Advice on Buying Gold

Gold has always been a valued commodity and a popular investment, especially during times of economic uncertainty. Given the lackluster economy in recent years, it is no surprise that many investors have favored gold. There are quite a few different ways to buy gold, but two of the most popular ways are by purchasing gold bullion or by trading a gold-backed security. We will go over details about both of these methods below.

Buying Gold Bullion

American Gold Eagle CoinSome people like to be in physical possession of their investment, and for this reason, buying gold bullion in the form of gold coins or gold bars remains a highly popular way to invest in gold. However, we do not recommend this way of investing for most people because of relatively high transaction costs. Take gold bullion coins, for example. The most popular coin being sold is the American Gold Eagle, which is frequently sold as one-ounce coins. Given that gold’s spot price as of this writing is $1230, a smart investor would hope to pay somewhere near this price for an ounce of gold. Unfortunately, when you try to buy gold from a gold vendor, you will have to pay a much higher price. Even the most competitively priced gold dealers we found online charged $50 over the current spot price for a one-ounce American Gold Eagle coin. Shipping is usually another $25. Therefore, by the time you take possession of your gold coin, you would end up paying an extra $75 for one ounce of gold. The price of gold would have to rise about 6% before you even break even.

In addition to the unfavorable transaction costs, when you buy gold physically, you will need to figure out a secure way to store your investment. Safety deposit boxes and private vaults are both great options, however, there will be additional costs associated with storing your investment in such ways.

Buying Gold-Backed Securities

Trading gold-backed securities is a much more convenient method that costs you far less in transaction fees. A gold-backed security is sold just like a regular stock, and is backed up by actual gold that the company selling the security must hold in possession. The price of the security goes up and down in tandem with gold prices, and such instruments are also highly liquid. Moreover, the bid-ask spreads on gold-backed securities are minimal. The most popular gold-backed security is GLD, which is an ETF (exchange traded fund) that is traded on the New York Stock Exchange. The spread between the buying price and selling price of this instrument is sometimes as low as $0.01 per share, making it a far more favorable way to invest in gold compared to buying gold in the form of coins or bars. Although gold-backed ETFs do charge an annual expense ratio similar to mutual funds, such costs are usually quite low, with the maintenance fee for GLD being just 0.4%. You also need to pay transaction fees to your broker to trade these securities, but if you use a discount broker, such fees are usually under $10.

The only times buying physical gold may be more favorable for you compared to purchasing a gold-backed security is if you are 1) buying in very large quantities and 2) planning to hold the investment for a very long time horizon (10 years or more). In all other cases, we believe trading a gold-backed ETF such as GLD is a much wiser way to invest in gold.

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