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Buy Gold As A Gold Investment

The History Of Gold

Throughout recorded history, gold has been coveted because of its beauty, scarcity, and virtual indestructibility.  Long before money was coined or printed, early civilizations relied on barter to exchange goods and services of equivalent value.  Money was created to facilitate commerce without the need to barter, and goods and services were valued relative to a proportionate amount of coin and paper currency.  Unlike our current monetary system, the early systems did not rely on the full faith and credit of the government to stand behind the money it created.  They required something of intrinsic value such as gold or silver to support the currency and ensure confidence in trade among different peoples and countries.

The United States, with its reserves held at Fort Knox, adopted the gold standard of $35 per troy ounce after World War II.  This remained in effect until 1971 when President Nixon reversed course and terminated the convertibility of dollars into gold.  From that point forward, the exchange rate for dollars has floated relative to foreign currencies as it was disconnected from the gold price.

Why A Gold Investment

A gold investment is generally regarded as a hedge against economic downturns that feature bear markets, low interest rates, and the prospect of higher inflation.  It’s also considered a safe investment during times of war and crisis around the world.  Gold is the commodity most often associated with wealth, and is valued by every culture in every corner of the globe.  Gold is subject to the classic law of supply and demand, and the gold price has fluctuated accordingly.

As more and more gold is mined, the less there will be for future generations to unearth.  Meanwhile, a rising worldwide population has increased the demand to the point where the gold price has reached all-time highs on an unadjusted basis.  In the last five years alone, the gold price has risen about 300%.  While no one can predict the future, current world events have led many to believe that there has never been a better time to invest gold.

When most people think of gold, they think of jewelry, luxury watches, and gold coins.  While these all constitute a significant amount of the demand for gold, it is also a vital industrial commodity.  This element plays an important role in the electronics industry as it is chemically stable, very resistant to corrosion, and is an exceptional conductor of electricity.  It has numerous applications in high technology components, thereby assuring continuing demand beyond that driven by traditional consumers.

What Is Gold Bullion?

When many people think of bullion, they think of the large gold bricks stored in Fort Knox seen in the movie “Goldfinger.”  These 400 troy ounce bars are held primarily by governments and some large central banks.  They are not a practical gold investment for the average person due to the enormous cost and fees to purchase and liquidate them.  Bullion represents a stamped weight of precious metal that has been refined for resale in a tradable form.  It may take the form of bars, ingots, or minted coins that carry a face value.  Gold of recognized weight and purity is available to investors at the current gold price plus the cost of refining and fabricating it into commercial form.

You can buy gold bars in various weights that commonly range from 1 gram to 1 kilogram.  These may be purchased from governments such as the Royal Canadian Mint, and from private label dealers such as Johnson Matthey, Produits Artistiques de Métaux Précieux (PAMP), and Credit Suisse.

Types Of Gold Coins

Gold coins are generally available in two forms: collector (numismatic) coins and uncirculated coins.  You can buy gold coins of all forms at most coin shops and gold dealers, and you can also buy gold online.  Older coins usually have rarity which prices them far above their face or meltdown value.  Collectors will pay a premium price for antique coins with the expectation that they will appreciate faster than inflation and the price of freshly minted coins.  Buying these coins requires research in order to determine fair market value to ensure that you don’t pay too much.

Several countries mint gold coins that are available to individual investors, and you can buy gold online.  Among these are the South African Krugerrand, Canadian Maple Leaf, American Eagle, Vienna Philharmonic, British Sovereign, Mexican Gold 50 Pesos, and U.S. Mint 24K Gold Buffalo Coins.  The purity of these coins ranges from .9 to .9999, and the price per coin is relative to the actual amount of gold.  Some of the coins are minted in a variety of sizes to enable participation by both small and large investors.  For example, the American Eagle is available in 1 ounce, 1/2 ounce, 1/4 ounce, and 1/10 ounce.

Other Gold Investments

Another way to invest gold is to purchase gold stocks, mutual funds, or index funds that specialize in precious metals.  The advantage of this approach is that you don’t have to worry about storage or security for the bullion, and mutual funds offer professional management of the stock portfolio.  It’s also a good approach for small investors who don’t have the financial resources to buy and store enough bullion to make it worthwhile.  Also, stocks and mutual funds have the potential for paying dividends, whereas the bullion only has the potential for capital appreciation.

The disadvantage is that the value of your stocks and funds will not necessarily track the gold price for bullion.  If a company is successful, the stock will most likely rise, but the reverse is also true.  Part of the reason many investors prefer the bullion is that they would rather have the actual metal in their position rather than a stock certificate that entitles them to a fractional share of a company.  There is a certain amount of security in knowing that you hold the metal and can sell or trade it at any time.

More experienced investors may choose to purchase options on gold futures contracts at a specified strike price.  You are essentially betting on the gold price to go up or down, enabling you to either buy or sell within a predetermined contract period.  You would buy a “call” if you think prices are headed higher and a “put” if you think prices are headed lower.  The cost of placing this bet is the premium, which is scaled based on the amount of risk in the underlying option.  The position must be closed before the expiration date and the premium is generally a function of how far into the future the option extends.  Most traders never actually buy the contracts, but instead close their option positions and take their profits.