When you want to invest in gold, you can do it in different ways, which I will discuss in this article. Besides the way to invest it is also important to look at the when to buy.
You can invest in gold
- bullion (bars)
- mines / companies / shares
- mutual funds
- exchange traded funds
- Gold future contract
Gold has a very long history and therefore investing in gold is besides the pure investing decision an emotional decision. Gold has been always a means of payment and people argue, that it´s value is stable over the time. 2000 years ago you could fit out yourself with one ounce of gold and today you can do the same. One suit, a pair of shoes and a coat you will get for approximately $1,200 USD.
This statement makes clear, that investing in gold is only value conservation, it is nothing about value appreciation.
Nevertheless there have been changes in value. For example, in the gold rush the supply of gold rose and the value of the gold decpriciate.
But the fact, that it’s value is very stable, it makes the value depreciation of the paper money very visible, which is not well seen by the government. Therefore, they try to avoid this competition, because the paper money will lose. There is one easy way to avoid this competition: Prohibition.
The list of gold prohibition is very long and old. For example, during the French revolution from 1789 until 1796 the french government bans privat gold possession by death penalty. In 1796 the paper money broke, i.e. had no value.
Well known is the gold prohibition in the United States from 1933 until 1974. All American people had to deliver their gold to the government and got 20.67 USD per ounce . Half a year later the administration raised the gold price to 35 USD per ounce , but nobody could change the gold for this price because they had to deliver their gold earlier.
Similar things happened in Germany during the great inflation in 1923. Authorities confiscate Gold and foreign currencies without any compensation, though one year later, after cancelling the law and the introduction of a new currency, the court decided, that there has to be a compensation.
Some years later during the rule of the nazis the prohibition arose again and lasted until 1955.
This few events show clearly that government don´t like competition, if this is against their own interest and therefore excludes the competition if necessary. As a gold investor, you should keep in mind these facts and behavior.
Before you invest in gold you should also consider, what you want to achieve with your investment, for example
- capital gains
- value conservation
- a valuable exchange for “bad” times
If you are interested in the last point, make sure that the possession of gold is still possible and that you have a direct access.
Invest in gold coins
There are a lot of coins in circulation, which are well known and of different size or weight. So every investor can choose what size fits him best. If you bought it because of “bad” times, make sure, that the coin is well known, accepted and that you have access to it. Believe me, in “bad” times you don´t have access to a bank locker. If the coin is unknown, you will suffer a big loss, because nobody wants it.
Invest in gold bar
In general gold bar are cheaper than gold coins, because the manufacturing is easier. Also gold bars can be delivered in different sizes, up to 400 ounces (12 kilogramm). The other points are the same as for gold coins.
Mines / shares / companies
The investment in shares is for investors, who believe that the gold price will rise. If the gold price rises, the share price of gold mining companies goes up a lot faster, because their profit goes also up faster. But also the other direction in possible. If the gold price should decrease, it could be, that the company can’t sell the new gold above carrier cost and suffers losses. The worst case would be bankrupt.
The NYSE Arca Gold BUGS Index is a well known mutual fund, which contains international gold mining companies. Mutual funds try to balance the risk of individual companies but if the gold price is decreasing, their value will decrease as well. But if you are bullish for gold, you should consider this investment. For further information about mutual funds and ETFs take a look at my article: “Mutual fund vs ETF comparision“)
Exchange trades fund
ETFs are the cheaper version of mutual fonds with the same advantage. Furtheron if you should think that the gold price will decrease, you can choose an ETF, that has an inverse price development. This means, if the gold price goes down, the price for this ETF will go up, for example the DB Gold short ETN (DGZ).
Gold future contract
If you really want to trade the gold price, you should think about the gold futures contract. It is highly leveraged and you can trade it long and short. But as I mentioned, this is for trading, not investing.
The best way to invest in gold depends on your aim, capital gains, value conservation or as a valuable exchange in “bad” times.
If you are interested in capital gains, you might consider the gold futures contract, ETF, mutual funds or shares.
If you are interested in value conservation, you might consider a bundle of ETF, mutual funds or shares and perhaps some coins or bullions.
If you are interested in a valuable exchange in “bad” times, you should consider coins and bullions with direct access.
I hope, that I could show you some insights and alternatives about the best ways to invest in gold and would like to hear your opinion.