How to Invest in Gold
Does anyone else remember those gold prospector commercials that were all over late-night TV about five years ago? They gave you a green pan for sifting and a booklet that gave you great places to look all across the country. Supposedly, with those two items in hand, you were set for getting rich!
Once again, gold fever has taken hold. The only difference is that it’s not just the outdoorsy-type getting in on the action. With prices tripling over the last five years, everyone seems to be seeing gold.
Why Gold?
Right now, people are interested in owning gold for security. Generally people fear that currency will become less valuable either through inflation or possibly even a breakdown in social order. In the height of the financial crisis of 2008, people were worried if the banking system collapsed they wouldn't be able to get money from their ATM. Obviously the fact that gold has appreciated so quickly suggests that you can make money with gold. So if you are interested, how can you make money off of gold?
Gold ETFs
We've talked about what an ETF is. Basically it allows you to buy gold like a stock. The most popular gold fund is GLD, and its price should basically track the price of gold. The obvious appeal is that you can invest in the ownership of gold without the fear that accompanies trying to store it somewhere.
Coins and Physical Gold
Of course ETFs have the downside that they're dependent on the banking system functioning correctly. While it may sound crazy, preparing for a banking collapse didn't seem so "out there" in 2008. Taking possession of gold has certain security risks as well as high transaction costs.
Mining Stocks
This is probably the most conventional way to try to profit from a rise in gold prices. Just like countless other companies, mining companies also sell shares to help finance new ventures. What that means is that you can enjoy the success of others going out and doing the mining. No need to buy a pan and get your hands dirty. Just buy some stock in the company, then sit back and watch the price of gold rise. Of course, if the company is poorly managed or has an accident, the price of the stock could go down even if the price of gold goes up.
Gold as an investment is very complicated. Typically when you "invest" in gold you're simply trying to keep your value intact, not make your money work for you. A popular point is that an ounce of gold would buy you a nice suit in 1850, and it would buy you a nice suit today. Obviously whether gold is a good investment depends on a wide variety of factors.
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MoneyCone wrote:
Wed, 01/26/2011 - 17:16 Comment #: 1Pay attention to taxes. Gold is taxed at a much higher rate than stocks.
Jessica Schmeidler wrote:
Wed, 01/26/2011 - 18:24 Comment #: 2Good tip. Thanks, MoneyCone.
Robert wrote:
Thu, 01/27/2011 - 02:36 Comment #: 3You can also short gold via GLL. If you are bearish on it, could be useful!
Money Reasons wrote:
Thu, 01/27/2011 - 02:50 Comment #: 4As India and other countries (but mainly India) continues to become more wealthy, those countries will become a driver for gold demand (or so I've been told by an Indian friend). As to what degree, that I do not know... I wonder how much higher gold can appreciate? Seems so high already...
@MoneyCone: Really? Gold is tax at a much higher rate than stock. I had no idea... how interesting!
Jessica Schmeidler wrote:
Thu, 01/27/2011 - 04:31 Comment #: 5Hi, Robert! I'm glad you stopped by. You're quite right; thanks for the additional information.
Jessica Schmeidler wrote:
Thu, 01/27/2011 - 04:35 Comment #: 6I'll add India to my watch list. As far as how much higher it can go, I've read people on both sides of the fence on that issue. So, someone tell ME. :)
Ace wrote:
Sat, 01/29/2011 - 16:37 Comment #: 7This post is disappointing. If you were interested in buying gold, the time to do so was five years ago. Buyers right now are getting in when prices are high. What happens next?
Gold is an investment that fluctuates according to market conditions like anything else. It has gone up--and it will go down (then up again, then down again, etc.).
Also, gold "for security" is a silly concept. Gold is only worth as much as it can be traded for cash. You're not going to buy groceries in gold, are you? And how is gold a hedge against inflation when it's value fluctuates just as much as any other commodity, stock or currency? People buying gold because they were worried about banks collapsing and not being able to get money from an ATM is laughable. What was their plan? Sell gold on the street to passersby?
I don't mean to be an absolute naysayer, but many who invest in gold are confused into thinking it is some unique, indestructible, commodity with unlimited value. Gold is only as valuable as long as others are willing to buy it. If you truly believe a worldwide economic meltdown is impending, gold makes very little sense. However, recognizing that gold is just like any other investment, it has a place in any diversified portfolio (a small place). At today's prices, though, gold looks much more like a bubble than a safe haven.
MomVesting wrote:
Sat, 01/29/2011 - 20:29 Comment #: 8Thanks for the comments Ace. I am not terribly bullish on gold and I think each of the alternatives you present have advantages and disadvantages. Maybe we'll do a post on the subject.
Invest It Wisely wrote:
Wed, 02/02/2011 - 15:05 Comment #: 9The taxation is a cruel aspect of it, indeed. I'm not completely sure how that is handled up here in Canada, actually, but at least you don't have to pay sales tax if you buy physical gold, silver, or platinum.
Canadian Finance Carnival #33 – Canadian Finance B wrote:
Sun, 04/24/2011 - 08:48 Comment #: 10[...] Jessica at MomVesting presents How to Invest in Gold. [...]