by | May 3, 2017 | Precious Metals

Last Updated: February 9, 2023

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Photo Courtesy of Oil Trading Group

Photo Courtesy of Oil Trading Group

Gold is one of those commodities that many sophisticated or accredited investors are looking into when it comes to portfolio diversification. Gold has many characteristics that make it stand out as a truly unique type of investment. It sits at the opposite end of the spectrum compared to other traditional assets which depend heavily on the economy and paper currencies. Also, when you consider how much gold has been mined in all of human history, as well as what remains below ground, you will immediately understand the reasons why many investors are looking into this shiny bright metal today:

  • The most accurate estimates available today indicate that approximately 183,600 tons of gold have been unearthed in all human history (around two-thirds of this amount has been uncovered since 1950)
  • Since gold is practically indestructible, nearly all of it still exists somewhere on earth (including beneath the sea in shipwrecks or hidden under the ground in buried treasure caches)
  • All of the gold ever mined would fit inside of a 21 meters squared cube as this picture below demonstrates:

All the gold ever mined would form a cube 21 metres on each side

  • Estimated below ground stocks of gold not yet mined are only 56,000 tons, per the U.S. Geological Survey

This is to say that over 76 percent of all gold on the planet has already been mined. The gold mining industry will not be making any more of the yellow metal beyond that. It is an excellent reason to lock in your share of total world gold supply now while you can.

There are a variety of ways to do this once you have settled your mind on acquiring gold.

  1. You might buy gold mining company stocks.
  2. You could purchase gold ETF exchange traded funds
  3. You can buy shares in gold mutual funds.
  4. There are gold futures contracts available from major commodities exchanges in Chicago and London.
  5. You could buy gold ounces in the form of gold spot on the world Forex markets
  6. You can also acquire physical gold through a gold IRA.
  7. Finally, you might purchase gold bullion outright and then either store it in a depository, bank safe deposit box, or in the privacy of your own home-based safe.

We will consider each of these methods of acquiring gold in this article.

The Various Methods of Investing in Gold Considered

What makes it important to consider the various ways of investing in gold for yourself is that there is not any single one right way to do this. It depends more on what is important to you personally. Gold investing as speculation is a major part of the gold market, as approximately a fifth of global gold demand originates with investors. You have to decide what your focus is on investing in gold. Are you more of a speculator or a longer-term investor? The answer to this question will heavily influence the type of gold vehicle you choose in the end. This is why we will look at the seven different popular methods for investing in gold and consider their various merits here.

Gold Mining Company Stocks

Among the variety of ways to invest in gold is to buy into it indirectly. This is by purchasing the shares of the companies which actually mine, refine, and sell the gold in the business of gold mining. The advantage to this is that you typically obtain a greater amount of leverage. When gold prices are high and rising, the stocks of gold miners generally go up faster than the actual underlying price of gold itself does.

There is a double edge to this sword though, as when the price of gold is decreasing, the gold mining company stocks’ prices usually fall faster and harder than does the price of gold. This means that though can be a larger reward to this strategy of acquiring the shares of gold miners, there is also a greater level of risk. Gold mining companies also introduce another element and type of risk to the gold investing equation that straight bullion purchases of the yellow metal do not.

These are the risks which are problematic for any company involved in the (usually international/overseas) extraction of natural resources. This involves national political risk, currency movement risk, environmental impact regulation, and labor problem difficulties. Because of this, it is worth considering the following points in investing in gold in this manner:

  • Since you are purchasing a stake in a company, this gives you the possibility for higher upside, as well as downside
  • Stocks in gold miners can be quickly and simply purchased as well as sold. This means that you can rapidly free up cash if you run into a cash flow issue
  • Investing in gold stocks requires more time spent in upfront (and continuing) research on the players in the gold mining universe. The idea is to find a value-plus proposition that will deliver a greater percentage gain than simply the movement in gold prices. If you do not receive this, then you are really better off with a straight bullion investment

Beyond this, you need the gold mining firm that you select to embody a number of critical characteristics, including:

  1. Successful management – not only who have a proven track record, but also who are vested in the success of the mining venture and operation.
  2. Access to major financing – you need to know that the gold mining company has an effective current cash position and manageable total debt. The balance sheets must be strong since they constantly require capital infusions to operate effectively.
  3. Skills in often hostile international environments – the majority of gold miners are operating in countries with physical challenges such as the harsh natural environment or lack of infrastructure and with political headwinds like questionable government institutions, real security issues, and weak legal frameworks. If the managers of the various mining projects and leadership can not navigate these often treacherous scenarios effectively, they may well lose the mine.

