Looking for how to invest in gold?
What does that mean to the average investor?
Do you think of running out to the local bullion dealer to begin stockpiling gold bars in your basement?
Or perhaps visiting a local jeweller or pawn shop to buy a bunch of gold chains or coins?
Although purchasing jewellery or bullion do create an exposure to gold, they are hardly the only (or most effective) ways. The majority of gold investment is done through the stock market, in a variety of different ways. There isn’t a one-size-fits-all solution — the goal is to find out what works best for you. Here we give you a basic overview of some of the more popular methods.
How to Invest in Gold
If you are looking for answers on how to invest in gold, the most direct method is physical ownership, but that is hardly the only way for investors to gain exposure to this precious metal.
We have identified 28 strategic methods for you to put gold in your investment portfolio. Which is the best way to invest in gold? That depends on you and your investment goals. Each strategy listed below has unique characteristics, unique risks and unique rewards. The points are grouped into five sections, based on the following themes:
- Physical Gold Ownership
- Indirect Gold Ownership
- Equity Investments in Gold
- Gold Derivatives
- Exchange Traded Products
According to investment purists, gold ownership means actual physical possession, but not everyone is comfortable with, or set up to accommodate, such ownership. As a result, many financial instruments have been developed to facilitate an alternative method of investment for the rest of us.
1. Gold Bars
Gold bars are the primary choices of central banks and institutional gold investors. “Bullion” is the common term for gold bars. Owning bullion is only one way to gain exposure, and it requires that you store the physical metal. Effective storage needs to be secure because the threat of theft can be significant – stolen gold bars can be stolen can be melted down with ease, thus rendering them untraceable.
There are various weights available with the standard being the 12.4 kg (400 troy ounce) bar.
Smaller weights are also available, such as the 10 gram “Tola,” 50 gram “Tael,” or 100 gram TT, (or “Ten Tola”) bars. So why do investors buy large gold bars, instead of either small weights, or coins? A 25-pound block of gold is not exactly well suited to act as a liquid form of currency, but the price per ounce is cheaper for bullion than for coins. Larger bars are cheaper per ounce than smaller bars. Of course, if you really want to make a splash, the world’s largest gold bar measures 250kg, and is on display at Japan’s Toi Gold Mine.
Are you thinking of buying bullion? Then you should look for gold bars marked Good Delivery, which indicates adherence to a set of rules specifying the physical characteristics, and is required by dealers in the major world markets.
The specification was established by the London Bullion Market Association (LBMA) to ensure integrity.
The LBMA has established an accredited list of refiners that act as Good Delivery Referees. Bars that appear similar but do not meet the GD criteria must be marked “Non-Good Delivery,” and will therefore be less desirable.
2. Gold Coins
Like bullion, coins are a popular form of owning gold and are valued according to their weight in “Au” (the Periodic Table abbreviation for gold). Gold coins are often sought by collectors, which can push their price higher their marked Au weight.
There are a variety of common bullion coin weights, ranging from 0.1 to two-ounce coins. One ounce is the most commonly held weight, available at virtually any major vendor or dealer. The smaller denominations enable ease of use in trade.
Coins are more suited for common transactions rather than other forms of physical gold. Buyers are still responsible for storage of coins though, and this can pose a major expense and risk; as with bullion, security against theft is a real concern.
You are probably already invested in gold, and don’t even realize it. You might not think of your wedding ring or necklace as an investment, but it likely should be considered as such. We don’t suggest running out to buy a bracelet as an investment strategy, however, nor do we believe it is a good strategy to gain gold exposure.
Although there are companies that buy gold necklaces and bracelets only for the gold content, gold jewellery is going to be valued at a minimum for its physical value. One of the primary uses for gold is the jewelry trade, and it has been that way for centuries. Jewelry is like art though, and can trade at a significant premium over the sum of its materials.
Regardless, a gold ring can be as good as cash, if you’re desperate, almost anywhere in the world.
4. Gold Rounds
Rounds look just like coins, but they have no currency value and do not have to be issued through a mint. As a result, gold rounds are not generally considered collectibles. Rounds are typically pure weight gold, with no other metal added, valued according to their fine weight of Au.
These options still allow the investor to own gold directly, but allow for greater flexibility of storage, among other benefits.
5. Gold Certificates
The first bank notes circulated were actually gold certificates.  These certificates mitigated some of the risks associated with the storage and transfer of physical gold bullion, and represent gold held in trust at a bank.
Investors assume credit risk in this scenario (both – bank can default if actual holder doesn’t deliver).
There are two types of certificates:
- allocated (or fully reserved);
- unallocated, or pooled.
