When first investing in gold there is a few key things that you should be aware of. These are the key points that I have learned while investing in gold and I hope you find them useful so you don’t have to make the same mistakes as I did. First of all we need to realize that there is a lot of people out there that will try and scam you when your buying gold. Because gold is a commodity in a sense just like wheat or lumber there is not a lot of overhead for the businesses that sell gold. If you see commercials on TV about gold investing you should always think for yourself first: “How can they afford this expensive commercial?”
Because like I said there is not a lot of profit in selling gold so how do they make all this extra money to throw at a fancy commercial? Are they selling the gold for a much higher price then their competitors? Are they selling coins that they claim to be rare but really aren’t so they can boost up the price and therefore their margin? With this out of the way lets look at the different ways that you can invest in gold.
Paper gold or Physical gold?
There is two ways that you can invest in gold. You can buy gold from an Exchange-traded fund (ETF) which is almost like a stock. You are buying a paper claim into a fund, and this fund is suppose to be backed up by physical gold. For example the GLD which is a gold ETF means that the fund (GLD) owns gold and then you invest in the fund. You are not owning your own physical gold, it is all owned by the trust. Supposedly you can cash in your paper claim for gold whenever you want and take delivery of the physical gold.
If you read my post about Why you should invest in gold you might directly hear what I think of paper gold. Paper gold to me is much like holding the paper currency that you have in your wallet. It is not intrinsically worth more then the paper that it is printed on. A gold ETF is exactly the same and you can hear it from the name which has trust in it. The only reason this paper has any value is because you trust the ETF that they actually have your physical gold.
As you can see in this chart below that is absolutely not the case. There is now a RECORD 228 ounces of gold claims per every ounce of deliverable gold. So there is 228 people owning the same ounce of physical gold in the vault. If a fraction of the people owning gold ETF’s suddenly wanted to take delivery on their gold the trust would collapse. Makes sense right? If one person takes delivery of one ounce of gold then that means 227 people are left with nothing.
It should be very logical that this can’t go on for ever. A system built up solely on trust can’t keep doing this type of stuff without any consequences. The reason that you see the massive spike is because people are starting to realize that the trust doesn’t really have any physical gold so they are trying to take delivery on the existing gold, draining the trust. At the same time the ETF is selling more and more paper claims. Sooner or later this trust will be broken and the GLD will have no more gold for it’s customer to take delivery on.
When this happens then GLD will either completely default and not pay anything for the paper claims of gold that their customer bought. Or they will settle in cash. Giving you declining paper dollars for what every the price of gold is that day. This is obviously not the smart way to invest in gold.
Whenever I’m talking about gold investment I mean PHYSICAL gold investment. You should hold the actual metal yourself. Either in a safe at home or you can store it at a gold storage facility. Personally, I like the keep my gold close around me so if I ever need it I can quickly go get it.
Rule #1: Buy physical gold that you can see and touch. Not paper gold from a trust.
Gold Bullion or Numismatic Coins?
Once we have agreed on that we should invest in physical gold and hold it for ourselves, the actual metal, then what type of physical gold should we invest in? Currently there is two ways. The first one is to buy numismatic coins. What that means is collector coins. There are many collectors out there collecting nice and rare gold coins. This gold coins doesn’t just have it’s value from the gold itself. It also has value because the coin is rare and it is collectible.
Buying numismatic coins is a pretty big gamble. What you are speculating in is that the coin that you buy will be even rarer in the future and you will be able to sell it for a much higher price. Because the coin is only worth as much as someone else is willing to pay for it. If the coin isn’t that rare then it might actually fall in price. This can also be a huge gain if you know what your doing. So before investing in numismatic coins make sure you really know what your doing and what your buying.
A much safer and more stable way to invest in gold is to invest in gold bullion bars. These are the bars that you can see on TV and so on (in different sizes of course). When you are buying gold bullion bars you are just buying the gold. You will get more gold for your money then if you buy numismatic coins.
Also when you would like to sell your gold it is much easier to find a buyer for a gold bullion bar then for a numismatic coin. You need to find someone that wants your coin and is willing to pay the price that you want. With gold bars it is just the actual metal so you can sell it to a wide variety of people. You can sell it to the industry so they can use the gold to make products (Almost all electronics got some type of gold and silver in them). You can sell it to a jeweler that will melt it down to make jewelry, or you can just sell it to another investor just like you.
Buying gold bullion bars is my personal choice because I get more gold for my money plus I have a easier way to exit my investment if I would like to.
Rule #2: Buy Gold bullion bars and not numismatic coins.
What purity of gold should I get?
A very important thing to think of when you are buying physical gold bullion is the purity of the gold. When it comes to investing you want to have the gold as pure as possible. The purity is measured in carat where 24 carat is as pure as it gets at 99+%. That means that your bar contains above 99% of gold. Gold is a very soft metal so 24 carat wouldn’t be good to have in jewelry because it could easily be bent. For jewelry you often see maybe around 14 carat which is 58.5% gold and the rest is a mixture of other metals.
As I said what you want is 24 carat in your gold bar. So look for that or sometimes is also says 99.99% which is 24 carat.
Rule #3: Make sure you get 24 carat 99.9% pure gold in your bar.
What size should I get?
Alright, so we have decided that the best way to invest in physical gold would be in 24 carat 99.9% gold bullion. Next question is what size of the bar should we get? Believe it or not but size doesn’t matter. As long as you buy 24 carat gold bullion you should be fine. But I have a few thoughts on it.
Obviously the bigger the bar the cheaper the gold will be per ounce. If you buy a 100 ounce bar the price per ounce will be cheaper then if you buy a 1 ounce bar. If you get more of something then you will get a better deal, right? But I also think that there is a trade off. Because if you get a 100 ounce bar it will cost you a lot of money. Right now it would be around $120,000. So when you want to sell it you need to find one person with that kind of money as well to buy it. Where as if you buy smaller nominations more people will be able to buy it.
This doesn’t really matter though but it’s just a thing to think of. Buy what ever size that you are comfortable with. The important thing is that you are trading your declining paper dollars into hard physical 24 carat 99.9% gold bullion.
Rule #4: Buy what ever size you are comfortable with
I hope I answered some of your questions that you had about How you invest in gold. If there is any other question or you just want to say a few words don’t hesitate to comment. Let’s go over the rules again:
#1 Buy physical gold that you can see and touch. Not paper gold from a trust.
#2 Gold bullion bars and not numismatic coins.
#3 Make sure you get 24 carat 99.9% pure gold in your bar.
#4: Buy what ever size you are comfortable with