Gold is hot with the market collapse and this could be the asset that saves your portfolio. But investing in gold is more than just calling in to that 3am infomercial. What are the best ways to invest in gold and the pros and cons of each?
In this video, I’ll reveal five ways to buy gold, including four I’ve used myself, and how to get started now.
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How You Invest in Gold is Just as Important as Why
Nation, last week I showed you how to analyze gold as an investment and when to buy and it was one of the most popular videos in a long time.
There’s just something about holding gold as an investment, that gold fever, and the stock market’s recent crash has sent the market into a full-blown gold rush.
We talked about three ways to invest in gold in that prior video, but I wanted to go into more detail and show you all the ways I’ve used to invest. In five methods from futures to stocks and buying physical gold, I’ll show you how to get started and the pros and cons in each.
Again, I want to thank Vaulted for sponsoring the video. The platform lets you invest directly in gold bars, with insured storage in the Royal Canadian Mint or physical delivery to your home. The gold is certified 99.99% pure and it took me less than a minute to set up an account and buy my first gold bar.
How to Invest in Gold Bars
Our first way to invest in gold is buying physical bullion, gold bars.
I’m planning on doing a step-by-step on buying physical gold next week but this is really the ultimate in safety. I’ve used futures to buy gold and invested in stocks but all these carry that hacking risk or institutional failure. When all your gold is in bits and bytes on a computer screen, it doesn’t take much to destroy those records and your investment.
So buying physical gold is done through brokers and most investors take physical delivery or store at a depository. For example, the Vaulted app is built by McAlvany Financial Group, a broker with 48 years advising clients and all gold is stored at the Royal Canadian Mint. This is the official government vault, audited each year by the auditor general and insured by Lloyds of London.
It took me less than a minute to set up my account on Vaulted and the app makes it extremely easy to buy gold. You just link up your bank account, make a deposit and buy however much you want. Your gold is stored in the Mint and verified monthly. You can gift gold to a friend with just their email address and even get your gold delivered to you by Fedex.
Pros and Cons of Buying Gold Bars
Pros of buying physical gold include that ultimate in safety, owning that physical asset instead of just the financial record. You get all the upside benefits of the investment including the inflation hedge and return potential.
The biggest con of buying physical gold is the premium you pay to buy and sell. On average, brokers charge a 4% fee for each transaction plus an annual expense to store and insure the gold. Now Vaulted’s fee is about half that at 1.8% for each transaction but that’s still higher than we’ll see with stocks or futures.
If you’re holding the gold yourself, you’ve got the added risk of theft or loss. Physical gold also doesn’t pay a dividend so your sole return is selling at a higher price.
Investing in Gold Futures
Another way I’ve invested in gold before is through futures contracts.
Now futures can be more like speculative investment than that longer-term investment we’ve talked about. What I mean by that is futures are contracts to buy or sell a commodity at some point in the future.
These are mostly used for risk management. For example, a wheat farmer can sell futures contracts for September delivery. He locks in the price he’ll get for his crop and doesn’t have to worry about price swings. Conversely, a wheat user like maybe General Mills making your Breakfast of Champions, can buy those contracts and lock in the price it will pay for supply.
Futures contracts for gold are for 100 troy ounces of 99.5% purity but what makes futures so interesting is you can buy a contract for a fraction of the actual cost. So 100 ounces at a price of about $1,600 per ounce, each contract is worth $160,000 in gold…BUT you only need to put up 5% of that price to buy the contract. You only need $8,000 in your futures account to start the position.
That’s 20-to-1 leverage and means a simple 5% increase in the price of gold will double your money!
Of course, that leverage also works the other way. The value of each contract in your account is marked-to-market each day, the value is adjusted according to the actual contract’s change. If your account balance falls below a certain level, you have to add funds or your contract is liquidated. This is why I generally recommend not using the full leverage on a contract. For example, here maybe you use 15-to-1 leverage which is still a lot of leverage.
Pros and Cons of Investing in Gold Futures
The biggest pro of trading futures is that leverage available. I made over twenty-grand in two months in 2016 on oil futures. I bought three contracts worth $114,000 in West Texas crude but only had to put down $7,000 in the account. The contracts were for May delivery at $38 a barrel and I was able to sell at $45 a barrel before expiration in May for a gain of twenty-one thousand dollars.
Other advantages of futures are they’re highly liquid, meaning you can buy and sell these things in less than a second, basically just like stocks.
Unfortunately for a lot of people, that leverage can be a disadvantage as well. It takes very little to wipe you out completely. Even on a 10-to-1 leverage, a 10% move in the price will mean a total loss on your account. Contracts are also time-limited, so you’ll buy a contract that expires in a month or two, then have to roll it over into another contract if you want to keep the investment on. Finally, this isn’t really a direct investment in gold but a contract on the price so it’s not quite the same as other methods.
Most brokerage and investing sites will have a futures platform, usually with around a $10,000 minimum to start trading. Because of that leverage, this is definitely one where you want to do your homework and understand what goes into those prices on a day-to-day basis before getting started.