Allocated gold certificates are usually correlated with specific gold bars, while unallocated (pooled) gold is part of the fractional reserve banking system and is not guaranteed in the event of a run on the bank’s gold deposits.
If you want to own gold, but do not have the ability to store, secure or transfer the commodity, then gold certificates are an option. We urge you keep in mind that not having physical custody can present problems during times of turmoil, which could be a factor for those looking at gold as a hedge against such events.
6. Gold Accounts
Similar in a number of ways to gold certificates, there are various types of gold accounts. As with certificates, the major distinction between them is allocated versus unallocated accounts. There are similar risks as those associated with certificates.
Some banks offer gold accounts where gold is purchased and sold like other currencies.
It should be noted that banks typically only offer gold-based accounts for amounts of 1000 oz. or more, which make this type of investment plausible only for those investors taking a significant position in gold.
Owning physical gold is a direct investment in the metal. Some investors prefer equity options, such as gold stocks, or funds. If you are more comfortable owning gold equities, there are several options.
7. Junior Gold Exploration Companies
Junior explorers are considered by far the most volatile of gold equities.
The reality is that mining exploration is a capital-intensive activity. Junior exploration companies issue equity to generate capital to fund their exploration operations. Such capital raises can go on for several rounds and each time, existing shareholders suffer dilution.
It is rare for a project to evolve from exploration to production, but projects that uncover a new, viable gold discovery offer stakeholders a potential windfall. Even if the project doesn’t grow into an operating mine, these companies can be profitable, which is why gold exploration can attract so much speculation investment.
Many experienced resource investors (who are willing to accept the risk), consider junior gold exploration their primary investment focus. These risky ventures shouldn’t form the foundation of your entire portfolio but deserve some consideration. If you have funds set aside for speculative growth, then gold exploration stocks offer huge opportunities for investment profits.
Junior gold exploration stocks have been established as one of the best ways to invest in gold.
8. Junior Gold Producers
There are examples of small-cap companies who have successfully brought a mine to production, but they are rare. These small operations offer limited daily production, ore concentrates, or are contract mills.
On the surface, these operations appear to be more secure, but that is not the whole story. Small operations must be run efficiently efficient to remain profitable. If not, they run the risk of becoming vulnerable to fluctuations in the price of gold.
If you want to dip your toes in this pond, look for stocks that use production revenue to fund exploration. The reality is that production may seem attractive but the asset is still in the ground and must be dug up and refined before the value is realized. Creating a real mineral resource is going to provide a greater return on investment than a small mill.
9. Speculative Area Play
A common way for gold investors to look for new opportunities is to focus on mining regions that are hot. Investors buy shares in gold stocks that have mineral claims in these regions. The logic here is simple to follow — new discoveries in a region will generate huge attention. That attention in a region brings investment dollars. It stands to reason that other properties in the area will reap the benefits of this focus: “a high tide raises all ships.”
Though not scientific, advocates of this strategy point out that when gold is in vogue and a particular region is hot, the surrounding properties attract disproportionate buying, which then further drives up share prices. Over the long term, this is not a safe route and there are much more effective ways to find investment targets.
10. Mid-Tier Gold Exploration
Investors with an aversion to risk are likely not comfortable with grassroots projects. A good alternative is to look for more advanced exploration properties. Mid-tier explorers usually have properties that are either at a feasibility or pre-feasibility phase. With deeper pockets than their junior counterparts, mid-tiers represent more secure exploration projects.
11. Mid-Tier Gold Producer
From our perspective, Mid-Tier gold producers are the most exciting opportunity for investors. These companies are revenue-positive and have projects large enough to warrant proper attention. As well, mid-tier producers are often the focus of acquisition speculation from the major producers, all of which combines to make these gold stocks among the more attractive options.
These companies are mature enough they have surpassed their junior brethren. As stand-alone operations, mid-tier producers are often focused on a single project (which can be a double-edged sword). Look for companies that have 43-101 compliant reserve numbers and promising resource calculations.
12. Speculative Acquisition Targets
The word ‘speculative’ pretty much says it all.
Regardless of gold prices, the prospect for consolidation or acquisition is a real possibility. Most junior mining stocks realize that growing into a major producer is a long shot at best. Their most likely prospect for success is to either:
- attract a joint-venture partner; or
- position themselves for acquisition.
Speculating on potential acquisition targets is different from industry consolidation of the majors. The junior markets exist primarily because they fuel speculative acquisition targets.
There is a strong belief in the sector that acquisition fuels further acquisition. When a major or mid-tier make a move to acquire an asset, it creates pressure for competitors to follow suit. This is a risky strategy and not for the inexperienced or passive investor.
