buying gold

February 16, 2006 7:46 PM

The best way to buy gold.

I want to diversify with gold.

It looks like my choices are a fund of gold producers (mines), a publicy traded company that holds only bullion, or buy gold coins myself.

Any thoughts appreciated.

posted by larry_darrell to work & money (11 comments total)

It would be irresponsible to make recommendations without a very deep understanding of your individual situation (and anybody who tells you otherwise probably just wants to sell you something so be very careful if that happens.)

Regardless, here's some more info to chew on before talking to a good, hopefully fee-based advisor (or coming to a decision yourself after gaining a thorough understanding of investing in metals):

In addition to the options you list, there are also precious metal funds, including ones that specialize in gold, out there. Think of a mutual fund whose portfolio is metals rather than stocks. If you decide you want to invest in metals rather than producers this should be a relatively trouble-free way to invest.* If you want to mirror gold's performance you need to find a fund that tries to replicate this as closely as possible -- read the prospectus, blah blah blah. Presumably (I don't know for certain) there are also metal funds that invest partly in metals and partly in derivatives to amplify returns in the underlying market -- their return volatility would be somewhere between straight metal funds and futures and probably not a good choice for less-sophisticated investors (see the caution on futures at the bottom of this post.)

In making your decision, be sure to consider transaction costs (including commissions and bid/ask spreads) and management fees for your various options. I imagine they could be significant if you buy gold coins or bullion from smaller dealers. Higher transaction costs will lower your return.

This link might be worth reading.

*Technically, you could also play the metals market through trading derivatives, e.g., futures. In your case, the one recommendation I will make is that you keep as far away from them as possible.
posted by Opposite George at 9:00 PM on February 16, 2006

Don't buy gold. Unless you're talking about oil or large food companies, don't buy any commodity or invest in any company that primarily deals in commodities, unless you are significantly experienced in that field. Trading commodities is really dangerous for the little guy, because the markets are so elastic. Don't buy into the hype that gold has "real" value in the same way that, say, real estate has real value.

Diversify with bonds, real estate or a wide variety of mutual funds.
posted by frogan at 9:01 PM on February 16, 2006

Oh, after reading frogan's post I realize I failed to make one thing clear: part of your consultation should be how much you should be invested in gold (and that answer might well be zero,) or if there are better strategies for structuring your portfolio.

Like I said, it all depends on your situation, including your age, your financial and life goals, the size of your portfolio, your tolerance for risk, your earning potential, etc. etc. etc.
posted by Opposite George at 9:06 PM on February 16, 2006

NYSE:GLD and AMEX:IAU are two ETFs that track the price of gold. Shares are valued at 1/10 troy ounce. Volume in GLD is 25x that of IAU.
posted by ryanrs at 9:10 PM on February 16, 2006

Gold ETFs -- the low-cost transparent way to own gold.

E-Gold -- the anonymous libertarian way to own gold. (Sorry, don't know if this carricature is still true.)

As an investment, I would suggest gold be only a very small part of your portfolio, say 5%. I believe it's only useful as a hedge. In the short term it tracks fear; in the long term it tracks inflation. IANACFA.
posted by blue grama at 9:14 PM on February 16, 2006

Having some gold in your portfolio is a very good idea, as we head deeper and deeper into this era of profound monetary disorder. Traditional wisdom says that commodities suck and stocks and real estate rule; in another 10 or 15 years, everyone will think commodities rule and stocks suck.

That said, as frogan points out, if you don't know this market, some research is in order. Personally, I like Gold Stock Analyst... John Doody, the guy who writes/sells this newsletter, has as good an understanding of the gold business as anyone. He has some knowledge of silver too, but doesn't specialize in that area. His newsletter is $300/year, which will get you at least one writeup on the current state of every company he covers. (he hits them all at least once a year.) He has a good track record of picking solid stocks.

Having at least a little gold in hard cash for emergencies is probably a good idea, but remember that gold is a way to store wealth, not so much a way to generate it. Gold stocks will give you far better returns if it keeps going up.

You should, by the way, expect a sharp pullback in gold before too long... it's had a long run and it's probably about due. Eventually, given the way the Fed is treating the dollar, I fully expect to see $2k/ounce gold, or even higher. But it's not going to get there overnight, and there's a good chance it will drop sharply in the near future. Buy slowly, just nibble away at the pullbacks until you have your position, and then hang tough. Like real estate, precious metals are for the long term. Once you have a core position, if you want to buy more and speculate with it, you can, but there are wolves out there who want to rip your lungs out. Tread carefully.
posted by Malor at 9:16 PM on February 16, 2006

I bought some Credit Suisse bars back around Y2K from a dealer in Newport Beach, California. It was easy enough, and I got the bars in plastic security cards within a few days. I think I sold some back to him later without any problems. So, if you want to buy gold that you can put in your safe-deposit box, that's one option.
posted by spacewrench at 11:04 PM on February 16, 2006

I bet Opposite George has piqued your curiosity. Here ya go: CBOT Gold Futures.

There are two contract sizes—100 oz and 33.2 oz. At a current price of $545/oz, these contracts are valued at approximately $55k and $18k. With an initial margin requirement of just 4% you get plenty of rope to hang yourself.
posted by ryanrs at 11:05 PM on February 16, 2006

<ConspiracyFilter>
There's been some rumours about gold stored in bank safe deposit boxes, so caveat emptor!
</ConspiracyFilter>
posted by Arthur Dent at 3:41 AM on February 17, 2006

Um...www.ige.com?
posted by jaded at 6:20 AM on February 17, 2006

You should, by the way, expect a sharp pullback in gold before too long.

... we just had one, actually. I went long at the recent bottom. Options on a gold producers ETF are my vehicle of choice, for a good bit of leverage. Slightly less volatile than trading futures on margin, for which I limit myself to day trading.

Anyway, I recommend real physical gold coins for a long-term investment. I haven't got any myself yet, but I've been meaning to. For one thing, they're nice and shiny. I'd only buy a few ounces that way, but if you're looking for something absolutely guarranteed to be worth exactly as much as gold is worth, it's hard to beat actual gold. As long as you have a reasonably safe place to put it.

Basically I'd go for the gold miner ETF if you want to speculate on an increase in the gold price; the gold-holding ETF for a convenient way to track the price of gold; the coins for fun and paranoia; and one of those deals where you sign up to have someone hold actual allocated gold on your behalf in a vault somewhere if you have lots of money.
posted by sfenders at 7:43 AM on February 17, 2006