Gold and other precious metal IRAs are investments 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 clearly understand the fees associated with any investment before agreeing to invest.
Gold has been a popular investment option for centuries, and it's not hard to see why. Not only is it a safe-haven asset in times of economic uncertainty, but it also provides investors with a tangible way to hedge against inflation.
“Investing in gold can also help you diversify your portfolio because it doesn't move the same way as stocks and bonds,” said Drew Rathgeber, owner of ProGoldTrader. “This means that adding gold to your portfolio can help lower the risk of your entire portfolio.”
In today’s times, investing in gold doesn’t mean hiding away solid gold bricks. Instead, there are several investment options you can choose from that don’t even require you to store the gold yourself.
Key insights
- Although gold is considered a safe-haven investment, its prices can fluctuate in a short period.
- Physical gold requires safe storage and security, which can add to the costs of investing in gold.
- Investors can buy gold in various forms, such as bullion bars, coins, exchange-traded funds (ETFs) and individual retirement accounts (IRAs).
Pros and cons of investing in gold
In times of crisis, gold is touted as the most reliable investment. While these claims can be very biased, it is good to consider that investing in gold has advantages and disadvantages, like other investment choices.
Pros
- Hedge against inflation: Gold has traditionally been viewed as a hedge against inflation because its price tends to rise when the cost of living increases.
- Diversification: Gold can provide diversification to an investment portfolio because its price often moves inversely to stock prices.
- Limited Supply: Gold cannot be manufactured like a company issues new shares or a federal bank prints money. Its finite supply provides inherent value.
- Liquidity: Gold is a highly liquid asset, which means it can be bought or sold with relative ease. Regardless of the country you're in, gold is universally accepted as a valuable commodity.
Cons
- No guaranteed future return: The price of gold can be significantly affected by speculation and sentiment, making it potentially unpredictable.
- Storage and insurance costs: Physical gold needs to be stored and insured, which can incur additional costs.
- Price volatility: While gold can be a hedge against inflation, its price can also be highly volatile. This means that the value of your investment can fluctuate rapidly in a very short time.
- No passive income: Unlike stocks and bonds, investing in gold doesn't provide any passive income, such as dividends or interest.
Due to these pros and cons, gold investment is typically recommended as a supplement rather than as the foundation of a portfolio.
Ways to invest in physical gold
You can buy physical gold from precious metals dealers, banks or individual sellers or retailers. Most people purchase gold bullion when buying physical gold for investment purposes. These assets are typically stored in a home safe or with a bank or other depository.
Bullion refers to gold that is at least 99.5% pure.
Gold bullion
Physical gold bullion can refer to any gold bar or ingot that is at least 99.5% pure gold (i.e., 995 parts per 1,000 fine gold). Gold bars must weigh between 350 and 430 troy ounces (roughly 11 to 13 kilograms), but ingots can come in various shapes and sizes.
Gold coins
You can find bullion coins as well as numismatic, or collectible, coins. Collectors’ coins can sell for a higher premium than bullion because of their added numismatic value. However, it’s important to purchase through a reputable coin dealer if you want to invest in gold coins — you don’t want to wind up with a stash of gold-plated nickel. Popular gold coins include the Krugerrand, the American Gold Eagle and the Canadian Gold Maple Leaf.
- Proof coins: You’ll want to avoid buying proof coins if you’re investing in gold. Proof coins are commemorative coins that are typically polished and in special packaging to look more catchy than ordinary coins currently in circulation. While this type of gold coin has a higher value for collectors, its monetary value is not guaranteed to stick around over the long term, making it a poor choice for investors.
- Fractional coins: Coins are available in a variety of fractions; there are half-ounce, quarter-ounce and even twentieth-ounce options. You’ll be better off buying a full ounce because the fractional amounts have a higher premium.
Gold jewelry
Investing in gold jewelry makes sense because it holds value and is easy to liquidate. Like coins, jewelry might have added value based on its rarity and craftsmanship. Some people prefer gold jewelry because it can be worn and passed down from generation to generation.
» MORE: How to buy silver
How to invest in gold assets
In addition to buying physical gold, you can put your money into funds that hold assets related to gold, such as gold ETFs or futures contracts, or a retirement account backed by gold. Additionally, you can invest in a gold fund on the stock exchange, such as the SPDR Gold Shares (GLD), which holds gold in reserve.
Gold IRA
Many investors diversify their portfolios with a gold IRA as a supplement to retirement savings. Instead of buying traditional stocks and bonds, this type of retirement account is backed by gold or other precious metals.
Gold ETF
Gold exchange-traded funds are passive investment instruments based on the price of gold bullion. Rather than investing in physical gold, you can get an ETF, which is based on the changing value of gold and gold-backed assets. A gold ETF is a relatively affordable option for a new investor. This investment is also ideal for traders or those who don’t wish to own gold bullion or coins.
Gold stocks
Owning stock in a gold mining company is a popular alternative to owning actual gold. However, this kind of investment can be vulnerable to the volatility of the stock market. Gold miner stock prices are based on the movements of gold, and therefore the values of the stocks reflect the value of gold.
Gold futures
Futures options are contracts between buyers and sellers stating that the buyer will purchase gold at a guaranteed price in the future. Gold futures options are worth what others have committed to paying for the commodity at a future date. In other words, the buyer doesn’t have to fund the investment upfront. Some investors seem to like gold futures options because they think they offer more leverage and flexibility.
Gold mutual funds
With mutual funds, several investors pool their money together to purchase securities. Gold mutual funds are available through commercial banks, investment companies and other financial institutions.
» MORE: Physical gold vs. ETFs
How to find a gold dealer
When you are ready to invest in physical gold, it's important to work with a reputable gold dealer. Most gold dealers are available for purchases online or over the phone, so you can purchase gold wherever you live. We recommend using a gold dealer that has more than 10 years in the business since these companies have an established track record. Ensure the dealer has transparent pricing and policies and positive customer reviews.
The most common complaints from our reviewers about gold dealers and buying gold online are hidden fees and delayed shipment times. Dealers will often charge a premium over the spot price, so know what the current gold market value is to determine how much your dealer is charging for the spot price. Always request a receipt for your transaction and ensure that the gold’s purity, weight and serial numbers are marked on it.
FAQ
How is the price of gold determined?
Since it’s a commodity, the gold price is largely determined by supply and demand. Investors pay the most attention to the gold spot price, which represents the real-time value of 1 troy ounce of gold. The gold spot price is derivative of future contracts over the month, and it’s recalculated each day.
Do I have to report my gold investments on my taxes?
Sales of physical gold must be reported on Form 1040 of your tax return, according to the IRS. Gains from investments in physical gold and ETFs are taxed as collectibles. Additionally, the regular rules for taxes and penalties on IRA withdrawals also apply to gold IRAs. For more, read about how to trade gold.
Is buying gold coins a good investment?
Buying gold coins can be a good way to diversify your portfolio and provide access to a stable asset. However, it’s not a good idea to invest solely in gold coins because their value can fluctuate significantly.
Bottom line
Investing in gold can be a valuable addition to any diversified investment portfolio. While the price of gold can be volatile, it has historically served as a safe-haven asset during times of economic uncertainty. Whether you invest in physical gold, gold ETFs or gold mining stocks, it's important to understand the risks and benefits associated with each investment option.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- IRS, "Issue Snapshot - Investments in Collectibles in Individually-Directed Qualified Plan Accounts." Accessed Dec. 1, 2023.