The takeaway on investing in gold mining company stocks is straightforward. The shares of these firms provide you with a higher amount of leverage than holding the gold itself would. However, the share price sensitivity in relation to the potential move in the price of the gold comes down to the price valuation impact from both proven/probable reserves and the current output cash flow.

Even just buying and holding one or more gold mining company stocks will require significant time investments in research and analysis, as well as continuous monitoring of the performance of the company (as shown by quarterly earnings reports, news about and updates from the company, and SEC filings).

Gold ETF Exchange Traded Funds

Another highly liquid way to buy into gold independently of acquiring physical bullion is through exchange traded funds which trade alongside the value of their physical vaulted inventories of the precious metal. These gold ETF’s prove to be a unique type of mutual fund-like vehicle which pour their investment capital literally into physical gold bullion. They keep this with an insured and independent bullion custodian. An example of this would be in a bank vault with HSBC in London, or JP Morgan in New York City. Every year, independent accountants will audit the ETF’s gold assets.

As U.S. News and World Report magazine explains in their slideshow, the two main gold ETFs are GLD (SPDR Gold Shares), the hands down largest gold ETF option on the planet (with over $31 billion in assets under management of gold vaulted in London in 2016), and IAU (iShares Gold Trust), which offers a lower expense ratio but is otherwise nearly identical to GLD (though with only a quarter of the assets under management which GLD possesses). There is also the GDX (Market Vectors Gold Miners Company ETF) which proves to be the best-known way to buy into a basket of many gold mining companies. They invest in 50 global player gold mining companies with their $10 billion worth of assets under management.

The obvious advantage to this form of directly investing in gold is that you are able to both purchase and sell the shares via any stock broker or online trading platform imaginable. Since the shares are extremely liquid, the transacting costs prove to be minimal, in particular if you utilize any of the discount brokers like Schwab or Fidelity, or trade them yourself with personal investment platforms like TD Ameritrade. You also benefit from:

  • The shares tracking the gold price movements very closely
  • The ability to purchase or sell put or call options on the ETFs. Implementing complicated strategies is easy
  • The easiest and by far most cost efficient means of investing in gold directly

The main downsides to this are the:

  • Lack of access to or actual custody of any tangible gold
  • Counterparty risk involved because the gold is owned by the ETF company itself

Gold Mutual Funds Shares

A similar idea to the ETFs just described are the gold mutual funds shares. The main difference between these and the ETFs is that these are mostly collections of gold (and silver) mining companies which professional fund managers handle so that you do not have to determine what are the best choices for investing in equities and bullion. In other words, you hire the fund manager to gather and perform all involved research and to monitor the portfolio of stocks and bullion holdings so that you do not have to spend your valuable time on this endeavor.

The process of picking out a gold mutual fund is made easier by the reports offered via Morningstar, Inc. which rates mutual funds of all kinds. They call gold mutual funds the:

“Funds that pursue capital appreciation by investing primarily in equity securities of companies engaged in the mining, distribution, or processing of precious metals.”

These mining companies in the mutual funds will usually be based in either North America, South Africa, Australia, or the United Kingdom.

It is important to realize that while most of the mutual funds in this space will focus on stocks of gold mining companies, others can and do maintain substantial exposures to precious metals’ miners of platinum and silver as well, and even to companies of baser metal mining operations also. VGPMX (Vanguard Precious Metals and Mining Fund Investor Shares) is a well-regarded example of a gold mutual fund company.

The pros and cons to this type of gold investment are the same as those with the ETFs and gold mining company means of investing. This is because gold mutual funds are essentially a hybrid of both ETFs and gold mining company stocks. The main advantages you gain from this form of investing lie in the diversification into many different gold (and other precious metals) miners (up to 50 or more companies with a single investment) and the professional full-time managment of the investment by the mutual fund manager.

Counterparty RiskLeverage AppliedMargin CallsPotential to Lose More than Invested
Gold Mining Company Stocks
Gold ETFs
Gold Mutual Funds
Gold Futures Contracts
Gold Spot on Forex
Gold IRA
Physical Gold Bullion

Gold Futures Contracts

There is also the futures market as a means for investing in gold with leverage. Futures are merely contractual deals that allow you to trade gold with quantities and prices determined now but with a settlement date occurring in the future. Simply put, you would not be required to pay for this gold today as the seller would not be required to deliver it to you now either. Settlement dates are commonly as far away as three months in the future.

