Ways to Buy Gold

There are many ways to buy gold both electronically and physically.  Which way you choose to purchase gold should depend entirely on why you are buying it.  Let’s explore the electronic and physical forms of gold investments and I think this will bring clarification as to which way to buy gold is right for you.

Electronic Gold

The different ways to buy gold electronically are: gold mining stocks, gold ETF’s and options contracts.  Be clear that if you purchase any of these options, unless you take delivery you do not actually own any gold.  There are counterparty risks involved with electronic ownership.  Here is a brief overview:

Mining Stocks

When you invest in stocks of gold miners you are indirectly participating in the price of gold.  If the price of gold goes up that does not necessarily mean the company’s stock with have a corresponding rise.  The performance of the stock will have more to do with the performance of the company itself.  However is gold rises then theoretically the company will be more profitable.

Gold ETF’s

Gold Electronically Traded Funds are “backed by physical gold.”  They can be traded on the stock exchange and represent a share of the price of gold.  They rise and fall in step with the price of gold.  The advantage here is that you can play the volatility in the market without taking possession making it easy to buy and sell quickly.  SPDR Gold Trust is the most popular but there are a few to choose from.  Many experts speculate that ETF’s are leveraged 100 to 1, meaning that if you and everyone else were to try to take delivery the ETF would not be able to deliver.

Gold Futures

Gold futures contracts are a bet on the price of gold going up or down, sell it short or go long.  You can bet either side of the price fluctuation with the contract set at a specific date in the future.  There is always a winner and a loser in this form of investment and should only be approached by an expert.

Physical Gold

There are two types of physical gold: bullion and gold coins with a rarity premium (old gold coins).  There is no counterparty risk involved in owning physical gold and is the best way to own gold for the long-term.  Here is an expanded look at both:

Gold Bullion

Gold bullion comes in coins and bars, but both are based on the spot price of gold plus a premium for being mined, minted and marketed.  Bullion coins and bars go up and down correspondingly with the spot price of gold.  Some examples of bullion coins are American Eagles and Canadian Maple Leafs.  Bars are typically minted by private mints like Johnson Matthey and Engelhard and carry the lowest premium over spot as the manufacturing costs are low.  Bullion is a great way to get exposure to gold at the lowest cost.

Numismatics

Numismatics are gold coins with a rarity premium, bought by both investors and collectors.  These are typically gold coins minted prior to 1933 like the $20 Liberty and $20 Saint Gaudens.  They are made of the same gold that modern issue bullion coins are, and the $20 versions contain .9675 ounces of gold, they are just minted a long time ago.  As such they are rarer than modern coins and are therefore more valuable.  The rarer they are the more valuable they will be.  The reason an investor likes to buy these is for the premium play.  Right now these coins are carrying some of the lowest premiums over spot than they have in 40 years.  This gives extra leverage to the gold market, making higher profits possible.

There are benefits and downfalls to each category and type.  With electronic gold you don’t own physical gold so if an economic collapse occurs and you want physical gold, good luck trying to get it.  Electronic gold comes with trading fees and storage fees over time (ETF’s).  Physical gold is heavy and risky to store, but the premiums are low over the long-term.  Plus if there was an economic collapse you would have barter-able metal in your hands.  Before you buy any of the types above ask yourself why am I buying gold and how long do I want to own it?

About Eric Griffin

Eric Griffin is the President and Co-Founder of www.GoldAndSilverOnline.com. Eric has been around the precious metals business since 1995 when his father started a leading nationwide precious metals dealer. While getting a finance degree from Arizona State University he helped his father with operations but decided to go into banking and finance when he graduated in 2002. He soon found his way back to the precious metals industry, and has written commentary, managed precious metals websites and managed clients portfolios for many years before opening GASO. Eric has a strong grasp on economics as well as a deep understanding of the precious metals markets. If you have any comments or questions don’t hesitate to respond to any of his blog post.

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