and then add their markup.
Most investors are better off buying their gold directly from a reputable gold dealer and then storing it in a London Bullion Market Association (LBMA) approved vaulting facility.
Unfortunately, it is not possible for investors to buy physical gold at the spot price. There will always be a spread between the buying and selling price of gold bullion.
The spot price of gold is the price of gold as a raw material. Buyers pay a premium over the spot price to cover the costs of producing the gold, as well as distribution costs and dealer markups.
Minting and fabrication costs represent the largest part of the total premium over the spot price. This is especially true for coins and small bars. While fabrication costs of a 400oz cast bar are very small compared to the total value of the bar, minting costs are a very large part of the total cost of a 1/10oz gold Eagle coin.
The good news is that the minting premium paid on well-known sovereign coins can usually be recovered when selling the coins. Most sought-after sovereign coins will sell above the spot price. However, there will still be a spread between the buying and selling price, as distribution costs and dealer markups have to be accounted for.
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