When it comes to adding gold to your portfolio, there are two main courses of action: Buying physical gold, and buying gold through an investment vehicle. Gold is often considered a solid commodity investment, and it is perceived by many as a safe haven during times of market turmoil.
If you’re interested in adding gold to your arsenal, you cannot simply stroll into a bank and begin buying up gold bars. Here’s what you need to know about how to buy gold, as well as what to consider before making the purchase.
3 ways to invest in gold
One of the most common ways to add gold to your portfolio is to invest in it. There are a variety of ways to do so.
1. Invest in gold ETFs
With exchange-traded funds (ETFs), investors pool their money into a fund that includes a bundle of securities, which can range from stocks to bonds to commodities. A popular type of commodity ETFs are gold ETFs, which track the price of gold.
When you invest in a gold ETF, you don’t own any physical gold — instead, you own shares of a fund that give you exposure to gold, whether that’s in the form of physical gold, gold futures contracts or gold companies. The issuing company of the ETF (not you) is the one who either invests in gold companies or buys and stores the physical gold.
Where to buy gold ETFs: You can invest in gold ETFs through a brokerage account, such as E*TRADE or Charles Schwab. Below are some examples of top gold ETFs:
- SPDR (GLD): A fund that allows investors access to gold bullion
- Aberdeen Standard Physical Gold Shares (SGOL): A fund that purchases and redeems physical gold
- VanEck Vectors Gold Miners (GDX): A fund made up of a variety of major mining stocks
2. Invest in gold futures
Another way to invest in gold is through gold futures. With gold futures, you’re agreeing through a financial contract to buy gold from a seller at an agreed-upon price at a specific date in the future. These contracts can then be traded on an exchange.
Investing in gold futures is rooted in speculation — you’re betting on the price of gold to either rise or fall in the future, depending on your position. With gold futures, you put down just a percentage of the full price, so you can own large amounts of gold for a fraction of the cost. Then, if the price of gold rises, your futures contract becomes more valuable, and you can sell it for more — profiting off the changing price of the gold.
Most investors in gold futures do not actually end up buying physical gold from the seller in the contract. Instead, they’re just taking advantage of price movements in the market. If your prediction on future gold prices pans out, it can generate great yields — if you’re wrong, though, you could lose a lot.
Where to buy gold futures: Since gold futures are traded on exchanges, you can purchase them through a brokerage account that supports futures trading, though these are typically more limited. Popular brokerage firms that offer gold futures trading include Charles Schwab and TradeStation. The most common exchange for gold futures is COMEX.
3. Invest in gold mining stocks
A third way to invest in gold is through investing in gold mining stocks. As its name suggests, when you invest in gold mining stocks, you are investing in the companies that mine for gold.
This is a more roundabout way of investing in gold: You aren’t betting so much on the actual commodity as you are on the companies that mine for gold. The stock price of these mining companies are not just based on the price of gold, but also additional factors like management, production costs, reserves and mine exploration, which all contribute to the expected future earnings of the gold mining company.
Where to buy gold mining stocks: Once again, investing in gold mining stocks can be done through a brokerage account. Examples of large gold mining companies include:
- Newmont Goldcorp
- Barrick Gold
- AngloGold Ashanti
Meanwhile, ETFs that are comprised of gold mining companies include:
- VanEck Vectors Gold Miners ETF (GDX)
- Direxion Daily Gold Miners Bull 2X Shares (NUGT)
- iShares MSCI Global Gold Miners ETF (RING)
2 ways to buy physical gold
If you’re in the market for physical gold, you have two main options.
1. Buy bullion
Bullion is a bulk quantity of precious metals, such as gold, silver or platinum. It is assessed by weight and typically sold in the form of bars or ingots.
While large, gold bullion bars are often touted as an efficient way to purchase physical gold and the best route for large buyers, due to lower premiums. However, gold bullion bars can also be costly to liquidate and can come with assay, refining and handling fees.
2. Buy bullion coins
Bullion coins are struck from precious metal, like gold. The U.S. Mint, a department of the U.S. Treasury, produces bullion coins, guaranteeing their weight, content and purity. Coins can be easier to sell and trade, and they can sell at a higher premium than bars, since they can have a rarity factor. Common gold coins produced by the U.S. Mint include the American Buffalo and the American Eagle.
Where to buy physical gold: If you’re looking for where to buy gold coins or bullion, you have options:
A gold dealer: One of the most common ways to buy gold is through a precious metals dealer, many of whom can be found online. If you go this route, you have the advantage of being able to compare rates across a number of dealers and gold exchanges across the web.
However, it’s important to only buy from a credible dealer — gold premiums are generally closer to 2%, so be wary of any dealers who charge you a premium of 5% or more above the gold’s spot price. You’ll want to look at the dealer’s transaction history and customer reviews, and also ask about their buyback policies. You can also search for dealers on the U.S. Mint’s website.
Avoid buying gold through bidding websites, websites advertising big discounts, cold calls and pawnshops. While some dealers might offer to store your gold for you, to ensure its authenticity, it’s often recommended that you store your gold in your own safe or safety deposit box.
Select financial institutions: While it is extremely rare, some banks and brokerage firms may sell gold, and if they do, it will likely be in the form of gold coins. Fidelity, for example, offers a number of gold coins, as does Massachusetts-based Leader Bank.
Does gold belong in your portfolio?
All that glitters isn’t gold — in fact, many experts disagree on whether gold belongs in the average investor’s portfolio. Here are a few common pros and cons associated with the precious metal.
Benefits of gold
- Diversification: Gold is often used by investors as a hedge against inflation and a diversifier of risk, as it is known to be a relatively stable investment. Because physical gold’s properties don’t change, it is often considered a reliable store of value, and since its value moves in the opposite direction of the U.S. dollar, it is considered a good hedge against inflation.
- Performance in times of trouble: Physical gold in particular is often viewed as a type of insurance — if the economy were to collapse, you can use physical gold to barter, since it’s a tangible asset. Additionally, gold’s value tends to go up during times of turmoil, as was the case in the wake of COVID-19 and during the aftermath of the Sept. 11, 2001 terrorist attacks.
- Potentially lower tax rate for physical gold: Physical gold can come with a lower tax rate. Gains made on collectibles (in this case, gold) that are held for less than a year are taxed as ordinary income, but taxes on gains made on collectibles that are held for longer than a year are capped at 28%. So, this could be beneficial depending on what your marginal tax rate is.
Downsides of gold
- Physical gold premiums: The price charged for coins and bullions by dealers, banks and brokerage firms is almost always more than the value of the gold that the products contain, according to the FTC. Be sure to shop around to make sure you’re paying a reasonable premium.
- Additional costs: There are significant additional costs associated with buying physical gold. This can include security expenses, such as a safety deposit box or other storage, as well as insurance expenses and shipping fees.
- Potential for scams: Scams run rampant in the physical gold market. Make sure you do your research, take necessary precautions and purchase from a reputable dealer to avoid falling victim to fraud.
- Underperformance in comparison to stocks: While gold tends to perform better when the stock market is in turmoil, which makes it an attractive investment during times of trouble, stocks have historically generated better returns than gold in the long run. If your sole focus is to generate the best returns, gold may not be the best option to turn to.