Gold and gold-related investments are on a massive run this year.
There’s no better time than now to grab a stake in the yellow stuff.
Today I will show you five dos and don’ts when it comes to investing in gold. Let’s get started…
#1. Gold Bullion: Do
Gold bullion is simply a term for gold bars or gold ingots. You can determine the value of the bullion by finding out its purity and mass, otherwise known as the precious metals content.
You can also buy it in the form of jewelry and coins (although I don’t recommend jewelry because it depreciates 20% as soon as it leaves the store, but I’ll talk more about that later).
These gold pieces can be stored in your at-home safe or a safety-deposit box at your local bank.
One of the pros of purchasing this hard asset is avoiding large premiums. When you buy gold above the spot price, you are buying gold with a higher premium. The spot price is the current price per ounce exchanged on global commodity markets.
The price you buy it at determines the amount the price of gold needs to rise in order for you to make a profit.
If you want to calculate the premium of your gold bullion in a percent, subtract the spot price from the price you are being quoted, divide that by the spot price and multiply by 100.
The highest premium you should be willing to pay is 10%. The longer you want to hold onto the gold investment, the closer to the spot price you should try to get.
A caveat I recommend keeping an eye out for is buying rare coins. The premiums can go wildly high and that isn’t what we are looking for.
#2. Gold ETFs: Do
A gold exchange-traded fund, or gold ETF, gives you the opportunity to have gold in your portfolio without worrying about where to hold onto a physical asset. This is also known as a commodity ETF.
ETFs are very similar to individual stocks. They trade on an exchange in the same way.
This technique allows you to diversify the type of gold you’re investing in. Typically, with each share of an ETF that you buy, you possess the equivalent of 10% of an ounce of gold.
When there are too many investors looking to buy these shares, the ETF issuer must buy more actual gold to transform into stock. If there aren’t any buyers when an investor is looking to sell, the company has to sell the gold equivalent.
As I mentioned earlier, you will not own physical gold if you invest in gold ETFs. You will always receive the cash equivalent when you sell.
I also like gold ETFs because they act as a hedge against disruptions in the economic and political worlds. They also protect against the lowering value of currencies. When the dollar isn’t doing well, gold tends to go up.
Gold futures are simply standardized exchange-traded contracts in which the contract buyer agrees to buy a specific amount of gold from a seller at a predetermined price on a future date.
To recap, if you’d like to own shares of gold without having to deal with the physical property itself, gold ETFs are a good place to start.
#3. Gold ETNs: Don’t
Gold exchange-traded notes, or gold ETNs, are a risk that I don’t recommend taking.
These are unsecured debt securities typically issued by a bank. The value of an ETN depends on stock index movements and other barometers.
Gold ETNs are a tool used to track the price of gold. They represent an agreement to pay you a certain amount that corresponds with the gold they’re tracking. They are similar to bonds because they are contingent on the issuer.
If the issuer goes bankrupt, so do you.
You give the issuer money for a predetermined amount of time. When the money matures, the issuer pays you based off the performance of what the ETN has measured.
I don’t recommend ETNs because there is no protection on your investment. If the performance that the ETN is based on is not going well, you can lose all of your investment.
#4. Gold Miner Stocks: Do
It’s time to look at the source of where all this gold is coming from. Mining companies are a great place to allocate your dedicated gold funds.
When investing in mining companies you want to make sure that you are looking at the quality of the companies you are investing in. Consistently strong production, capable management and reserve growth are good factors to keep in mind.
I would also recommend looking at companies that partner with small-cap companies to keep their inventories reinforced.
Investing in the small-cap companies themselves can be risky. Make sure you conduct your own due diligence first.
Another great thing about gold mining stocks is that the higher the spot price of gold goes above the miner’s production cost, the more profitable the shares will be to us.
Gold is a hedge, and in a volatile market, it’s worth keeping up with.
#5. Gold Jewelry: Don’t
The BBC quotes Harsh Roongta of the price comparison website ApnaPaisa.com saying, “Jewelry is a very bad investment.” I agree.
Much like a car, its value depreciates by around 20% the moment it leaves the store.
Back in 2010, Today did a test where they sent out gold to 10 different companies to test the professional diagnoses on the worth of their gold jewelry. They saw returns as low as 8% with an average of about 51%.
Imagine paying $300 for a gold chain and upon selling it receiving only $24 back!
That doesn’t sound like a profitable investment to me. But if you heed my advice here, along with the advice outlined in my other four dos and don’ts, you’ll be well on your way to getting the most out of your gold investments.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
P.S. Our favorite way to invest in gold is with the real thing. ETFs are simpler but carry greater risk — since, really, you’re just paying for paper that (hopefully) is backed by gold. We recommend getting physical gold through Hard Assets Alliance. With the most secure storage available — free of charge for most UCW readers — and the best spot prices around, HAA is the easiest, safest, most profitable way to grab your slice of the world’s oldest store of value.