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Lesson 5: Buying Gold

Lesson 5: Buying Gold

Before buying gold, it is important to understand some of the factors that make gold unique and what moves the price of gold.

For generations, gold has been a valued commodity. Gold has been used as a currency and a symbol of prosperity and power throughout history.

This long-term value indicates gold's consistency and desirability throughout time. Investors believe gold to be one of the safest investments, as it quickly recovers its value during economic downturns. Its price often moves in the opposite direction of the stock market or economic fluctuations.

When investor confidence is shaken, gold prices rise as worried investors seek a safe haven for capital removed from the market. In times of inflation, gold is also a safe haven since it holds its value far better than currency-backed assets, which may arise in price but fall in value.

Gold as an Investment

Before buying gold, it is important to understand some of the factors that make gold unique:

  • Newly minted coins are typically 90% to 99% gold.
  • Gold provides no income stream unless you own stocks or mutual funds that pay dividends.
  • Owning gold stocks does not entitle you to possession of the metal.
  • You may incur a cost to store physical gold.
  • While the current supply is limited, as the price rises it makes more mining economically feasible, which could increase the supply.
  • Because much of the metal is not used for any economic purpose other than the creation of Jewellery, demand is not a function of genuine necessity.
  • Due to the concentration of gold holdings within a few governments and central banks, gold is subject to significant price volatility when these institutions buy and sell.

Investing in gold is not like buying stocks or bonds. You can take physical possession of gold by buying gold coins or buying gold bullion. Bullion is gold in bar form, with a stamp on it. The stamp contains the purity level and the amount of gold contained in the bar. The value of the bullion or coin comes from its precious metals content and not its rarity and condition, and it can change throughout the day.

You can also buy stock in gold mining companies, gold futures contracts, gold-focused exchange-traded funds (ETFs), and other regular financial instruments. If investors purchase a gold-backed ETF, they are purchasing shares of a trust's ownership in gold but have no claim to the physical gold itself.

Investing in gold with the idea it never loses value is the wrong approach. Like any investment or financial asset, gold is subject to supply and demand pressures that cause the price to fluctuate.

How to buy Gold

Gold's attractiveness has made it a tempting asset for those seeking diversification and the spreading of their risk. There are many ways to buy gold, both for decoration and as an investment. To many, it's also a hedge against economic upheaval, war, inflation, and global uncertainty.

Buying Gold Coins

Buying Gold Coins

Several countries are actively minting uncirculated gold coins. They are all legal tender, but their meltdown value is significantly greater than their face value. Many numismatic (collectible) coins have even higher market prices. Collectors are drawn to coins due to the obvious potential for rising value because of their rarity and demand.

Newly minted coins are affordable, and the government mints that create them guarantee their purity. The American Eagle, Canadian Maple Leaf, South African Krugerrand, Vienna Philharmonic, Mexican Gold 50 Pesos, British Sovereign, Australian Kangaroo, and United States Mint 24K Gold Buffalo are also popular choices. Some of these coins come in a variety of sizes to suit both large and small investors.

Buying Bullion or Bars

Buying Gold Bullion

While many people associate bullion with the massive bars stored at Fort Knox, the term refers to the stamped weight and quality of gold. It can take the shape of a bar, a coin, or any other shape that represents a transferable and practical size and shape. Bullion prices often include the cost of the metal, as well as the costs of refining and shipping, as well as the dealer's commission.

The bars come in a variety of weights, starting at 1 gram. Heavy bars are ideally suited for major investors since they may be safely stored in a precious metals-specific facility that is insured. When you buy heavier bars, you also save money on the extras. The negative is that large bars are more difficult to sell and more expensive to buy, and they may be difficult to utilize in a barter.

Buying Gold Jewellery

Buying Gold Jewelry

Jewellery allows the investor in gold to also experience the enjoyment of wearing it. Gold is often combined with other precious gems and metals to enhance the overall value and appearance of the Jewellery. Pieces are often passed down to the next generation as family heirlooms, adding sentimental value beyond that of the piece itself.

If you're looking for a long-term investment, Jewellery isn't the ideal choice because the price will usually well surpass the meltdown value. This is related to the quality of the work and the price markup. Before purchasing Jewellery, always check the purity of the gold to ensure that you aren't paying for 18 karats when you only receive a 14-karat item. Most homeowner insurance policies cover Jewellery, which is beneficial in the event that it is lost or stolen; however, you may want to consider purchasing a Jewellery floater to complement your coverage.

