Over many centuries, society’s fascination with gold has evolved from crafting amulets that ward off bad luck to investing in the asset as a safe haven and inflation hedge amid economic downturns.
Today, the precious metal serves as a portfolio diversifier due to its relatively low correlation with stocks and bonds. Although gold can be volatile in the short term, it has held its value well compared with the United States dollar over time.
“Investors and central banks turn to gold to weather economic and political storms,” said Alex Ebkarian, co-founder and chief operating officer of Allegiance Gold, a precious metals dealer. “It’s a strategic tool for wealth preservation.”
While investing in gold probably won’t make lots of money, owning gold can help smooth out returns during the up-and-down cycles of the stock market. This primer provides a starting point for investors interested in learning how to buy gold and adding the shiny metal to their portfolio.
Different forms of gold investments
Depending on your reasons for wanting to invest in gold, there are plenty of ways to do it.
- Physical gold: Investments in bars, coins or jewelry
- Gold stocks: Investments in companies that mine gold and other precious metals
- Gold funds: Investments in funds that own gold miners or physical gold
- Gold futures: Investments in contracts based on the price of gold
Physical gold
One popular method is to buy physical gold in the form of bars or coins — often referred to as bullion — and jewelry. This might be the most psychologically satisfying way to own gold. You can touch it, see it and show it off to your friends, putting you in a millennia-long tradition of appreciating gold’s physical beauty and status as a symbol of wealth.
Gold stocks
Investors also turn to the stock market and invest in gold-mining companies. This method eliminates the need for safes, insurance, transportation and third-party storage associated with physical gold ownership.
But this method of investing opens you up to the vagaries that may arise from management decisions and other factors not driven by the market price of gold itself.
Gold funds
There are also gold funds that own miners or are backed by physical bullion in vaults. You can mitigate some of the risk of owning gold stocks by turning to funds that are one-stop shops for owning multiple companies under the same ticker symbol.
Bullion-backed funds offer a close approximation to owning physical gold without having to deal with storage, insurance or transportation yourself.
Gold futures
More sophisticated investors may use gold derivatives, such as futures or options contracts, to try to magnify their earnings if their bets on the direction of gold’s price pan out.
Gold futures and options are considered derivative investments because their value is derivative of the price of the precious metal, similar to other futures like wheat or oil.
Futures contracts form an agreement to buy or sell a certain amount of gold at a certain price at a specified date in the future. Options give the holder just that — the option to buy or sell a certain amount of gold at a certain time in the future.
Futures and options are traded on exchanges, but it’s not the same as buying or selling stocks, which tends to be much simpler.
For example, you’ll need to understand what happens when your futures contracts expire. For gold, you can take delivery of the metal, but most futures traders don’t. Instead, they will settle financially or roll over the contract into a longer-dated futures contract. If the further-out contract is more expensive than the closest one, you’ll have to pay more.
Pros and cons of investing in gold
Like any investment, there are benefits and drawbacks of investing in gold.
Cons
Perhaps the biggest drawback is that investing in physical gold or gold futures doesn’t pay any interest. Because gold competes with Treasuries as a safe-haven investment, rising interest rates can make those government debt securities more attractive because they pay interest. In that scenario, gold prices would probably fall, all else being equal.
Gold bars, coins and futures also don’t pay dividends. For that, investors would need to look to gold-mining companies that pay dividends, which are typically the larger, more established producers rather than the more speculative exploration companies.
For physical gold, there are also the costs of secure transport, safe storage and insurance. Investors will also want to watch out for counterfeits. Those who store gold at home risk it being stolen in a robbery.
Investors also should not expect gold to behave like a growth stock. Because of its volatile nature, there will be times that the metal outperforms other assets, but there will also be times that it lags.
Pros
Unless an investor is a day trader trying to time the market, they’ll be better off thinking about gold as a long-term store of value that behaves differently than stocks or bonds.
