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How to buy gold

Answers to the 5 most important questions to ask before buying gold

Profile picture of Kate Williams, Ph.D.
by Kate Williams, Ph.D. ConsumerAffairs Research Team

Gold and other precious metal IRAs are an investment and carry risk. Consumers should be alert to claims that customers can make a lot of money in these or any investment with little risk. As with any investment, you can lose money and past performance is not a guarantee of future performance results. Consumers should also obtain a clear understanding of the fees associated with any investment before agreeing to invest.

gold jewelry and cash

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, buying gold is thought by some to be a proven method for ensuring financial security.

We interviewed Don Durrett, long-time investor and author of the book “How to Invest in Gold and Silver,” to help answer the five most common questions about buying gold.

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    Question 1: When should you buy gold?

    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, research the type of gold you want to buy and keep your eye on the market.

    Since gold tends to perform well when the economy is in a recession, most people buy gold as a type of financial insurance policy to hedge their bets against the value of the dollar in the market. As a hard asset, gold holds its value even during times of inflation. For instance, the early 1970s would have been a great year to buy gold — its value increased from $35 per ounce in 1971 to $180 per ounce in 1974.

    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 policy. As long as you have physical gold or silver to sell or trade, you will never be broke, even if the economy collapses. It is relatively easy to buy a gold bar, and once you purchase it, you don’t need to do anything but store it.

    Question 2: What type of gold should you buy?

    Bullion bars and ingots are a relatively safe way to buy gold, though some investors prefer to invest in gold-focused mutual funds or exchange-traded funds (ETFs). For instance, gold IRAs are a type of investment retirement account that is backed by gold. They work similarly to a traditional or Roth IRA but hold bullion or coins instead of paper assets. To learn more, research how to find the best gold IRA company. Additional ways to purchase gold include:

    Gold coins
    Two of the most straightforward coins to buy and sell are the Canadian Maple Leaf and the American Eagle gold bullion coins. The 22-karat Canadian Maple Leaf typically sells well in countries outside of the U.S., while the 24-karat American Eagle bullion coin often sells well within the U.S. The U.S. mint also offers the 24-karat American Buffalo coin through reputable dealers, which costs more upfront and is less popular than the American Eagle. Other common bullion coins include the South African Krugerrand, produced by Rand Refinery and the South African Mint, and Australian Gold Kangaroo coins from the Perth Mint.
    Gold jewelry
    In general, jewelry is not a lucrative form of investment. Retailers add up to a 400% 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.
    Gold mining stocks
    Mining stocks are another popular form of gold 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. Gold stocks are a riskier, potentially high-profit investment.

    Buying gold bullion vs. mining stocks

    While many people prefer to have a tangible asset such as gold bullion or jewelry, investing in mining stocks can be a more lucrative investment opportunity that sometimes leads to greater wealth.

    Investing in mining stocks is riskier than buying physical gold bullions or coins, but the payoffs can be more significant and include dividends you won’t get when you buy a piece of gold. According to Durrett, “Mining stocks are potentially the investment of a lifetime opportunity because of the cash flow.”

    Still, this option may not be for everyone. During our interview, Durrett described successful investors of mining stocks as “contrarian” and “speculative.” He further noted that a successful investor would pay attention to their particular mining stock(s) daily and external factors, such as oil prices, geological events and natural disasters that can affect the price of gold.

    Because of the risk involved, some investors recommend starting 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, according to Durrett.

    “It takes at least one year to get a little bit of comfort level [and] an understanding of what they’re doing,” he said. There are many unknowns, but “over time you can understand what makes a mining company strong.”

    “You can have total control over it; If something crazy happens in the world you still have your gold bullion.”
    — Hunter Riley III

    However, one 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 stocks is as easy as clicking a few keystrokes.

    Even though he invests 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."

    Hunter Riley III, long-time investor and author of “Stack Silver Get Gold: How to Buy Gold and Silver Bullion Without Getting Ripped Off,” said that one of the main things gold bullion has going for it is that it’s a tangible asset you maintain control of, no matter what happens to the global economy.

