One of the best things about gold investing is that it’s relatively simple, compared to most other forms of investment. You mostly don’t need to worry about short sells, dividends, residuals, proxies, and all the other financial esoterica that tends to cause ulcers — unless you really want to.
Even better, gold tends to be wildly profitable. There’s no guarantee the bonanza will continue as it has for the past decade or so, but lately gold does provide a better long term return than almost any investment you can name.
A Crucial Concept
Gold’s a great hedge against inflation, and it can certainly help spread the risk somewhat so that you don’t suffer too badly during market corrections. But as with any commodity, you shouldn’t put all your eggs in one basket.
Many experts suggest that you invest a certain percentage of your financial portfolio in precious metals, but they can’t seem to agree on how much; I’ve seen suggestions ranging from 3-15%, with some gold bulls suggesting even higher rates.
As an avid fan myself, I’d suggest about 10%. But sit down and look over your finances carefully before you decide what’s right for you. Keep this in mind: gold’s value can compound nicely over a decade or more, so even a small percentage of your investment portfolio spent on gold offers substantial returns.
The Big Three
While there are, in fact, a number of ways to invest in everyone’s favorite previous metal, as a newbie you’ll want to stick to the Big Three: ETFs, gold mining or processing stocks, and physical metal.
An ETF, or Exchange Traded Fund, is a kind of security that tracks an index, basket of funds, or a particular commodity (in this case gold) but sells like a regular stock on a stock exchange. A gold ETF’s price can change throughout the day, like any stock.
The good thing about ETFs is that they’re easy to buy and sell through a brokerage house, and you never have to worry about anyone stealing your physical gold. Also, there are tax advantages, since you don’t have to give your state a cut of your profits.
The disadvantages are that you don’t have immediate access to physical gold, which is a downer when you need cash in a hurry (or if you just like to admire the shiny beauty of gold bullion). Plus, if the stock market ever crashes again or the government collapses, your investment will go down the tubes in an instant.
Most gold mining and processing companies also produce stocks that trade on the open market. Like ETFs, you can buy or sell gold stocks through a brokerage, and you don’t have to worry about theft; unlike ETFs, they’re keyed to one specific company, so they’re not nearly as stable.
So why bother? Well, some can be incredibly profitable, if the company grows and the share price increases. Alas, most are a wash, or lose money. Worse, you can lose your entire investment if the company goes bankrupt, or if the accountant decamps with the company funds.
Perhaps I’m biased — okay, I am — but I prefer physical gold to the paper kind. While there’s some theft risk involved, you can vastly lessen said risk if you’re careful… and bullion will never become just so much toilet paper simply because someone mismanaged or gutted the company or ETF you’ve invested in.
That’s all the time we have today, Faithful Readers, but come back soon for a few more insights on physical gold investing — including some handy do’s and don’ts.