Gold is an essential part of any investor’s portfolio. It acts as a hedge against inflation and can help protect your assets when markets are down. But buying and holding gold isn’t as simple as it may sound. One doesn’t simply stash gold bars under the bed.
As with anything else, there are rules of thumb to follow when it comes to buying and owning gold. Make sure you pay the right price for your gold and you have a safe place to store it. If you invest in gold stocks or exchange traded funds (ETFs), make sure you choose the right ones. Finally, don’t try to make scrap gold a part of your investment portfolio.
Don’t Overpay for Gold
Overpaying for gold is one of the most common mistakes new gold investors make. According to Alix Steel of TheStreet.com, you shouldn’t pay more than five to 10 percent above spot price for gold. Some gold dealers will, however, charge premiums of up to 75 percent for their gold, especially for gold cast into coins.
Figure out the premium by subtracting the spot price of gold from the price the dealer is asking. Divide that number by the spot price and then multiply it by 100. The resulting percentage will let you know how much your investment needs to earn so you can break even.
Don’t Forget to Find a Place to Store Your Gold
When you buy physical gold, you need to have a safe place to store it. Many new gold investors make the mistake of buying gold without first arranging for gold storage and insurance. Many gold vaults have limited storage space, so you should find a place to put your gold before you buy it. You’ll also need to buy insurance, in case the vault suffers a burglary or other misfortune. Don’t forget storage and insurance costs will lower your returns.
Don’t Buy the Wrong Gold Stocks
When you buy gold stocks, you’re investing in a gold mining company. Buying gold stocks isn’t the same as buying physical gold or even gold ETFs (more on those in a minute). While buying gold stocks can be a wise investment and a strong part of your portfolio, you should approach an investment in gold stocks the same way you would approach any other investment.
That means you’ll need to choose gold stocks based on sound company management, low production costs, strong reserve growth, the safety of the area in which they operate and their ability to match returns as closely as possible to the going price of gold. However, because you’ll be investing in a company rather than buying the gold itself, your returns probably won’t match the returns you’d get from investing in physical gold.
Don’t Buy Gold that Doesn’t Exist
Gold ETFs are exchange traded funds that allow you to own a paper representation of a certain amount of gold. A custodian, like JP Morgan or HSBC, keeps the gold itself. However, when you buy gold ETFs, you don’t buy actual gold; you can’t redeem your ETF shares for physical gold.
When these funds need to meet investor demand for more gold, they may buy gold futures contracts instead of physical gold. Because gold contracts are no longer redeemable for physical gold either, you may be buying into a combination of physical gold and futures contracts.
It can be hard to tell if the gold in an ETF actually exists. Even if it does, it can be sold short — so that two people technically own the same gold. There is some debate as to whether there is enough gold to cover the claims held by the various ETFs. You might also pay more in fees than you would if you just bought and stored physical gold.
Don’t Buy Scrap Gold
While it might be tempting to buy up old gold jewelry at thrift stores and yard sales instead of buying expensive gold bars from a dealer, scrap gold isn’t a worthwhile investment vehicle. Scrap gold isn’t as pure as the gold that’s traded on the open market. When gold is made into jewelry, it’s alloyed with other metals to make it stronger. You’ll struggle to find a buyer for scrap gold unless you’re able melt it down, form it into bars or coins and assay it. The expense of going through that process would considerably reduce any returns.
Investing in gold can offer you some security in an uncertain market, but as with any other investment, there are pitfalls along the way. If you can avoid some of the most common mistakes gold investors make, you’ll find this precious metal protects your portfolio from inflation while offering substantial long-term returns.