3 ways to invest in gold

Tina Haapala |

Gold… I’m rather neutral on gold as an investment; I can take it or leave it. However, a lot of folks are not just investing in gold, but are selling almost everything else to buy more. This is dangerous. But every investment would be, if you expected it to do it all.

We’ll look at how you go about investing in gold.

Up until recently, people invested in gold primarily by buying coins or bars from gold dealers. This was somewhat of a hassle as you had to 1) find a gold dealer, 2) drive to them, 3) pay a markup for the gold, and 4) get marked down when you sold it. For many, this is still the preferred method. There are several reasons for this.

By buying the gold itself, they get to hold it, rub it, put it under their pillow and sleep with it, put it on their dashboard and marvel at the sparkle. There’s just something about having a lump of gold that you can see and touch. Plus, they don’t like the other methods of investing in gold because either 1) they can’t see it so don’t trust it, or 2) they’re investing in a proxy rather than the gold itself.

Then there are those who want to buy physical gold because they want a working currency to use after an apocalyptic event (think Mad Max movies). They reason that paper money will be worthless, so they want gold and silver as a trade medium. Related to this is another reason that physical gold is valued: no one knows you have it. You can bury it in the back yard and no one’s the wiser. There are no monthly statements to give away the value of your wealth.

Unfortunately, if you own physical gold you have to store it somewhere. And someone could steal it from that somewhere.

Another popular way to invest in gold doesn’t involve actually investing in gold, and it eliminates some of the problems of owning physical gold. These people buy gold mining stocks, either directly or through a mutual fund. The idea is that since gold mining companies own gold mines, when gold goes up in value, the value of the mines (and thus the value of the company) will go up as well. In addition, if the value of gold falls flat, these companies will still dig up and sell gold, so they will make a profit.

The last method of buying gold is the newest: gold ETFs. An ETF, or more formally, an Exchange Traded Fund, is a mutual fund that trades on a stock exchange. They make investing in gold really easy. Just like buying a gold mining stock, you can buy these ETFs through your broker. You don’t have to store the gold or worry about someone stealing it. Also, the shares of these ETFs are backed by physical gold bullion, not gold mining stocks. Thus when gold goes up 10 percent, the ETFs go up 10 percent. Likewise on the down direction. There are two of them, ticker symbol GLD from State Street, IAU from iShares.You can find detailed information about these at http://statestreetspdrs.com and http://ishares.com.

Some warnings here: Gold ETFs are a special breed of ETF and have different operating parameters and tax implications. Also, while the ETFs are designed to mirror the price of gold as closely as possible, “as possible” doesn’t mean perfectly. As with any investment, do your homework before you invest.

This article was published as part of a 3 part series under the title "3 ways to invest in gold" in the Wichita Falls Times Record News on October 30, 2011.