The idea with gold futures for speculators is to sell back the contract before the settlement day arrives. At this point, you are required to settle out any gains or losses you experienced by holding the contract as gold prices fluctuated. Thanks to the margin (the down payment surety against changes in the gold prices) involved and leverage which applies, you are able to control far larger amounts of the yellow metal with gold futures than with outright gold bullion purchases or even ETFs and mutual funds. The amount that you must put down ranges from two to 20 percent of the gold value depending on market conditions and the futures exchange in question.

The far larger sized positions translate to substantially greater risks in exchange for potentially vast rewards. The downside is of course that the losses can be far higher and quickly magnified by relatively small movements in the underlying gold prices. It only needs from $5,000 to $10,000 to control $100,000 in gold with futures contracts. If gold prices moved a dramatic 10 percent (which can and occasionally does happen over relatively short periods of time), then you would make or lose $10,000 with that move alone.

Should the price of gold start to move against you, then you will receive margin calls demanding that you put more money into the position to offset the change in price. In theory this means that you can easily lose more money than you put into the investment in the first place. In the example above, if your position has lost $10,000 but you only put $5,000 up as margin, then you will be required to put another $5,000 in just to cover the gold futures contract paper losses, which are literally marked as real. This chart below shows the relative degrees of risk in various forms of gold investing such as futures:

GoldCore Pyramid

The futures contracts also must be rolled over every three months if you do not close them out sooner. Such rollovers cost quite a lot of money as the position must be entirely remade. It explains why investment professionals will advise you that if you plan to hold gold futures for longer than three months, you should just get gold bullion or gold ETFs instead. It is cheaper to acquire gold via either means than to pay the costs of rolling over consistently.

In any case, if you decide to pursue gold with futures, then you should treat gold futures contracts very carefully and seriously indeed. The fact remains that the vast majority of individuals who choose to trade futures contracts lose all or most of their money. This is the case even if you are right in your medium-term prognosis on gold. An unexpected short-term movement in the price in the meanwhile can spoil your plans.

To succeed at this, you will require both extremely sound judgement and ironclad nerves. This is why futures are generally best for those market trading professionals or shorter-term speculators who foresee a quick and large move in the underlying price of gold. Numerous individuals who have tried their hand in the futures markets with gold have been shocked by how fast their trading capital simply disappeared.

Gold Spot Forex Trading

You might also trade gold spot on the London market and prices using a Forex account. This spot price proves to be the actual world gold price for instant settlement. This is why it is utilized across the globe as the true reference point for gold prices. If you trade this market, you have the option to buy Gold (XAU) against a currency like the U.S. Dollar  (USD) or the euro (EUR). Since the world Forex market is the largest in the world with a typical daily turnover that amounts to $5 trillion, trading gold this way in ounces (as gold-currency pair XAU/USD or XAU/EUR) provides you with the greatest liquidity possible.

There are many advantages to this form of investing in gold, though you once again do not actually own any gold, but merely have a paper position in gold against a certain currency at a fixed price at which you execute the trade. The advantages to gold spot Forex trading are:

  • Completely flexible trading schedule – as the world Forex markets remain open 24 hours per day, five days per week
  • High leverage possibility – you can trade gold with as much as a fifty to one leverage ratio which can and will magnify gains and losses as it does with futures
  • Lowest possible trading costs – there are no commissions or fees, as all trading costs are intrinsic in the very tight bid to ask spreads

You can easily open a Forex trading account with a number of reputable and well-regarded Forex companies such as in the United States or the multiple industry award-winning Saxo Bank based in Denmark and with offices in London and Singapore.

Gold IRA’s

Self-directed IRAs allow you to invest in gold (as well as silver, platinum, and palladium bullion or coins) for your future retirement. It is the Internal Revenue Service which determines the requirements and allowable forms of gold that can be included in your Gold IRA. Other high ranking companies according to the repubale magazine Gold IRA Guide include Advantage Gold and American Bullion. Gold IRA Guide uses ratings from BBB, BCA, TrustLink and other sources to rank the Gold IRA dealers. Since many companies are pushing their customers into proof coins and numismatics, which are NOT IRA-approved instruments, it is important to work with a trustworthy company that will guide you and offer IRA-approved products that will pass IRS rules.

