Gold may be the hottest investment in the world right now.
This yellow metal now commands more than $1,250 per ounce, and many folks are making wild predictions about how far it can run.
Yet there are many ways to invest in gold and each has its pros and cons.
Whether buying simple jewelry as a newbie or arbitraging gold markets across international borders as a hardcore trader, we’ll show you how to make it happen, ranked from the least hardcore strategy to the most.
Jewelry is the easiest -- and most common -- way to buy gold around the world. Gold bracelets, necklaces and watches are easy to find, familiar to buy, and have added fashion value.
But there are numerous reasons not to invest in gold through jewelry.
First, its price is usually much higher than for pure gold, sometimes having as much as a 300% mark-up. Secondly, the value of the item comes more from the craftsmanship and adjoined pieces, like gemstones, than from the actual gold. This can make it difficult to assess a piece's real value. Finally, your bling is easy to steal.
If you must, buy wholesale, at auction, or in countries with reduced cost. And for international buying be wary of customs tax implications.
Coins are another easy way to invest in gold.
Some have value more from their rarity than their actual gold content, but most are solid gold and coins' relatively small units make them far more affordable and accessible than gold bars.
Popular coins like the American Gold Eagle, Canadian Maple Leaf and South African Krugerrand are readily available at coin shops, sites like goldcoins.org and bulliondirect.com, and directly from the U.S. Mint.
If you go to a store, bring your cash -- most coin shops don't like credit cards or checks. And consider a home safe or your bank's safe-deposit box as a means of keeping the collection secure.
Lastly, remember that there's a 28% collectibles tax if you sell the coins after owning them for a year. Ouch.
If you think gold prices are peaking, then there's an easy way to short the market: Cash4Gold.
The website's commercials have been seemingly everywhere, usually with MC Hammer or Ed McMahon imploring you to send in your unwanted gold jewelry for dollars.
Here's how it works:
Cash4Gold sends an envelope. You stuff it and send it in. Then the company evaluates your stuff and mails a check 'based on gold content (karat), weight, and the daily price of gold.' If you don't like the price, they'll send the jewelry back.
The company has made a killing since launching in early 2007, but has recently been accused in a class-action suit of stealing customer jewelry and lying about its return policy. But whatever, they give you cash for your gold.
Gold Exchange Traded Funds (ETFs) can be broken down into those based on gold futures, and those backed by physical gold held in vaults.
Obviously, the latter represents a more direct exposure to the metal.
Taking it one step further, if you happen to be someone who just doesn't trust governments from Anglo-Saxon economies, you can even own an ETF whose shares are backed by gold held in Switzerland. Just in case.
Nevertheless, there are drawbacks related to physical gold ETFs.
Primarily, the Internal Revenue Service treats physical gold as a collectible, thus may subject it to a higher tax rate on gains than other types of investment such as futures-based ETFs.
Physical gold ETFs also represent a decreasing amount of metal per share over time due to funds selling portions of their investors' gold to cover expenses. Technically, one day each share could own almost nothing.
Of all the ways to own gold, ETFs are one of the least likely to label a gold bug. Yet at the same time, in certain circles, they may lack the cool of gold bullion stacked in the wine cellar.
Examples of Futures-Based Gold ETFs:
Powershares DB Gold Fund (DGL)
E-TRACS CMCI Gold Total Return (UBG)
Examples of Physical Gold ETFs:
SPDR Gold Shares (GLD)
ETFS Physical Swiss Gold Shares (SGOL)
iShares Comex Gold Trust (IAU)
Gold mining companies let you tap into the business of selling gold, in a rather levered fashion.
They can be highly sensitive to changes in expected gold prices since their income is tied to the price of gold minus their production cost, rather than to the price of gold alone.
For example, if a miner can produce gold for $400 per ounce, yet gold prices double to $1,200 from $600 an ounce, then the miner's profit per ounce could quadruple to $800 from $200.