Buying Gold Stocks and Exchange Traded Funds (ETFs)

Buying Gold Stocks

Stocks and ETFs have two main advantages: you do not have to store the metal and you might potentially earn dividends. Aside from individual mining stocks, mutual funds that invest partially or entirely in mining companies are also available. Diversification into other precious metals, such as platinum, palladium, and silver, is possible with these. You can also buy options on gold futures contracts at an established strike price.

Bullion is held by ETFs on your behalf. GLD is the ticker sign for the SPDR Gold Shares ETF. The ETF trades intraday, just like equities, and has low expense ratios.

Because mining businesses thrive or fail based on their operating performance, gold stocks do not always move in lockstep with bullion prices. If the firms you acquire fail, you do not have the security of physical custody of the metal.

Buying Gold Futures and Options

Buying Gold Futures and Options

For investors willing to take on more risk, futures and options may be attractive. (If neither of those words means anything to you already, you should avoid these gold investments for now as they are highly speculative.)

With gold futures, you commit to buy or sell gold in the future at a specified price. Under a gold options contract, you have an agreement with the option to buy or sell gold if it reaches a certain price by a predetermined date.

Where to Buy Gold

You can buy gold bars from dealers, individuals, or online from sites like JM Bullion, the American Precious Metals Exchange (APMEX), or SD Bullion. And keep in mind that you may be on the hook for delivery fees—plus insurance—to assure the safe transport of your bullion.

You can buy gold coins through dealers, pawnshops, and individual sellers that you trust. If you choose to buy your gold coins online, make sure to go through a dealer listed in the U.S. Mint’s database. Whether you buy your gold coins in-person or online, you don’t want to waste money on forgeries or gold that’s less pure than you’re led to believe.

As with coins, you’ll want to be extra careful when buying gold Jewellery. Make sure the person you purchase your Jewellery from is reputable. You might start with jewelers who are members of the Jewelers of America and have signed a code of professional conduct requiring them to be honest and forthcoming about the nature of their pieces.

Buying and selling gold assets like mining stocks, mining funds, or ETFs must be done through online brokers. These brokerage firms are registered with and authorized by a local authority to trade on the stock exchanges.

To buy gold futures or options successfully requires a brokerage account and an intense amount of industry knowledge. You will have to monitor your account and gold’s price closely to make sure you do not miss the chance to enact your options. You also may end up magnifying any losses you incur as futures and options involve taking on leverage, or using borrowed money to buy securities.

With CAPEX you can trade the most popular gold assets via CFDs, from gold stocks and ETFs to gold spot prices and Gold Rush Tematix, a basket of selected shares from companies that engages in the acquisition, exploration, and development of gold in different countries around the world. Trading means that you are speculating on a gold asset’s price movements with derivatives like CFDs (Contracts for difference) – without taking direct ownership. CFDs are leveraged products, which means that you will not need to commit to the full value of the position. But bear in mind that leverage can increase both your profits and your losses, so practice on a risk-free demo account before you commit any funds.

When Should You Buy Gold?

Many proponents of gold suggest it is a good hedge against rising prices. The facts do not support this statement though. Gold is often a better hedge against a fiscal crisis, rather than a hedge against inflation. In times of crisis, gold prices tend to rise. But that is not necessarily the case during periods of high inflation. If there is a monetary crisis or recession on the horizon, it may be wise to buy gold. However, when there are concerns about the purchasing power of fiat currencies like the US Dollar and Euro, gold benefits the most.

In other words:

  1. In times of optimism (aka risk appetite), gold can either appreciate if markets believe growth will lead to inflation, or it can fall if the desire for higher yields overrides inflation concerns and investors move into more classic risk assets which they believe will provide better returns.

  1. In times of pessimism (aka risk aversion) gold can either rise if markets believe that stalling growth will lead to rising deficits and/or money printing that could cause inflation, or it can also fall on fears of deflation or of a market crash that feeds demand for cash. In times of panic, traders seek cash either to cover margin calls or other obligations or to be ready to go bargain hunting.

    If pessimism turns to panic, then gold could either:
    – rise if markets are more concerned about the USD or EUR losing their purchasing power than about near-term liquidity needs, as was the case at times from 2009 through 2011.
    – fall if markets are more concerned about liquidity than the loss of purchasing power, as was the case in late 2011.