“This is not a short-term asset by nature,” Ebkarian said.
This means gold can shine as a long-term defensive investment within a portfolio of stocks and bonds. And it can serve as a store of value against declines in currencies such as the US dollar. Gold is also used as a safe haven in times of crisis that spook equity markets.
Ebkarian pointed out that holding physical gold doesn’t have the same counterparty risks as some other investments. Stocks can lose all their value. Bonds are based on the ability of the borrower to repay them. Commercial real estate is dependent on tenants paying their rent.
“At the end of the day, it’s all paper-based,” Ebkarian said of these types of assets that aren’t physical gold.
| Pros | Cons |
|---|---|
Some established gold-mining companies pay dividends | Physical gold does not pay interest or dividends |
May provide a long-term store of value | Can be expensive to transport, store and insure |
Can act as a safe-haven asset during times of equity market turmoil | Can be stolen or counterfeited |
Not subject to the same counterparty risks as other assets | Subject to the volatile nature of commodity cycles |
Historical gold prices
As noted, gold has experienced periods of both outperformance and underperformance over time. This is evidenced in the chart below showing the nominal gold price, not adjusted for inflation, at the close of each year since 1969.
When adjusted for inflation, however, the current gold price remains just below the peak set in 1980.
How to buy physical gold
With the advent of the internet and a proliferation of gold dealers, buying physical gold has never been easier. Typically, investors buy physical gold in one of the following forms:
- Gold bars
- Gold coins
Whether you want gold bars or coins, ordering online may be your best bet, but you can also buy physical gold from pawn shops, individuals and some banks.
Like other gold investments, the value of gold bars and coins is determined primarily by the weight of their gold content based on the current market price of the precious metal. Jewelry as well as extremely rare and valuable coins offer exceptions to this as they may be worth considerably more.
To value some gold coins and jewelry, it may be best to consult an appraiser. You can also have gold assayed by a professional to determine if the purity of the gold is as-advertised.
Gold bars
When it comes to gold bars, you may think of stacks of large, rectangular hunks of the precious metal stored in vaults. These bars weigh 400 ounces apiece and go for roughly $870,000 each at gold’s spot price of about $2,175 per ounce, as of March 26, 2024.
You can buy similar bars made by various manufacturers around the world. The international benchmark for these bars are “good delivery” standards set by the London Bullion Market Association, which include a purity of at least 99.5% gold.
These standards enable the global spot market for gold held by refineries, central banks, wholesalers, bullion banks and professional dealers. Despite the name, you can’t take delivery of these bars yourself without losing that benchmark standard. They have to be stored in special vaults.
“It is quite common for central banks and high net worth investors to buy 400 oz gold bars as a great way to own physical gold bullion at a low premium or price per ounce compared to the fluctuating gold spot price,” according to bullion retailer Kitco’s website.
For those who can’t afford a whole bar, investors can buy fractions of these bars in pooled accounts. There are also many other sizes of gold bars to choose from, such as one kilogram, 10 ounces, one ounce or even tiny one-gram bars about the size of a thumbtack.
Keep in mind, however, that the less weight you buy, the more expensive the bars are. For example, the one-gram gold bars “cost at least twice the value of their gold bullion content,” according to online precious metals marketplace BullionVault.
Gold bars will often come engraved with numbers indicating purity and weight, as well as the manufacturer. It’s especially important to look for a unique serial number and check it against the records of the issuing authority, a mint or a refiner, to verify authenticity.
Gold coins
While you can buy rare gold coins for their collectible value, investors often want to focus on bullion coins, such as those regularly manufactured by mints around the world, because they carry much less of a premium to the spot price of gold.
Sovereign coins generally come with a face value, such as the one-ounce American Eagle, which is worth $50 if used as currency but substantially more when considered for the amount of gold it contains. Other common sovereign coins are the Canadian Maple Leaf and the South African Krugerrand, although the latter doesn’t carry a face value.
