How to buy gold
Answers to the five most important gold investment questions
by Kate Williams, Ph.D.
Director of Research
As a global commodity, the price of gold is not tied directly to the value of the U.S. dollar, and its long history as a global currency (dating back to around 550 BC) is a testament to its endurance as a valuable commodity.
Whether you are looking for a long-term investment or just want something tangible that you can sell quickly in the event of another economic crisis, investing in gold is thought by many to be a proven method for ensuring economic security.
This guide will answer the five most common questions about buying gold:
Why should you buy gold?
What type of gold should you invest in?
What do you do when you’re ready to buy gold?
How can you avoid getting scammed?
What outside factors influence the price of gold?
I’ve consulted with 16 investors and experts from around the country, combed through dozens of online articles and read 10 e-books on the subject to bring you accurate information so you can make an educated decision about how to buy and invest in gold.
Question 1: Why should I buy gold?
Insurance versus investment
There are two main reasons people buy gold: as insurance and as an investment.
People who are concerned about the recent economic crisis tend to view their ownership of precious metals as an insurance investment. As long as you have physical gold or silver to sell or trade, you will never be broke, even if the economy collapses. As nationally recognized gold expert, long-time investor and author of Stack Silver Get Gold: How to Buy Gold and Silver Bullion Without Getting Ripped Off! Hunter Riley III told me, one of the main things gold bullion has going for it is that “You can have total control over it… If something crazy happens in the world … you still have your gold bullion.” Tres Knippa, Investor, analyst and regular contributor on several networks including CNBC, Bloomberg and Fox Business, agrees with Riley’s sentiment, adding, “I am always in favor of owning the actual asset rather than some paper promise on those assets.”
While bullion is a relatively safe way to buy gold, many investors prefer to invest in precious metals to make a large profit. Mining stocks are a popular form of investment and can be lucrative. Instead of just owning a piece of gold, stockholders own a share of the process of mining gold by investing in companies that own mines. Investing in mining stocks is riskier than buying physical gold bullions or coins, but the payoffs can be greater, including a dividend that you won’t get when you buy a piece of gold. As Don Durrett, long-time investor and author of the book How to Invest in Gold and Silver, told me during our interview, “Mining stocks are potentially the investment of a lifetime opportunity because of the cash flow.”
Most common types of gold to buy
The most common ways for investors to purchase gold are:
Mining stocks: A high-risk, potentially high-profit investment that I will explore in more depth later.
Gold bullion: Available online and in gold stores, bullion can be bought as coins or bars. I will go into more depth on gold bullion later.
- Gold jewelry: In general, jewelery is not a lucrative form of investment. Retailers add up to a 400 percent markup on gold jewelry, making it unlikely that you will be able to recoup your investment or make money on top of it later. It is possible to find valuable gold jewelry at estate sales or antique shows that don’t have the added markup, but this is time consuming and only works if you really know what to look for. Because of all these factors, I did not investigate the ins and outs of buying gold jewelry as an investment for this guide.
Question 2: Bullion vs. mining stocks. Which is better for me?
Bullion is sold in the form of bars or coins. The two easiest types of coins to buy and sell are the Canadian Maple Leaf and the American Eagle gold coins. The 22 karat Canadian Maple Leaf sells best in countries outside of the U.S., while the 24 karat American Eagle gold coin sells best within the U.S. The U.S. mint also offers the 24 karat American Buffalo gold coin through reputable dealers, which costs more upfront and is less popular than the American Eagle. Other common gold coins include the Australian Gold Nugget and the South African Krugerrand. One long-time gold bullion investor explained to me that, while it might seem like buying common mints of coins would yield a lower return than buying less common mints, the payoff comes when you are able to easily sell one of these more popular mints of coins when you need the cash.
It is relatively easy to buy gold bullion, and once you have purchased it you don’t really need to do anything but store it. In fact, even though he prefers investing in mining stocks, Durrett recommends that people begin investing in gold bullion before jumping into stocks: “I always tell people to buy some physical gold or silver coins – buy them and stick them in a safety deposit box and see how it feels … do you feel like you’re smart?” If owning gold makes you feel more secure, it’s time to start thinking about investing in mining stocks.