When markets are not concerned about fading purchasing power, the major currencies tend to gain against gold. That can happen due to:

  • Low inflation expectations, as we saw starting in late 2011. Concerns about the global economy kept inflation fears low, and so gold began a multi-month downtrend.

  • Panic periods when markets fear a financial crisis, and liquidity becomes the top priority. We saw gold sell-off during times of peak anxiety about the US or EU. During these periods, investors tend to sell gold to raise cash.

Current and Historical Prices of Gold

Gold Price CAPEX
source: CAPEX Webtrader

Investors should start by looking at the spot price of gold, which is the current price at which it can be purchased and traded. The spot price of gold is expressed in terms of an ounce, gram, or kilogram of gold. For example, the spot price of gold was $1,903.00 per ounce, $61.18 per gram, and $61,181.45 per kilo at the end of the day on Monday, June 7, 2021.

When you look at historical gold prices, you will notice that the price of gold skyrocketed in the 2000s. Gold prices ranged from $720 per ounce to over $1,000 per ounce in 2008. Due to investor demand and sentiment as the economy plunged deeper into crisis, gold prices rose to $1,895 in 2011. Gold prices had fallen from over a decade earlier by April 2020, but they had continued to perform well despite the economic crisis.

Something similar happened in the late 1970s. After the price increase in the '70s, gold spent the next 20 years declining in value before going back up around 2000. During the pandemic crisis, demand for gold surged, and the price of gold increased. Investors could not be certain at that time whether the increase would continue or not because it is equally possible that the trend could continue, or the price would once again languish for a considerable length of time. While languishing, any gold investment would not produce any interest or dividends.

Final words

Investing in gold, whether real gold or gold-related instruments, is a difficult decision that should not be taken lightly. Gold comes in many forms, so one may be better suited for your investment strategy than another.

You could buy physical gold coins or bullion, but they must be stored in a secure environment. This may involve paying a broker, bank, or another firm a fee, so make sure you deal with a reputable dealer.

Investing in gold securities is like investing in any other security, except prices may move with the stock market. For example, if you are investing in gold mining companies, the price of the stock may reflect the company’s financial health and market position more than the price of gold. This can create a false sense of security if you are using it as a hedge against risk.

You can also buy options on gold futures contracts at an established strike price.

Financial experts recommend that you keep gold to a small percentage of your total assets as a rule of thumb. This is believed to be good advice because it acts as an insurance policy. If all your other equities go down in value and crash, your gold should rise in value, preventing you from losing everything. But remember, that is not guaranteed, so proceed with caution when buying gold.

Frequently Asked Questions (FAQs)

How do silver and bitcoin compare to gold?

Between the two, silver is much more like gold than bitcoin, but all three share a common trait (at least in the eyes of their respective investors) as market or inflation hedges. Like gold, silver can also be used to make products or worn as Jewellery. Bitcoin is a much newer asset, and without the centuries of data to draw on, its viability as a hedge is highly speculative compared to gold.

Is buying GLD shares the same as buying gold?

From the average investor or trader's standpoint, buying GLD shares is the same thing as buying gold. GLD shares will replicate exposure to gold prices, minus expenses related to storing the gold and trading GLD shares. However, it is important to understand that GLD shares do not give you ownership of physical gold. You cannot trade in your GLD shares for the gold bars, for example.

Can I buy gold and keep it?

If you decide to buy physical gold, you will want to keep a few things in mind: ... While you can certainly keep your gold at home, many investors prefer a custodian. Make sure you research secure options for storing your gold before you buy it, and keep in mind that safe storage adds costs to your gold investment.

What is the safest way to buy gold?

Bullion coins and ingots are one of the safest ways to buy gold, though some investors prefer to invest in gold funds, such as mutual funds or exchange-traded funds (ETFs). One benefit of investing in stocks over physical gold is that it is easier to sell.

Is it better to buy gold coins or bars?

Bullion Coins—Which Are Better as an Investment? Bullion coins, such as Gold American Eagles, are the best type of precious metals for most investors. ... You could buy smaller bullion bars, such as a 1 oz bullion bar, but they tend to be harder to sell back and the transaction costs are higher.

How much gold you can buy?

No Limits. Luckily, there is no limit on how much gold bullion an individual can acquire and own. There are no laws prohibiting anyone from buying as much gold bullion as possible. You can hold as much gold bullion as you can afford and purchase.

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