Don't forget that this levered effect can hurt on the way down as well.
A problem with mining stocks is that their gold reserves may not be precisely known and are subject to error.
Also, their production costs can change over time and their shares can be tossed around by market forces other than the change in gold price. So they might not track gold prices as effectively as other investments.
Don't forget that these companies can be mismanaged as well, especially when it comes to hedging or costs.
Gold stocks are a good proxy favoured by many pros, though a far cry from direct gold ownership.
Examples Of Gold Mining Stocks:
Newmont Mining (NEW)
AngloGold Ashanti (AU)
Barrick Gold (ABX)
Investors can buy certificates from various trusted sources which represent direct ownership of gold kept in storage by a third party.
The upside of holding this 'paper gold' is that it should technically track the price of gold perfectly.
It is also more convenient than many other investments since it allows you to buy and sell gold without having to transfer physical gold.
The downside is that you need to keep the certificates very safe.
You are also generally charged a storage or transaction fee for the gold backing your certificates.
Worse yet, in an end-of-the-world scenario, you could easily have your gold holdings frozen by the government regardless of what a few pieces of paper say. It's happened before...
Futures allow investors to buy or sell gold without the management fees of funds, and without being subject to the potentially bad decisions of third-party managers. Of course, you'll still be held liable for your own ideas.
They also allow investors to make leveraged bets, since as futures they are margined and you don't need to pay the entire value of your gold exposure upfront.
In addition, futures aren't subject to potentially higher 'collectibles' tax rates that physical gold may incur.
Yet futures aren't for the less-sophisticated investor, which means most of us.
Rolling over maturing contracts can be tricky, prices can be volatile and confusing due to issues such as contango or backwardization, and true trading costs are sometimes hard to calculate.
Importantly, futures in the end are just derivatives related to gold.
Should the apocalypse cometh, a collapse of the world financial system could render your paper profits on a futures contract totally meaningless.
One Futures Example:
A 400 ounce gold bar is the iconic representation of owning bullion.
The pool of individually numbered bars is deep and liquid, and most bars are stored in highly-secure vaults. Traditionally, that safety is reserved for professional traders like countries or companies who can buy millions of dollars worth at a time, not individuals.
That's changing. capitalising on demand for gold, select retailers are selling and buying the gold alongside kitchenware and clothes.
British luxury department store Harrods, for example, recently introduced 'a full range of Swiss investment grade 999.9 fine gold bars that meet international 'good delivery' standards,' offering them at 'market-linked' prices. And sites like kitco.com sell full bars too.
Of course, you shouldn't stuff bars under the bed or in the sock drawer. Next, see how to keep the bullion safe.
Because gold is such a valuable commodity, storage is necessarily an investment factor.
By buying ETFs or mining stocks, it's a non-issue as the cost is obviously borne by companies.
But to buy large quantities of bars, coins or other bullion, security is critical. Secure storage options include an individual safe, paying for space in a bank vault, or paying a retailer like Harrods.
Once it's stored, make sure it's either in a public, impossible to penetrate place, like UBS vaults in Switzerland or keep it a secret.
For example, hedge fund manager David Einhorn recently revealed that Greenlight Capital has amassed a horde of gold at an undisclosed location in New York City. Good luck figuring out where.
For the truly hardcore gold trader, the world is a big place and a sucker is born every day.
There are many markets for gold that are well off-the-beaten-track. Gold is traded between people in every country around the world, sometimes on a very small scale and in hard to find places.
From India, to Nicaragua, to late night T.V. -- There are smaller gold markets with pricing inefficiencies all over the place.
Just remember, the smartest guy in the room is the one earning a spread regardless of market direction.
So carry a quote-enabled phone. And maybe a gun. Which brings us next to the most necessary gold investment of all...
Finally, should chaos engulf the world, nothing will prove more valuable and versatile than a gold-plated firearm.
This baby reaps rewards through any market cycle.
Every serious property owner should have at least one.