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In this article you will learn the possible ways to invest in gold and decide which way suits you best.

*For the purposes of this article, we will focus on gold, but the information applies to silver as well.

Why invest in gold?

In our article on asset allocation, we wrote about the wisdom of having a portion of a well diversified portfolio in gold.  

When we begin to accumulate savings, we are faced with the task of finding the best places to put it. One of the options in front of us is gold or silver bullion. Historically, gold and silver were a part of any pool of wealth, whether held by governments, institutions, or individuals.

The percentage of a portfolio dedicated to gold is a matter of wide differences of opinion; maybe 5% or less on the low side and on up from there.

Assuming that you decide that you should allocate a portion of your portfolio to gold, then you are faced with a multitude of ways to hold the metal.

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Gold bars and coins

Physical gold bullion is normally in the form of bars and coins.

Bullion coins are those that are mass produced and have value based on the gold content.

Collectible coins have value based on their rarity and age.

Collectible coins should be considered as an asset class separate from bullion coins. Their valuation has the added factor of relative rarity.

Where to buy gold bullion?

Let’s start with the premise that the only things you can say that you really own are those things that are in your own hands.

Gold held in other forms by various institutions is gold that is one step, or two or three steps removed from your own hands. In simple terms, we have to trust that the institution, and the institutions they contract with are sound and honest, and that they will reliably redeem our gold on demand either in bullion or cash.  This is not always the case.

We believe that the best way to make sure that you are getting real gold rather than counterfeits is to buy from a large established reputable precious metals dealer, like Money Metals Exchange – a dealer with over 100,000 U.S. customers.

Buy Gold and Silver - Money Metals Exchange

Government issued coins are generally regarded as the safest and most fungible way to hold bullion. You should be able to sell your gold back to the same dealer for a nominal fee.

Be warned that counterfeit gold is a reality, see a list of detection devices

 

Gold storage vault services

Banks often do not permit or insure the storage of gold coins or bullion in safe deposit boxes.  The next most secure way to hold gold after holding it in your hands is with a vault service, for example from a bullion dealer such as Money Metals Exchange.

With this method, you own specific bars or coins that are kept in storage in your account.  Be sure that the storage service holds specific bars or coins that belong to you and that you can retrieve at any time.  As in any financial services arena, there are risks of getting involved with less than honorable companies that will take advantage of you.  

The storage fees for gold and silver might be significant, but if you use an insured, established and respected service in a stable country, this is considered by many experienced investors to be the best way to hold gold bullion.

Holding a financial account in a foreign country might require reporting to the tax authorities in your country.  In the U.S. it may also require annual filing of a report as part of your tax return.

Gold bank account

Many banks offer gold accounts in different forms. These are usually designated as allocated or unallocated. These accounts are also subject to storage fees.

Allocated accounts are supposed to contain specific bars assigned to your account. Unallocated accounts are like common pools of metal without any specific bars assigned to your account, just an obligation by the bank to have gold backing for your holdings.

Bank held gold is convenient, but has a layer of faith involved. There are persistent stories as of this writing in 2018 of banks denying delivery of customer held physical metal and only offering cash settlement of allocated gold. We have no confirmation of those stories, but there have been cases of customers losing assets when banks were in crisis, as in Cyprus banks in 2012.

Gold Pools

A gold pool is a system run by a business or institution that offers customers metal as part of a pool that they promise to hold in their behalf. It is usually simple to get money in or out with a small fee.  The investor does not own specific bars and can only redeem in cash.

Pools offer convenience with no storage fees. The safety of the investment relies on the soundness of the entity operating the pool.  

Gold ETFs

There are now numerous exchange traded funds that offer various plans for holding gold for stockholders.

The share price usually represents a set quantity of gold, which may be reduced gradually over time due to subtraction of management fees.

ETFs usually offer plans for deposit and redemption of physical gold. This is usually limited to large institutions rather than individuals.

For individuals, ETFs are vehicles for gaining exposure to the price of gold. Additionally, they are convenient and inexpensive as a method for speculators to trade the price of gold. Again, their safety is controversial due to sometimes complex wording of their prospectuses, and their reliance on banks or even third parties to hold the gold.

Related reading:

Trading in Commodity ETFs

Closed End Funds

These funds are available in stock brokerage accounts, and are superior to gold bank accounts, gold pools, and gold ETFs, in our opinion.

  • They have a fixed quantity of metal in storage  
  • You can buy and sell shares just like any stock
  • The value of their metal holdings determines the value of the shares  

The net asset value (NAV) of the fund holdings per share is usually reported each day.  NAV is simply the current value of their holdings per share. 

The actual traded value on the exchange may be a bit over or under NAV at any particular moment.  Our favorites for safety of holdings are the Sprott Physical Bullion Trusts.

Gold backed IRAs

Gold bullion can be held in IRA accounts.  This sometimes requires opening an account with a company that can act as custodian.  Investors with IRA stock brokerage accounts can also use the previously mentioned exchange traded funds and trusts such as the Sprott Physical Bullion Trusts to more easily participate in bullion investing.

Comex gold futures

No discussion of gold bullion is complete without mentioning the Comex futures exchange.

The Comex is the elephant in the room regarding setting world gold prices. It is where the boldest and largest speculators, hedge funds, and bullion banks operate.

It is possible on Comex to buy gold for future delivery. There are persistent rumors that when individuals attempt to take delivery of gold that the Comex might insist that they take cash instead. We have no mainstream confirmation of those rumors.  Update:  Comex also has initiated what they call Exchange for Physical [EFP].  Instead of delivering gold themselves, they transfer the obligation to the London Metals Exchange.

Related reading: 

Trading future contracts

Trading and investing in gold and silver miners

Trading silver

Final thoughts on investing in gold

In summary, gold can be an important part of an intelligently diversified plan. If you are going to invest in gold, you should consider the risks and costs as with any investment.  Ultimately what is the best way to invest in gold is for you to decide. You need to pick one of the described options that suits your individual needs the most.