Investing in Gold Stocks
Our third method for buying gold is to buy stock in the miners.
This is where most investors start but it’s not necessarily the best way to invest. I like the liquidity in stocks, so you can buy and sell your gold miners fast, but I think most investors underestimate the amount of analysis that goes into these.
You really do need to be going into the financials on your mining stocks to see which companies have the best reserves, the low-cost mines and which might offer the best returns. Gold miners were absolutely destroyed when the price of bullion dropped in 2011. Like most commodity markets, miners ramped up supply as fast as possible as prices rose, got caught when prices came down and had to cut everywhere possible.
Now the miners that have survived, it’s because they’ve become super-efficient focusing on lower-cost assets. With the back up in price over the last couple of years, we’ve seen a jump in mergers and acquisitions as the big players try to buy assets fast without development. Barrick Gold merged with Rangold in September 2018 to briefly create the largest miner before Newmont acquired Goldcorp in January 2019.
With the recent jump in price, I think there’s still an opportunity especially in some of the smaller junior miners as acquisition targets but you need to be analyzing these, you can’t just pick a name on something you heard over on CNBC.
With miners, there are two measures you want to watch, the cash costs per ounce and the all-in sustaining costs. Cash costs includes production costs, mine-level admin and processing to produce each ounce. For the largest miners in the GDX index, that was around $616 an ounce as of last year.
Probably more important though is this all-in sustaining costs per ounce or AISC which also includes the cost of maintenance expenses to keep mines running. This averaged $893 an ounce for miners so you want to be looking at these companies for which can produce at lower costs than the industry.
Besides costs, pay attention to reserves estimates and the miners’ production schedule for bringing assets online to production. This is going to be important because if you can find a junior miner with a big field coming into production, even if it has a little higher cash costs, then it might make for a good takeover target from a larger player that thinks it can lower costs.
Pros and Cons of Gold Stocks
Pros of buying shares in miners is the ease and liquidity. Just like futures, you can be in and out of these stocks in seconds if you like and the price spread on stocks is less than a couple of pennies. Unlike futures, you don’t need a few grand to start investing. In fact, some of these junior miners trade for less than $5 a share.
The big downside to mining stocks is they don’t necessarily track the price of gold very well. Here’s a five-year chart of that GDX gold miner’s fund in blue against the SPDR Gold Shares, which tracks the gold price, in red. And you can see how volatile the miners have been even as the price of gold has stayed relatively flat.
So with gold miners, you get a lot of company-specific risks and volatility. Most of these miners also produce other metals like copper and silver so it’s not a pure-play on gold.
Getting started is almost too easy. You can open an account on any investing platform but you really should do some analysis on these before jumping in on a stock.
Investing in the Gold ETF
Similar to buying gold miners, you can buy an ETF or fund tracking the price of gold.
There are other gold funds but by far the most popular is the SPDR Gold Shares. The shares are backed by physical gold held in a trust and stored in vaults, primarily in London. Each share is a fractional amount of gold so the trust buys and sells physical gold according to how many shares are bought by investors.
Pros and Cons of the Gold ETF
Pros of the fund are that the investment tracks the price of gold directly and you get that ease and liquidity of stocks. I’m not quite sure if this expense ratio is a pro or a con. The fund charges a 0.4% annual expense on assets for management which is more than miner stocks or some other methods but you won’t pay the fees like with physical gold.
The downside to the ETF is that just like physical gold, there’s no cash flow with dividends. Your only return is buying low and selling high. Like we talked about before, this is also a financial asset, so a record with the gold trust so there is that electronic risk as well.
With the gold fund, you can buy and sell it just like a stock so getting started is going to be the same as with the miners though you don’t have that same level of analysis here.
Investing in Gold Certificates
Fifth way to buy gold and this is the only one I haven’t tried yet, buying gold certificates.
These aren’t used nearly as much as in the past but the were basically the world’s first bank notes. As early as the 17th-century, goldsmiths in London and Amsterdam were issuing certificates on physical gold holdings. Pretty soon, they were being used by banks and as an exchange for goods.
Today, there are still some Swiss and Australian banks that issue the certificates and a few investment sites but it’s limited. The Perth Mint program is probably the most widely used and I’d definitely caution about just using any website.
Pros and Cons of Gold Certificates
The pros here are similar to the Gold ETF where you get direct exposure to the price of gold though this one doesn’t benefit from that ease or liquidity. Drawbacks to gold certificates are so many that I’d hesitate to recommend them.
The certificates are only as good as the company backing them and there are plenty of outright scams on the internet. They’re illiquid, meaning it might take a while to sell or get a redemption, and the fees are higher than other methods we’ve looked at.
There are lots of ways to buy gold as an investment but not all of them are good ideas. I've used four of these investments including buying physical gold and ETFs. Make sure you understand how the price of gold works and how the investment can save your portfolio during a market crash.