Last Updated on October 1, 2024
You have a number of options when it comes to buying gold and gaining exposure to the yellow metal, each with their pros and cons.
You can buy physical bullion, paper gold through an ETF, stocks in gold miners and derivatives such as options and futures.
This post will run you through what you need to know about each option and how to make a purchase.
Buy Physical Bullion
If you want exposure to the price of gold and are prepared to take physical possession or pay for storage then you should buy physical gold.
Buying physical gold is what gives you one of the key benefits of gold ownership – no counter party risk. The same cannot be said for any other form of gold ownership.
When you hold that gold securely in your possession you are not relying on the good faith and solvency of any other party to maintain your wealth.
Physical gold comes in either coins or bars. Coins can be either numismatic (collectible) or legal tender minted coins like the Canadian Maple or American Gold Eagle.
When most people first start buying gold, they start with legal tender coins or small gold bars.
Unless you are well versed in numismatic coins it’s much better to steer clear of them otherwise you will end up paying high premiums for something you don’t understand.
How To Buy Physical Gold
You can buy gold from any number of merchants.
The important thing is making sure you purchase from a trusted and reputable dealer. This could be a small local outfit or a big name player.
You can purchase gold in person or buy it online and pay for shipping and insurance.
When I first bought gold I did it in person because it felt much safer that way. But all my subsequent purchases were through an online dealer who I also arranged storage with.
Speaking of storage, when you buy physical bullion this is something you must take into consideration. Are you planning to store your gold at home? Or in a safety deposit box? Or in a facility provided by your dealer?
Each has its pros and cons and it might be wise to consider a mixture of all the options.
If you are using storage provided by a dealer be sure to check whether your assets are allocated (assigned to you) and segregated (held seperate from the other metal in the vault).
Buy Gold Through An ETF
An ETF is an exchange traded fund that can be purchased from a stock broker like a regular security.
Most ETFs represent a basket of stocks and might track an index or contain a diversified range of equities from a certain industry.
Other ETFs, like the gold and Bitcoin ETFs track the spot price of a commodity.
This means you can buy and sell gold via a brokerage account rather than buying physical gold.
Now why would you do that?
There are two key benefits:
- Lower transaction costs
- No storage or insurance costs
When you buy or sell physical gold there is a premium above or below the spot price. This is the margin where the dealer makes their money. ETF transaction costs are much lower.
However, the downside to buying gold through an ETF is that you are exposing yourself to counterparty risk. One of the key advantages of buying gold is avoiding counterparty risk.
So what should you do?
It depends on your aims and how long you want to hold your gold.
For significant sums that you are going to hold for a long time, physical gold makes more sense. For smaller sums that are going to be held for a shorter time, then the ETF makes sense.
The other option is to choose a bit of both.
How To Buy A Gold ETF
Buying gold through an ETF requires a brokerage account.
From there it is as simple as buying any security.
The most popular and liquid gold ETF is the SPDR Gold Shares ETF which trades under the ticker GLD.
However, there are many other gold ETFs such as the iShares Gold Trust (IAU) and the Goldman Sachs Physical Gold ETF (AAAU).
Buy Shares In Gold Miners or Gold Royalty Companies
Buying shares in gold miners is a leveraged play on the price of gold.
Generally speaking when the gold price appreciates, the miners appreciate more. The reverse is also true, when the gold price falls, generally the miners fall further.
This does not always play out in perfect synchronisity and there is often a signifcant lag between the move in the gold price and the price of gold miners.
However it is critical to understand that buying gold miners is a speculative move. You buy in the hope of a significant gain. Buying physical gold is primarily a defensive move and you buy to prevent loss in your purchasing power.
Therefore most people who want to buy gold accumulate a position in physical bullion before they start specualting with miners.
It is also important to note that while gold stocks are leveraged to the price of gold, you are buying shares in a business. Commodity businesses have no pricing power, face significant costs and are run by people with varying degrees of skill and experience.
In other words, you might buy a bad business.
Typically gold miners are not great businesses. After all their business is digging up physical assets out of a mine that will eventually be exhausted. Generally, they are only worth holding during during a sustained run higher in gold prices.
How To Buy Gold Stocks
Gold stocks are bought and sold through your regular brokerage account.
You have the choice of buying individual companies. These might be major producers such as Barrick Gold, mid tier producers, junior producers or explorers.
Explorers are the most speculative stocks and are akin to gambling. They do not own a gold resource and are burning cash looking for gold. But if they strike it lucky then shareholders win big.
You also have the option of buying a royalty company like Franco-Nevada. Royalty companies do not own or operate mines. Instead they own royalties in other mining companies which provide cash flows with much less risk.
If you are comfortable doing the research, determining the best companies and picking stocks then buying individual miners should yield a greater reward.
However, if you don’t have the time or skill to determine the best companies, but want exposure to the gold mining sector then there are ETFs for you that hold a diversified range of miners.
These are the GDX (gold miners ETF) and the GDXJ (junior gold miners ETF).
Buy Gold Options and Futures
Options and futures are derivatives and are not for beginners. I have never traded options or futures because I don’t think I’m smart enough.
Nevertheless, they are ways to get exposure to gold.
Futures are contracts to buy or sell an asset at a set price on a set future date. They are designed for producers or large institutions as a way to reduce volatility and bring some predictability to their business operations. Futures contracts protect industry players against volatility should price change in the future.
When the contract expires industry players normally take delivery of the gold at the agreed price on the agreed date.
However, a futures market has emerged where people never intend to take delivery. They are investors and speculators who trade futures contracts to make a profit.
Trading options is similar in that you are placing a bet on the future price of gold.
When you buy a call option you have the right, but not the obligation, to buy gold at a certain price before a specified expiration date. You are betting the price will go up beyond the stated price in the option and can then exercise the option and purchase below market value or sell the option at a profit.
When you buy a put option you have the right, but not the obligation, to sell gold at a certain price before a specificed expiration date. You are betting the price will go down beyond the stated price in the option and can then exercise the option and sell higher than market value.
Options are ideally used as a hedge and insurance against market risk. However people can and do use them as speculative vehicles.
How To Buy Gold Options and Futures
To access options and futures trading you will need to open a margin account with a broker who offers options and futures trading.
Perhaps your existing brokerage offers this and you just need to upgrade your account. Alternatively you may need to find a new brokerage.
Conclusion
Buying physical gold is the purist form of gold ownership in the sense that you can hold it in your hand and enjoy the benefits of an assest free from counterparty risk.
There are many dealers you can buy from, just make sure you use a trustworthy and reputable name.
Buying gold through an ETF is much more convenient but is not the same as buying physical. You can buy a gold ETF or a gold mining stock through a regular brokerage account.
Options and futures can be accessed through certain brokers that offer those services.