If you decide to acquire gold this way, you will not be able to withdraw it without penalties until you reach the IRS-allowed retirement age for distributions. You are able to purchase the gold with pre-tax dollars. You also will not be able to store the gold at home or in your local bank’s safe deposit box (unless they are an IRS-approved gold IRA administrator and/or custodian).

In order to pursue this form of gold ownership, you will need to:

  1. Select a well-regarded Gold IRA administrator.
  2. Open the self-directed IRA account with your chosen administrator
  3. Fund the account using either an annual contribution to your IRA, with a rollover, or using a transfer of assets.
  4. Give orders to your administrator as to which IRS-approved gold IRA coins or bullion you wish to purchase.
  5. After the purchase is made, the administrator will vault your Gold IRA physical coins or bullion with the IRS-approved third party custodian you select, such as Delaware Depository or Brinks Security.

Physical Gold Bullion

The final way you might chose to obtain gold is through a physical holding of it in the form of coins or bullion bars. This involves buying gold coins such as the South African Krugerrand, Canadian Maple Leafs, American Eagles, Austrian Philharmonics, Australian Kangaroos or U.K. Britannias. While gold bullion coins do retail for near the world spot gold price as determined in London, you still should expect to pay an over spot price premium of approximately four percent if you purchase larger quantities and around eight percent if you purchase smaller quantities. The transaction costs to sell will similarly run between four and eight percent on your reselling of the coins or bullion bars.

The alternative to bullion coins are bullion bars. They are readily available in a wide range of sizes from several grams to one kilogram and hundred ounce sizes. While London is the globe’s primary physical gold bullion market place, such bars can also be acquired from secondary bullion markets in Zurich, Switzerland and New York City.

All that remains to decide is whether or not you will accept delivery and physically inventory your gold or instead choose to accept delivery but store it offsite in one of several ways. We will consider the important matter of gold storage in this last section below.

Gold Storage Options

There are four basic means of storing your gold bullion from which you will need to choose if you acquire physical gold bullion directly. These are:

  • Physical ownership – you take the gold into your own custody and store it in a home-based vault or a safe deposit box at your local bank
  • Unallocated storage – you buy the gold and turn it over to a custodian which will show it as an inventory in their books and keep it as a part of their general gold bullion holdings in their collective vault
  • Allocated storage – you require the custodian to keep your personally purchased gold in segregated storage in their vault. Very few custodians even have their own vault, as most subcontract this service out to HSBC or JP Morgan Bank, so be sure you check out the service and custodian before agreeing to this
  • Offshore storage – you send the gold to a protected and insured storage vault in a secure and stable third party country outside of the one in which you live, such as Singapore, Switzerland, Hong Kong, or Canada. We look at the benefits of this option below:

The Benefit of Offshore Storage

Offshore storage provides you with a main advantage over physically holding your gold or trusting a custodian in the United States to keep it for you. The bullion can not be confiscated by the U.S. government via the Treasury or Justice Departments or tied up in court-based litigation when it is safely vaulted outside of the territorial United States and American jurisdiction.

You may think that the benefit of having the gold close to you at home (in the event of a national crisis) outweighs keeping it safely beyond the reach of the government or courts. One thing to keep in mind is that you would have an extremely difficult time leaving the country with the gold in the event of either a catastrophic event or a personal situation that made it necessary to depart quickly.

The empirical evidence proves that capital controls in every country which have suffered from disaster, including Russia, Argentina, Yugoslavia, Zimbabwe, and Iraq, made it next to impossible to leave with gold. In none of these countries was gold widely accepted as a currency when its citizens chose to stay and try to live off of their gold. Instead they had to try to sell it as contraband black market goods at significantly lower local prices than the world gold prices of the time.

In the best cases, having the gold close at home proved useless, while in the worst cases it invited personal danger or even disaster. Gold which you keep outside of your country in a safe and stable third party nation can be sold and imported back home in local currency easily though, as countries do not implement capital controls in the form of incoming investment.

Better than keeping your gold personally is to opt for a vault offshore which is insured and protected by a nation that boasts of high political stability, solid government finances, a sound rule of law tradition, and no international relations problems. This is why Switzerland and Singapore consistently score so highly as offshore storage location prospects.

Wesley Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, retirement, finance, expatriate living, international relations, investments, and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.