Even though it is relatively easy to find and buy gold bullion, there are some risks to consider and research before jumping into your purchase. Here are six things to think about before you buy any type of physical gold:
1. Storage: Where will you store your precious metals? Bank safety deposit boxes are an option, but many precious metals investors don’t trust banks. You might prefer purchasing a home safe for your gold, which will add additional overall cost to your investment.
2. Insurance: Home insurance won’t cover the loss/theft of your gold, which also may affect where/how you store your bullion.
3. Taxation issues: In his book How to Buy and Sell Gold and Silver Privately, Internet marketer and business coach Doyle Shuler explains many of the complexities surrounding taxation and buying gold. Some states apply sales tax for gold, and others do not. Buying from an online dealer might be a way for you to bypass your state’s taxation law.
4. Scams: You will need to do some research to find a reputable gold dealer. Reading reviews on ConsumerAffairs.com is a helpful way to figure out which gold dealer is right for you.
5. Reporting: Many gold buyers are critical of the U.S. government and therefore do not want their gold purchase to be noted to the IRS. According to Shuler, simply paying cash isn’t enough to keep you off the grid. By law, precious metals dealers are required to report purchase amounts over $10,000 cash to the IRS. However, they are only reporting the amount of money that was spent per transaction, not what was bought or who bought it. Shuler recommends paying with a bank wire or check if you are purchasing more than $10,000 worth of gold in cash since banks do not report to the IRS.
6. When to buy: You will need to follow the price of gold for some time before deciding that it is the right time to invest. You don’t want to buy at the peaks, so you will need to understand what factors affect the price of gold.
Durrett emphasizes the risks involved with investing in mining stocks saying, “You can never think that mining stocks is a non-risky investment.” He explains that “anything can go wrong: political events, geological events, flooding events, currency situations, taxation rules; you never know what you can get blindsided by.” Because of the risk involved with mining stocks, Durrett recommends that new investors start small: Investors “really want to start out using money they can afford to lose until they get an understanding” of how mining stocks work and what causes their prices to rise and fall. “It takes at least one year to get a little bit of comfort level that they get an understanding of what they’re doing. There’s a lot of unknowns,” but “over time you can understand what makes a mining company strong.”
Durrett advises gold bullion buyers to buy from online companies and to sell locally, explaining that local retailers can’t compete with online stores and so charge customers more money. But because you will always be selling your gold at the spot price, it doesn’t matter where you sell.
While many people prefer to have a tangible asset such as gold bullion, bars and/or jewelry, investing in mining stocks can be a more lucrative investment opportunity that will lead to greater wealth. In his book Durrett states, “if you only want to maintain your wealth, then bullion is the place to be invested.” Durrett opted to invest in mining stocks, “since my focus has been on increasing my wealth and not just protecting it.”
Another benefit of investing in mining stocks over physical gold is that it's easier to sell. When you have physical gold, you need to find a physical buyer, which can be difficult and time consuming, especially when the market starts to go south. In contrast, selling mining stocks is as easy as clicking a few keystrokes.
While it may be lucrative, investing in mining stocks isn’t for everyone. During our interview, Durrett described successful investors of mining stocks as “contrarian” and “speculative.” He further noted that a successful investor will pay attention not only to their particular mining stock(s) daily but also to gold generally and external factors such as oil prices, geological events and natural disasters that can affect the price of gold.
Question 3: I'm ready to buy. What do I do next?
Know when to buy
As with all investments, the general rule of “buy low, sell high” applies to gold, whether in coin, bullion or stock form. To know the right time to buy, you need to do some research and keep your eye on the market. If you’re going with stocks, you will want to pay attention to the market for a few months before deciding that the timing is right.
Understand how gold is priced
The price of gold is constantly fluctuating, and the current price of gold is called its spot price. This reflects the most recent average bid price according to global professional traders. Several things can influence the spot price on any given day including war, the central bank, supply and demand and the size of the average transaction. When you buy gold, you will buy at a percentage (generally five to eight percent) above the spot price, and you will sell for exactly the spot price. Dealers maintain that gold coins are worth more than just the metal contained inside of them, which is how they can justify charging a premium when you buy. There's really no getting around this, so be cautious of any dealer who claims they aren't charging a premium.