13. Major Gold Producers
Buying shares of a major gold producer is the most logical way to find an equity position to track gold. Majors are responsible for the majority of global gold annual production. They control the vast majority of in-ground gold assets, worth billions of dollars.
Incorporating major gold producers into your investment portfolio is a must when tracking gold, but we also take the classic value investor position: share price is paramount.
When the gold market is bullish, shares of the majors can be very expensive, but during bear markets, the majors can often represent huge value opportunities. The price of these big gold producers is often so juicy that they are impossible to pass up. During these periods, it is often pointless to even look at the mid-tier or junior markets, as the majors are simply a better deal – would you rather get 80% off a BMW, or 80% off a scooter?
Major gold stocks represent one of the best ways to invest in gold. You should look for value opportunities to buy positions of these gold stocks when shares are low, and if you’re serious about investing in gold then you need to become familiar with the major producers.
14. Major Gold Acquisition Targets
One thing you can be sure of when looking at the gold market, is the fluctuation in price per ounce. When gold prices stagnate, then consolidation at the top of the industry is inevitable. For the savvy investor forecasting potential acquisition targets, it can be highly profitable.
Companies with capital intensive projects or dwindling resource assets look to acquisition.
A bull gold market can produce large cash reserves for the major gold stocks. Acquisition and consolidation are not only possible scenarios, they become inevitable. Gold investors who take this approach have to be patient, and use due diligence to select targets.
Forecasting potential major acquisition or consolidation targets can be highly profitable. This remains one of the best ways to invest in gold for you, the investor, but it is not for everyone.
15. Gold Royalty Companies
A gold royalty company is a financing entity that provides funding for exploration. In exchange, the royalty company gets a percentage of sales (usually 1 – 5%) when the property goes into production.
16. Gold Streaming Companies
Gold Streaming companies are also financing entities. They provide funding for capital costs such as
- building a production facility;
- expanding operations; or
- purchasing new equipment.
In exchange, the streaming company receives a percentage of the gold production, or stream. The ‘stream’ is a commitment to buy a portion of production, or specific number of ounces per annum. This commitment is usually at a fixed price that is set at a dramatic discount to the market.
Let’s discuss royalty and streaming together, because they are closely associated with one another.
John Doody is one of the most premier gold analysts in the world, and a proponent of both royalty and streaming. Doody suggests that gold royalty and streaming companies represent a risk-mitigated option. Why? Well, there are a few reasons this is the case.
First, these companies are insulated from capital cost overruns and the rising cost of production. Second, overhead for these gold stocks is generally lower than for a mine operator. This provides the added benefit of potentially higher dividend yields for shareholders.
17. Privately Held Gold Producers
Believe it or not, there are many privately held gold mining operations around the world. Investors wanting to avoid the tumultuous ride of the public markets often prefer private equity. Many of these private mines require capital to upgrade or expand their existing operations.
This can be an opportunity for the right accredited investor. Private equities are not suitable for the general public — they require sophistication and large amounts of capital.
Private operations do not raise funds from hundreds, or even thousands of investors. This means if you want to play, you will have to pay. Expect to spend millions of dollars to gain access to these private investments.
Additionally, as the buyer, you need to beware. Small private mining operation may not have a credible resource report or operational history. You need to make sure the books are in order, and that your partners are capable mine operators, bearing in mind that a fair valuation can be extremely hard to access.
Finally, quality situations only become available sporadically, and gaining access can be an obstacle. If you are interested, look for a business broker who specializes in private gold mines. As gold bugs, this type of investment is exciting. In practice, it’s only suitable for a few sophisticated investors with deep pockets.
18. Private Alluvial / Placer Mines
Reality television has given rise to the idea that anyone is capable of being a miner — simply get a piece of property in the Alaskan panhandle, and you can start your own operation.
Although alluvial mines can be profitable and require less capital investment than traditional mining operations, there are several factors to consider with placer mines. Most notable is the lack of reliability of resource estimates for alluvial deposits. As well, reality television aside, placer mining requires hard work and luck to be successful.
That said, an alluvial mine can yield a profit, often at a fraction of the cost of a traditional open pit mine.
19. Gold and Precious Metals Mutual Funds
Gold-centric mutual funds offer investors a professionally managed portfolio of gold assets.
Is your goal is to mitigate risk? Would you like to take a more passive role in the day-to-day management of your portfolio? Then mutual funds are an excellent option.
There are numerous funds with exposure to gold and/or the mining and resource sector as a whole. Mutual funds differ from Exchange Traded Funds (see #26 below). ETFs trade like common stock, while mutual funds have a net asset value (NAV) calculated at the end of every trading day.
