How to Buy Gold

Gold bullion and coins | Physical gold ETFs | Gold stocks, ETFs, and indices | Gold futures | Gold-linked bonds and notes

With the gold price setting all-time highs this week, investors are seeking ways to increase their leverage to the price of gold. There are many different ways to obtain exposure to the gold price as a plethora of investment products have been created in recent years making it easier for retail investors to invest in gold and other commodities. Even large institutional investors have taken positions in some of the newly-created gold-related investments. John Paulson of Paulson and Co. has purchased 31 million shares of the SPDR Gold Trust ETF (GLD), while David Einhorn of Greenlight Capital has purchased physical gold bullion for his fund as well as 3.2 million shares of the Market Vectors Gold Miners ETF (GDX).


Gold bullion and coins - It is difficult to miss commercials on television and radio that hawk gold coins as an investment vehicle. One ounce gold coins, for example American Eagles or South African Kruggerands, offer an easily portable and identifiable gold vehicle. However, it is important to keep in mind that the transaction cost of obtaining exposure to gold in this manner can be quite high, particularly if the purchase quantity is small. In addition, sales taxes may apply to the purchase and shipping costs for physical delivery can add 1-3% to the total purchase price. Insurance and secure storage can also add to the cost of holding physical gold.
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Physical gold ETFs - There are a number of gold exchange-traded funds now available which make the process of obtaining exposure to the gold price more economical and easier than purchasing and holding bullion. Exchange-traded funds are specialized investment vehicles known as unit trusts which issue stock to raise funds and then use the proceeds to purchase the asset for which they have been established. In this manner, acquiring gold exposure is as easy as purchasing and holding any other stock with similar transaction costs.

While the scale of positions held by gold ETFs results in lower acquisition and holding costs for shareholders, there is usually some minor slippage relative to gold price returns due to the timing of physical gold trades as ETF share subscriptions and redemptions are made. Gold ETFs include SPDR Gold Trust (GLD: NYSE) which is the most liquid gold ETF; ETFS Physical Gold (GOLD: ASX); iShares COMEX Gold Trust (IGT: TSX); Central Gold Trust (CEF: NYSE); PowerShares DB Gold ETF (DGL: NYSE); UTI Gold Exchange Traded Fund (GOLDSHARE: NSE - India); Gold Benchmark Exchange Traded Scheme (GOLDBEES: NSE - India).
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Gold stocks, gold stock ETFs, gold funds and gold stock indices - Because physical gold is a fungible asset, prices are set by macroeconomic factors that affect investment demand for the metal. Consequently, gold mining companies do not compete with one another based on competitive pricing or quality. Thus, share prices for gold miners are established by numerous factors, including but not limited to: the market price for gold, each companys individual production profile, and the costs for exploration, mine construction, extraction, processing, and general administration.

Although cash costs are affected by the price of energy inputs and the level of operating leverage a company employs, they are generally less volatile than the gold price itself. The inverse of this is that as the gold price fluctuates, operating margins can exhibit wide swings and act as a lever on share price returns. Because of this enhanced leverage, many investors seek exposure to the gold price through gold mining stocks. There are idiosyncratic risks that exist when purchasing a gold mining company, including permitting issues and operating risks.

Exposure to the gold price in this manner can be obtained by purchasing individual stocks, publicly-traded gold mutual funds, or through index vehicles which provide diversification, such as the PHLX Gold/Silver Sector Index (XAU), the NYSE Arca Gold Miners Index (GDM) and the NYSE Arca Gold Bugs Index (HUI). Positions in the XAU and HUI can be taken through cash options on the indices, while the GDM can be traded through the Market Vectors - Gold Miners ETF and options (GDX). Publicly-traded gold funds include ASA Limited (ASA: NYSE), First Eagle Gold Funds (SGGDX: NYSE), DWS-Scudder Gold & Precious Metals (SGDAX: NYSE), and others.
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Gold futures - Like physical gold ETFs, gold futures enable investors to obtain exposure to the gold price without taking delivery of the metal. In addition, futures contracts allow investors to access gold exposure utilizing less capital than is required for purchasing the physical metal, affording the investor considerably more financial leverage. The futures market in gold also tends to very liquid and compares favorably in terms of transaction and holding costs. Gold futures contracts are traded electronically and through open-outcry on the COMEX division of the CME Group (GC[Month,Year]) and the eCBOT platform of the CME Group (GC[Month,Year]).
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Gold-linked bonds and notes - Though not widely issued, mining companies and some sovereign governments will occasionally sell gold-linked securities as a means of monetizing natural resource assets or providing enhanced credit quality for loans. The terms of these instruments are usually specific to the individual issue, but usually include interest and, sometimes, principal payments in gold or an equivalent monetary value. For the average investor, sometimes the only economical way to access gold price exposure through these instruments is through a gold or bond fund.
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The above list of gold-related investment vehicles are some examples of ways for retail investors to gain exposure to the price of gold in order to protect their existing savings from a loss of purchasing power in the event that the U.S. dollar continues to depreciate. There are individual risk factors that impact each of the above investment vehicles and as with any investment, individual investment professionals and advisors should be consulted to determine suitability before making any decisions.