You can also find gold rounds, which are coin-like pieces of gold manufactured by private mints that don’t have a face value. Like gold bars, their primary value is based on their metal content.
“Coins tend to be the better option for smaller investments while bars can be more cost effective for larger investments,” said Bill Voss, founder of BullionBox, which provides a monthly subscription delivery service for precious metals coins, bars and rounds.
What to consider when buying physical gold
Security is one major consideration for investors looking to buy physical gold because it is always at risk of being stolen. Setting up storage and taking out insurance on your physical gold assets adds to the cost of ownership, as does the cost of secure transportation.
A key consideration to making money with physical gold is that gold prices have to rise enough to counter the purchase premium and the other costs associated with owning physical gold.
In the US, there are special tax considerations when selling gold at a profit because the Internal Revenue Service (IRS) considers it a collectible. Investors also need to do their due diligence to avoid counterfeit gold bars and coins. And like other forms of gold investment, physical gold doesn’t produce income like stock dividends or bond interest.
Where to buy gold
The best place to buy physical gold depends on whether you want to buy bars, coins or jewelry.
While you can buy gold bars from certain banks, it’s much more common to use online dealers. You may also be able to buy gold bars from a pawn shop or individuals, and these sources may also offer gold coins. Even big-box retailer Costco is getting in on the action, offering one-ounce gold bars to its members.
Gold coins are also available online or at brick-and-mortar metals dealers. Keep in mind that you likely will have to pay extra for the coin’s collectible value beyond the weight of the actual metal. Gold bars also carry a premium, but it may be less so than with coins.
“There are viable and secure options to invest in gold wholly online, including a world of physical metals companies where you can purchase gold directly on their website and it will be shipped to you,” said Joe Cavatoni, market strategist at the World Gold Council, an industry group.
Other ways to buy gold
There are plenty of options for adding exposure to gold aside from owning the physical asset.
- ETFs that own gold
- Gold-mining stocks
- ETFs that own gold miners
ETFs that own gold
Physically backed gold funds, such as SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU), are popular ways to get exposure to the price of gold.
GLD and IAU are exchange-traded funds (ETFs), but they are a different type of ETF than the baskets of securities that trade like a single stock. Shares represent a certain amount of gold held in vaults. That’s not the same as owning the metal yourself, but with ETFs, investors don’t have to worry about setting up storage or insurance like they would if they owned physical gold.
Investors should be aware that ETFs carry an expense ratio, which is how much an investor pays annually to cover the fund’s expenses, such as fees and operating costs. GLD’s expense ratio is 0.4%, and IAU’s ratio is 0.25%.
Gold-mining stocks
Buying shares of gold-mining companies like Newmont (NEM) or Barrick Gold (GOLD) is another way to invest in gold, but their stock prices may not track the price of the metal as closely as bullion or physically backed ETFs.
Gold-miners can outperform the metal in times of rising prices, as their profit margins increase faster than the cost of mining the metal. Some miners may also have the ability to increase production and make more money on volume.
On the flip side, mining companies are subject to risks like bad management decisions, mines that don’t pan out as expected or social unrest in the far-flung places they operate. While some miners have an income stream from the gold they get out of the ground, other mining companies in the exploration or development phase may not. Those “junior” miners have to find other ways to raise money, such as selling equity on public markets, which dilutes existing shareholders, or borrowing, which increases in cost along with interest rates.
ETFs that own gold miners
One way to manage these risks through diversification is to buy ETFs that hold gold miners, which are different from physically backed gold ETFs.
These funds of miners typically focus on mid- and large-market capitalization companies, such as the VanEck Vectors Gold Miners ETF (GDX), or their smaller exploration and development counterparts, like the VanEck Vectors Junior Gold Miners ETF (GDXJ). The VanEck offerings are the largest on the market, based on total assets under management. Their expense ratios are 0.51% and 0.52%, respectively.
Why do investors buy gold?