The derivatives market has developed investment instruments, each with their own benefits and risk. The complexity of the derivatives market requires a certain level of investment sophistication. Investors should be aware, the derivative markets are inherently risky. For the majority of investors, this is not the best way to invest in gold.
20. Gold Forwards
Forward contracts are agreements to buy gold at a specified time in the future and at a price agreed upon today. It differs from a typical contract to buy gold at the spot price. The buyer takes a long position and the seller assumes a short position. This is a specialized investment, suitable to only a select few sophisticated investors.
21. Gold Futures
Futures are another derivative contract. The contract takes place between a buyer and seller of gold. The price is agreed upon today, with payment and delivery to take place in the future. This has been a popular instrument to mitigate risk when currency trading. Again, the buyer is considered to be taking a long position, while the seller is short gold.
22. Gold Options
Another derivative contract, the gold option allows the buyer the right to purchase a limited amount of gold at a certain price before a specified date. The buyer has the right to purchase gold, and the seller has the obligation to fulfil the order, if the buyer decides to exercise the right. The buyer, though, has no obligation to exercise the gold option.
23. Contracts for Difference
CFDs are a financial derivative product that is a contract between two parties to purchase gold. They require the buyer to pay the difference between the current price of gold and the price at the time of the contract. As with most financial derivatives, they contain a significant degree of risk and are only viable for right individual. CFDs are generally only suitable only for sophisticated investors.
24. Spread Betting
Another derivative product that is only available in some regions of the world is spread betting – gambling on gold price trends. The investor bets on whether a security or commodity will go up or down in price. The investor uses margin to purchase the wager, instead of buying a long and short position.
Spread betting is a viable option if your risk tolerance will allow it, and you live in the United Kingdom, where the practice is legal. You may want to inquire with your broker. In the UK, spread betting has certain tax benefits and incurs fewer fees and upfront capital. As with many of the other methods described here it is not suitable for the general investing public.
Due to its selective nature, we do not consider this one of the best ways to invest in gold.
25. Digital & Crypto Currencies
The emergence of digital & crypto currencies has been dramatic the past 15 years. Their impact has grown as online banking and payment processing has expanded. One form of digital currency that has become popular is gold-backed currency. In theory, each unit of digital currency represents a specific unit of gold held in trust by the provider.
This is popular with many individuals, as it mirrors the old gold-backed US Dollar. In 1971, President Richard Nixon ended the US Dollar convertibility to gold. This action is what many feel triggered the U.S. Dollar’s extreme devaluation.
Digital and Crypto currencies are still in their infancy and are considered speculative. They have been the subject of fraud investigations and schemes to defraud the public. We recommend avoiding this type investment as a means of gold exposure. At least until the landscape becomes more clear, in our view it is not one of the best ways to invest in gold.
The proliferation of Exchanged Traded products is no stranger to the gold market. Investors have a variety of gold ETF options to choose from. Again, if you are a fan of Exchange Traded securities, this is one investing method you may want to look at.
26. Gold Exchange Traded Funds
ETFs are the most popular exchange traded product for investors. There many gold-related ETFs available for investors to select from. ETFs are an investment fund, similar to a mutual fund, that trades on a stock exchange.
A big difference from a mutual fund is that ETFs are not bought and sold according to their NAV (net asset value). These products are traded according to their share price, which closely reflects the NAV. Gold-themed EFTs are common, as the security tracks the price of gold and will move accordingly.
27. Gold Exchange Traded Notes
Another exchange traded product, ETNs are debt-unsecured debt securities that track gold. Exchange Traded Notes trade on a stock exchange and pose a number of benefits and risks to investors.
One of the primary reasons gold investors are drawn to ETNs is the perceived tax advantage – they are treated as prepaid contracts. ETNs are considered debt instruments and assume credit risks, such as the risk of default.
28. Gold Closed End Funds
The exchange-traded closed-end fund tracks the price of gold, and is different from ETF’s because the number of shares is fixed. New shares of the fund may not be introduced to meet overall demand for the product.
Like ETFs, they trade on an exchange and are either at a premium or discount to the NAV. This depends if they are priced above or below their net asset value.
So there are our 28 tips for the best ways to invest in gold. Of course there are other options for investors, but most are so specialized that they are not worth discussing here. While it may seem like there lots of options, there are two major categories that we believe will help you the investor the most:
- physical gold
- gold equities
A combination of gold stocks and physical gold is the very best strategy for gold investment.
Investors need to assess their own levels of investment knowledge and risk tolerance before making decisions. We also encourage you to sign up for our free investment newsletter, in which we regularly discuss many mining-related investment opportunities.
We love to get your feedback. If you have some suggestions that we missed, please send us a message. The question that we ask for those who already have experience in this market is:
“What have you found to be the best way to invest in gold?”