Okey, so you have understood that gold is a very good investment. Next big question is: How should I invest in Gold? It’s a jungle out there with tons of different products to invest in, but what’s the difference between them? Which one should you invest in?
The first thing we need to investigate is the difference between investing in physical gold or in financial gold products. Financial gold products are things that I like to call paper gold because it is very similar to invest in the stock market. After your investment you own a piece of paper saying that you own some physical gold that is stored somewhere else.
A very popular gold investment vehicle is a gold Exchange-Traded Fund, or ETF for short. A ETF is a financial instrument that closely mirror the price of something. It tracks the performance very closely to the real asset. The reason why ETFs are popular is because it makes it easy to invest in an asset that would otherwise be hard to hold in your portfolio.
Bottom line is that you do not hold or store the asset yourself. You invest in a company that supposedly holds the real asset and whenever you want you can swap in your paper claim and take delivery of the real asset to hold in your personal possession. This is why I like to call these financial instruments paper gold. Because you just own a paper, claiming that you own gold.
Paper Gold vs. Physical Gold
If you invest in paper gold through a ETF you are investing in trust. You trust the financial instrument that it should closely track the price of gold. I mean if gold price went up and the ETF didn’t then that would be pointless, right?
This trust has been good so far but there is another trust that makes me not invest in paper gold. You trust the ETF that they have enough physical gold so that if you ever wanted to take delivery of your physical gold then you can trade in your paper gold for physical gold.
So you need to trust the fund that they have enough physical gold so that if a lot of people want to take delivery at the same time they wont go bankrupt.
Say if there was 10 ounces of physical gold in the vaults and out of 100 customers of the ETF 10 of them wanted to take out 1 ounce each. This would make the ETF bankrupt right? There is no more gold but there is still 90 people that thought they owned gold and could take delivery on it if they wanted to.
So of course if we should invest in gold by buying ETFs we want to make sure that the ETF is financially sound and have enough gold that we can trust them to deliver my gold if I want to.
Lets have a look at an actual example. The chart below is the Comex gold cover ratio (which is the big financial paper gold instrument) between number of paper claims, people that think they own gold and can take delivery if they want. Over the amount of physical gold in the vaults.
As you can see there is 228 paper claims for every ounce of gold! So if one person in the fund wants to take delivery of their gold that means that 227 people will be left without any gold. Or if 0.45% of the people in the fund wanted to take delivery of their gold the fund would go bankrupt. No more gold in the vaults.
That a lot of people want to take delivery of their gold at the same time is a very probable event. If we for example have a spike in gold price or some sort of big negative economic event this can drive people to want to take possession of their gold.
See how it spiked after 2013? I think the fund just keep selling more and more of these paper claims to gold without actually having any more physical gold in the vaults. This will obviously not end well so please don’t invest in paper gold and get stuck in this mess.
If you want to invest in gold make sure that it is physical and in your possession. That way the gold is “outside” of the financial system and what ever happens you will still have your gold. By investing in paper gold you can see from the chart above that you actually don’t have any gold. And it is very unlikely that you can take delivery if a few people want to take delivery at the same time.
Numismatic Gold Coins or Gold Bullion?
Once we have understood that we should invest in physical gold instead of paper gold then the next question is: What type of physical gold should I invest in? There are two major ways to invest in physical gold. That is either by numismatic gold coins or by gold bullion.
So what do I mean by numismatic gold coin? A numismatic gold coin is often referred to as a collectors coin. The coin is very rare so the value, or price, is not just in the physical gold metal in the coin. It is also in the rarity and the collectible value of the coin.
Often these coins have their external value because they are historical coins, a one-of-a-kind coin or by some other factor that make the coin special. Although there is nothing wrong with investing in numismatic gold coins it is not the way that I invest in gold and you should really know what you are doing before you invest in numismatic coins.
The first reason why is because it is very easy to get scammed when you invest in numismatic coins. I have heard a lot of horror stories of people investing in a coin that the dealer said was very rare and only a few copies existed just to later on realize that the dealer sold way more copies of the coin then he said. And of course because there are more copies of this “rare” coin it is not so rare anymore and the coin is worth way less then what you paid for it. Thinking it was rare.
The second reason why is because it is very hard to sell. If there comes a time when you want to sell your gold, maybe because you just need to cash right now, it is way harder for you to find a buyer. You need to find someone that wants exactly the rare coin that you have and is willing to pay the price that you want for it. This can take months or even years to sell.
The third reason why is because you get a lot less actual metal for your money. Because most of the value in the coin is not in the actual metal but in the rarity of the coin you get less for your money. If you buy one numismatic coin you can maybe for example get 5 regular coins. Giving you five times as much gold as if you were to invest in a numismatic coin.
So personally when I invest in physical gold I invest in gold bullion. Gold bullion is the gold bars that you probably have seen in the movies. I want to pay as little as possible for my gold over the actual price for the metal. This way I get as much gold as possible for my money, which is my goal.
It is also much harder to get scammed because you can just look up the price of gold and compare that to the gold bullion bar that you want to invest in. How much more money over the price of metal do you have to pay at company X compared to company Y?
You don’t have the same problem as numismatic coins to try and figure out the value of the rarity. You can base your investment strategy on facts instead of predictions.
If you want to sell a gold bullion bar it is very easy. You do not have to find a person that wants the specific gold bar that you have. You just need to find someone that wants to invest in physical gold, because that is what your selling. And if you really need to sell it quickly you can sell it to bullion dealers instantly.
So what did we learn?
I hope that this blog post was valuable for you and that you now know exactly how to invest in gold. You should invest in the physical metal itself and not a financial paper saying that you (hopefully) own some gold.
You should also invest in gold bullion, or bars, instead of rare numismatic gold coins if you don’t know exactly what your doing and have a thorough understanding of the value of the coin.
Please leave a comment below if you have any other questions. I have been investing in physical gold personally now for about 10 years now and I love talking about gold. So any questions just leave a comment. Thanks.