Gold Investing 101: Guide to Investment Basics for Beginners

Quick gold investment guide or “101 course” covering the different ways of investing in the precious metal and the pros and cons of each method.

This brief gold investment guide is an easy “101” introduction to the basic methods of investing in this precious metal and then selling to Gold buyers Melbourne for profits. The various types of gold investment can be divided into two categories: physical gold investing and paper-based gold investing. To invest in the physical metal, investors buy bullion and store it, or have gold that’s allocated to them stored remotely. To invest on paper, they enter into purchasing contracts or buy or sell shares, but may never see the real gold behind the transactions – if there even is any.

Gold Bullion Investments

Gold bullion is gold of at least 99.5% fineness. It includes coins as well as ingots and bars, which vary in weight from a single gram to 400 troy ounces. Physical precious metal bullion can be bought from a refiner. The primary “con” of buying gold bars is that the investor must store the bars and keep them secure. This is a relatively minor problem, however, as gold, being a non-reactive metal, is easy to store. Bullion is also a very liquid investment, and the cheapest option, as purchasing and storage fees are minimal.

Gold Coins – Numismatic

Numismatic gold coins are those that have value as currency and are different from bullion coins. Their value is usually greater than the price of the gold therein, as it’s tied to the coins’ rarity as well as aesthetic and historic aspects of the coinage. The disadvantages? The condition of the coins also affects their worth, and investors would need to be sure to establish authenticity and have access to expertise regarding which coins to buy.

Gold Jewelry or Scrap

While 12 karat, 14 karat, and 18 karat jewelry can be bought as an investment, pieces of jewelry are not usually considered either fungible – interchangeable with other commodity units – or liquid – meaning easily sold. With rare exception, jewelry costs more than it sells for, and is not considered the best way of investing in gold. If already part of a collection, jewelry and gold dental scrap can be sold to refiners or dealers, though not generally at the full market value.

Gold Accounts

Gold accounts are a way of owning gold held remotely. In an allocated account, the most secure method of storing physical gold, the investor is assigned specific gold bullion that remains in a depository for him or her to claim. One disadvantage is that this can be an expensive method of keeping gold, as there are insurance and storage fees.

In an unallocated account, the investor buys quantities of gold usually over 1,000 troy ounces, and these bars are not allocated to anybody specifically. They remain with the bank, which can lend out the gold, making this a higher-risk investment. Fees, if any, tend to be lower than for allocated accounts. For smaller investments, there are also gold pools, which are accounts of unallocated gold.

Gold Certificates

A gold certificate provides a means for investors to own gold and store it remotely, retaining the right to claim it or cash out at fair market value. Only special banks, primarily those in Germany or Switzerland, or the Perth Mint Certificate Program in Australia, offer gold certificates. There can be significant charges and tax obligations associated with gold certificates, and financial advisers usually recommend that investors only buy allocated gold certificates.

Gold Accumulation Plans (GAPs)

With gold accumulation plans, money is automatically withdrawn every month from an investor’s bank account in order to buy unallocated gold, building up a stash over the course of the contract, and investors can collect their bullion at any time.

Gold ETF (Exchange Traded Funds)

Gold exchange traded funds are securities traded on a stock exchange and backed by allocated physical gold. They follow the price of gold throughout the day and can be influenced by significant tracking errors, according to a Morgan Stanley report in February 2010. ETFs are tied to an index, not the performance of specific companies. Since they must be bought through brokerage accounts or brokers, they can be expensive. They are, however, flexible, allowing investors to buy in small or large volume and to buy them on margin (on loan from the broker).

Gold Futures Contracts and Options

Gold futures options and contracts are either commitments or options to buy or sell gold at a set future date. Investors try to predict whether the price of gold will fall or rise and then take a profit or loss on the accuracy of their predictions. Futures are bought on commodities exchanges as securities. In trading gold futures, the gold usually never changes hands.

Gold Mine Stock Shares

Investing in gold mining stocks is a popular, if risky, form of investment. Investors buy shares in either existing or future gold mines – the latter investment being potentially more rewarding, and significantly riskier. Part of the risk of buying shares in gold mines is the mines themselves – problems can happen at any stage of production. The other element of risk is tied to the stability – or lack thereof – of the political environment of the country in which the mine is located.

Gold Mutual Funds

Gold mutual funds diversify mining stocks among various mining companies or across different regions in order to reduce the risk of individual or company-specific stocks. It’s usually acknowledged that gold mutual funds come with greater risk than ETFs but fewer risks than shares in specific gold mines.

Risks and Rewards of Different Types of Gold Investment

Generally, though gold is often cited as a hedge against inflation, the rules of investment apply here as with anything, especially when talking about the different forms of paper investment in gold. More risk means more potential profit; lower risk means slower and steadier gains. This 101 “course” and gold investment guide is for informative purposes only and does not constitute investment advice.