Find the right dealer
Take some time to research reputable gold dealers to find a good price on gold coins. In general, avoid buying gold online through bidding sites as you can end up in a bidding war and end up paying more for a gold coin than it is even worth. Here are five things to consider when you’re looking for a gold dealer:
1. Price: Shop around dealer websites to make sure you are paying a fair price for gold. Check exchange sites to find out what the spot price is for gold. You should expect to pay a five to eight percent premium above the spot price for a gold coin.
2. Dealer buyback policies: Before buying from a gold dealer, investigate their buyback policies. Some dealers will charge a premium for you to sell back your gold, while others will not add any additional charge. Get the buyback policy in writing, and keep it in a safe place for the future.
3. Reputation: Buying anything online poses risks, so be sure to do some thorough research before deciding on a dealer. The U.S. Mint’s listing of gold dealers is a good place to start. While these dealers are not affiliated with the U.S. Mint, the Mint has done some checking to make sure the dealers they advertise are represented by the Better Business Bureau. Reading consumer reviews is one of the best ways to tell if you are working with a reputable dealer or a scam artist.
4. Red flags: While buying gold is generally a sound investment strategy, there are some red flags to consider when you’re shopping around for a dealer. Dealers that offer free storage or delayed delivery might not be legitimate, and you may never end up seeing the gold that you paid for. Store your gold in your own safe or safety deposit box to reduce your likelihood of getting taken advantage of.
5. Key sellers to stay away from:There are certain places and people to always avoid when buying gold including Craigslist, online dealers offering massive discounts, pawnshops, TV ads, cold callers and any dealer without a brick and mortar location since there is no way of verifying that the dealer actually exists. Don't give in to the pressure of late night telemarketers insisting you call them immediately for a limited time discounted rate on gold. Take your time to find a reputable dealer.
Question 4: What common mistakes can I avoid?
Avoid buying proof coins if you are using gold as an investment. Proof coins are commemorative coins that usually come in a special case and are finely polished to look more attractive than normal coins. While these coins have a higher value for collectors, their monetary value is not guaranteed to stick around in the long-term, making them a poor choice for investors.
Coins are available in a variety of fractions including a half-ounce, quarter-ounce, even a twentieth-ounce. You are better off buying a full ounce because the fractional amounts are charged at a higher premium.
Exploration mining stocks:
Durrett emphasizes that investing in exploration mining stocks is “Very very risky because it’s so difficult to find a mine. Only one in about 500 deposits that they drill actually become a mine.” And while the odds might seem to be in favor of a big payout if the exploration company actually finds a mine, “shareholders who invest in successful exploration mines don’t end up making that much.” Instead, the exploration company will “sell it to somebody else. A company can find a billion dollar mine, but then they sell it and only make 50 million, which is what is split among the shareholders.” Because of the risk involved for minimal gain, it is best to avoid exploration mining stocks, especially when you are first starting out.
Question 5: What outside factors can influence the price of my investment?
Durrett writes in his book that, “You will often find that companies focused in Mexico, South America, or other third world countries will have low price structures. But beware of energy costs. As oil prices rise, this will affect the bottom line--profit..”
James Fraser and Kevin Pederson, authors of the book The Mining Stocks Investor Guide (Miningstocksguide.com), recommend that investors stick to “the old saying ‘sell in May and go away’ as the summer months set in and prices tend to flat line. Come September, volume starts to pick up again, most noticeably in October and November. December can be a tricky month with tax-loss selling to consider and depends largely on the level of gains that investors have achieved during the year.”
Country of origin:
According to Fraser and Pederson, “First, you want to determine which region of the world the project is in and avoid regions of the world where there is political and social unrest, dubious law enforcement, confiscatory royalty mindsets, nationalization ‘rumors’ and high taxation.”
Fraser and Pederson advise investors to “Always remember the number one goal of any management team should be to maximize shareholder value.” In addition, Durrett advises investors to pay attention to the websites of management companies and to consider it a red flag if a management company doesn’t send out newsletters and update their website with market trends and news.
Durrett anticipates the price of gold to rise to $2500/ounce by the end of this decade, meaning now is a great time to buy gold. Whether you are buying gold as an insurance policy or as an investment, make sure to do your research and take your time learning the ropes of buying and selling gold. Consumer reviews are a great place to start researching gold dealers, so be sure to read through the reviews on ConsumerAffairs.com.
- 2/13/17 Last Updated
- 16 Experts interviewed and consulted
- 32 Hours spent doing research
- 27 Articles & studies analyzed
- 94% Found this helpful