The main reasons investors buy gold are to hedge against declines in currency values or to own a safe-haven asset to cushion volatility in stocks, bonds or real estate.
“When other traditional assets decline due to economic uncertainty, gold often maintains or gains value,” said Richard Gardner, founder and CEO of Modulus Global, which provides financial software to brokerages and professional traders.
Before venturing down one of the many gold-investing avenues, investors need to make personal risk-reward calculations.
“You can own gold in a lot of different ways,” said Michael Wagner, co-founder and chief operating officer of Omnia Family Wealth. “But you want to think about why you’re buying gold. Ultimately, if you’re buying gold as a portfolio diversifier, I think it probably makes sense to do it in the financial markets using an ETF.”
Frequently asked questions (FAQs)
Although the story of humanity’s discovery of gold is lost to prehistory, early people probably found it in its natural state in streams. Because the metal is largely unreactive, it is often easily visible in its familiar, lustrous form.
But it remains rare enough that its shininess and malleability take on a special value. It appears that, as civilizations developed, they began using the precious metal for good luck charms and religious objects of worship.
Later, people began to also regard gold as a sign of wealth, and by 1500 B.C. the precious metal became an international standard medium of exchange, centered in the Egyptian empire and its conquest of the mines of ancient Nubia. Around a thousand years later, the first coins made solely from gold were minted in Asia Minor.
“Gold’s value is a social construction; it’s an agreement that it has always been valuable and will continue to be,” said Steven Kibbel, a financial planner and consultant and the personal finance columnist for Expat Frontier. “Its lustrous and metallic qualities, relative scarcity and difficulty of extraction contribute to its perceived value.”
Like any investment, you’ll want to consider the risks that come along with the potential rewards of investing in gold.
There are a host of factors that affect gold’s price, which is the underlying catalyst for the profitability, or lack thereof, of different types of gold investments. Prices can move based on inflation expectations, central bank actions and economic data that influence currencies and the bond market.
Timing the market is notoriously hard to do. Given specific circ*mstances, gold might move in tandem with or inversely to other assets like stocks, bonds and currencies, even though its correlation with these asset classes can be lower over longer periods of time.
In addition to price risk, physical gold can be stolen, the use of leverage in the futures market can magnify losses beyond what you originally invested, and mining companies and firms that offer funds can run into financial trouble.
For many years, nations tied the value of their currencies to a certain amount of gold, or at least the currency of another nation that did so. Gold coins served as domestic currency, and the link to gold meant exchange rates between currencies were fixed.
This classical gold standard began to unravel in the 1930s and eventually gave way to a system centered on the US dollar, which was tied to gold at $35 per ounce. That system collapsed in the early 1970s when the US ended its dollar-gold convertibility, beginning the era of the modern international monetary system of currency backed by the creditworthiness of the issuing government instead of gold.
This era of fiat currency declared by governments but without the intrinsic value of precious metals is one key reason that many investors decide to put some of their portfolio in gold. Unlike fiat currencies, the supply of gold is relatively stable.
“Its supply is not subject to large swings because of its relative rarity and the high fixed costs of its extraction,” said Robert Wright, a senior research fellow with the American Institute for Economic Research, a libertarian think tank.
This stability has helped lead to gold’s reputation as an alternative currency and inflation hedge. Beyond that, gold is also considered a store of value because it often behaves differently than other investments, playing a role as a financial hedge.
“Gold prices are not closely correlated with the prices of equities, bonds, real estate and other major asset classes, so they can make a bad year better or a good year less of a tax burden,” Wright said.
Gold IRAs are specialized individual retirement accounts that can hold bars and coins.
While there are some advantages to gold IRAs, including favorable tax treatment, setting one up may take more steps than traditional retirement accounts.
Generally, there are also premiums on the metal and fees for the IRA that don’t come into play with traditional IRAs. You’ll also need to understand complex IRS rules for these accounts to avoid penalties or disqualification.