    In his book, Durrett writes, “if you only want to maintain your wealth, then bullion is the place to be invested.” Durret also 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, including political events, geological events, flooding events, currency situations or new taxation rules. “You never know what you can get blindsided by.”

    Question 3: What outside factors can influence the price of my gold investment?

    The current price of gold is called the “spot price,” and it is constantly fluctuating. The spot price 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 5% to 8%) above the spot price, and you will sell for exactly the spot price.

    • Supply and demand: As with other commodities, increased demand causes gold prices to go up. Likewise, when supply is high and demand is low, gold prices go down.
    • Inflation: The cost of gold is typically inversely correlated to the value of the dollar. When the value of the dollar goes down, gold prices go up.
    • Seasonality: James Fraser and Kevin Pederson, authors of the book “The Mining Stocks Investor Guide,” recommend that investors stick to “the old saying ‘sell in May and go away’ as the summer months set in and prices tend to flatline.” By September, volumes pick up and continue to rise going into October and November. December can vary, and the market depends heavily on the gains investors have earned throughout the year.
    • Mint: It might seem like buying common mints of coins would yield a lower return than buying less common mints. However, the benefit is you can easily sell one of these more popular mints of coins when you need cash.
    • 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.”
    • Oil prices: According to Durrett, companies focused in Mexico and South America have low price structures but high energy costs, which can affect the bottom line.
    • Management: Fraser and Pederson advise investors to “always remember the number one goal of any management team should be to maximize shareholder value.” Durrett also 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.

    Question 4: Do you have to pay taxes when you buy gold?

    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.

    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.

    Question 5: I'm ready to buy gold. What do I do next?

    Gold bullion is sold in the form of bars or coins. You can buy gold online and from local gold dealers, pawnshops and jewelry stores. Here are some things to think about before you buy physical gold:

    Check current gold spot prices

    You should 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 need to understand what factors affect the price of gold. For instance, gold coin dealers maintain that numismatic 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.

    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 5% to 8% premium above the spot price for a gold coin.

    Find the right gold dealer

    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 typically charge customers more. But because you will always be selling your gold at the spot price, it doesn’t matter where you sell.

    Take some time to research reputable gold dealers to find a fair price on gold coins. In general, avoid buying gold online through bidding sites as you can end up in a bidding war and pay more for a gold coin than it is worth. Here are a few things to consider when you’re looking for a gold dealer:

    • Dealer buyback policies: Before buying from a gold dealer, investigate their buyback policies. Some dealers 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.
    • Reputation: Buying anything online poses risks, so be sure to do 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 ensure the dealers they advertise are trustworthy. Reading reviews on ConsumerAffairs is a helpful way to figure out which gold dealer is right for you.

    Consider storage options

    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.

    Remember, home insurance might not cover the loss or theft of your gold, and so this also may affect where and how you store your bullion.

    Tips to avoid gold scams

    Even though it is relatively easy to find and buy bullion, there are some risks to consider and research before jumping into your purchase. There are certain places and people to avoid when buying gold, such as 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.

    Buying gold is generally a sound investment strategy, but 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 see 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.

    • Proof coins: 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 ordinary coins currently in circulation. While these coins have a higher value for collectors, their monetary value is not guaranteed to stick around long term, making them a poor choice for investors.
    • Fractional coins: 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 have a higher premium.
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    Bottom line

    Gold has been a commodity for thousands of years. Its value has been relatively stable historically, and it tends to perform better when stocks are down. For these reasons, gold is a popular investment strategy for many people who want to diversify their portfolios. However, most financial advisors don’t recommend putting more than 10% of your assets in gold.

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    Profile picture of Kate Williams, Ph.D.
    by Kate Williams, Ph.D. ConsumerAffairs Research Team

    As a member of the ConsumerAffairs Research Team, Kate Williams, Ph.D. believes everyone deserves easy access to accurate and comprehensive information on products and businesses before they make a purchase. She spends countless hours researching companies and industries before writing buyers guides to make sure consumers have all the information they need to make smart, informed buying decisions.