Beginners Guide to Investing in Gold

Beginners Guide to Investing in Gold

With our beginners guide to gold investing, we are going to make a couple of assumptions up-front. You want to invest in gold bars, gold coins, gold stocks or gold futures because you think gold is undervalued and has a very significant upside. If that’s your assumption, we agree and will move on to discuss the different ways to invest in gold. 

 

Defining Terms: 

Let’s define a few terms here that describe the different categories of gold investing. Like I mentioned above, there are several ways to invest in gold. 

 

 

Here is a short list, but it contains the ways most people invest in gold:

  1. Gold Bars – Bars that are professionally created and stamped or minted with weight and purity. Some “bars” are shaped like coins and are called gold medallions. If a government does not have a face value on a particular gold “coin-shaped” medallions they are legally not considered “coins.”
  2. Gold Coins – Legal tender issued by a government, even if that government is long gone. If a government issued it AND it has a “face value” it is considered a “coin.”
  3. Gold Bullion / Coin Accounts – Where gold bullion or coins are held on account and you never take delivery.  Ask yourself if you trust this holder? Are you protected if they company holding your gold goes bankrupt? Don’t believe what anybody tells you. Not all of these companies are created equal.  A less reputable company could conceivably sell the same bar over and over. What happens if they have a huge amount of their client holdings stolen? Be careful. Some big names don’t offer you the protection you might think they do. 
  4. Highly Advertised Gold Brokers Companies Selling Gold by Advertising Massively, and Taking Retail Orders by Phone or Online  (Bars, coins) – When you buy from the big name companies advertising on television, make sure you know what you are paying in comparison to the actual trading price for gold. 
  5. Gold Jewelry – If you are buying from a retail jewelry store, you are NOT investing in “gold.” You are buying something decorative that is priced for far more than the weight of the gold. 
  6. Gold Stocks – Listed gold stocks on the Nasdaq, NYSE and NYSE MKT (formerly the AMEX) are far better than gold penny stocks. Know the difference. 
  7. Higher Risk Gold Penny Stocks – Gold penny stocks are the highest risk way to invest in gold via the stock market. You have to know the difference between a producing gold company and a non-producing gold company. More on that later in this guide.
  8. Gold Mutual Funds – The typical mutual fund that had gold stocks in it. 
  9. Gold Exchange Traded Funds (ETF’s) – This is a gold mutual fund that has a full stock symbol and is traded like a regular stock. 
  10. Gold Exchange Traded Notes (ETN’s / Debt traded as funds) – These are debt instruments for gold companies traded like a regular stock. 
  11. Gold Futures / Options – This is buying gold for a later delivery date. Options essentially are priced in the same way and work in a similar way. You can also do options on an individual gold stock. 

 

If you’re Buying Bullion or Bars: 

The first thing to do is to make sure that the gold you are buying really is gold. I share this one article that details how some of the most prudent buyers in New York City were scammed with gold bars that had been hollowed out and filled with another metal.  Read about it here

Obviously buy from dealers you trust. Gold bars are not something you should necessarily buy online. I have often attended coin shows over the years. You find many gold dealers that are really trying to get out of inventory at times. If you are such a buyer, use cash at these shows. The dealer has risks involved if you use a credit card. They know that any electronic transaction can be reversed, so their best price is going to come when you buy with actual cash. Save your receipts when you buy this way. You have to make sure the seller has full contact information, including phone number. 

Don’t buy gold on Craigslist for sure. There is too much of a chance someone may be setting you up to rob you. 

Buying from the well advertised gold brokers / dealers usually involves paying top dollar. You’re not going to get a “great deal.” Many have plans where you can pay a certain amount a month and you get gold bullion over time. 

When you buy from such dealers, some ship to you immediately as you buy gold. Others hold it “on deposit” for you. You have to decide what you like better. Remember, if all hell breaks loose in the economy and you have your gold “on deposit” you might find that your access to that physical gold becomes limited.

Remember, FDR OUTLAWED PHYSICAL GOLD OWNERSHIP.

Could another President do the same? Could that same President block you from taking possession? Food for thought, but highly unlikely. But, if you own gold for when all else goes bad, that may undermine the very reason you hold gold. 

If you take physical delivery you could also have it stolen in a robbery or burglary. Don’t share with anyone that you have it in your home. If you take physical delivery and then take it to your safety deposit box at your bank you may end up having access to that box frozen if our economy goes bad. When FDR outlawed physical ownership of gold, he also blocked all access to safe deposit boxes at banks until a government “revenue officer” (prior to IRS Agents) were present as you opened it. That really happened!

 

If You’re Buying Actual Gold Coins Issued by a Government (recent or centuries ago!):

There are three kinds of gold coins, generally speaking: 

  1. A gold coin that is only valued at the price of the gold. It has no “numismatic value.” 
  2. A gold coin that is more valuable than the gold due to its rarity. That rarity is called the “numismatic value.” That is the value of the coin to a collector. 
  3. The third kind of gold coin is something that is not actually a coin. These are medallions that are made of gold and sold by private mints. The Franklin Mint is such an example. The Franklin Mint mints both real coins that have a country and a face value or denomination. They also make medallions that look like coins, but are really only worth the value of the metal. They produce “collectors sets” at times of these medallions, but generally speaking they are worth ONLY the price of the metal – no matter how pretty the packaging is. 

Unless you know what you are doing, stick with the first kind of coin, those that sell for the price of the gold metal contained within. 

Coin dealers will see an amateur coming from miles away. I still like the coin shows best for buying as I have seen it many times where a dealer needs to get out of his gold and get liquid in cash. 

When buying from any dealer, get receipts. Get full contact info. Be able to prove where you got it. 

 

 

Buying Gold Stocks: 

When buying gold stocks, make sure you understand that there are many so-called “gold stocks” that pretend to be gold stocks. They are actually dreamers or scammers who have not quite got to the gold yet.

Is the gold company producing real gold? Are they also producing other metals at the same time? The latter does not apply to all operations, but if they are not producing anything they are not quite in business. 

Gold stocks do not necessarily go up to the price of gold. Let’s say that gold goes from $1000 to $1800 per ounce over a couple of months. The companies that are truly producing will benefit greatly. Those prospective companies are likely to bounce up also – but usually on a false buzz. Rarely is it because they will actually bring in more money. 

 

 

The Greatly Enhanced Risks of Gold Penny Stocks: 

“A fool and his money are soon parted.”

That phrase applied to nearly every gold penny stock.  If you buy them, you are almost certain to lose. Don’t believe any report that shows a huge amount of gold in an area that they are about to start mining. Believe only what they have actually brought out of the ground for a year or so.

Most of these tiny companies cannot even begin to actually start production. They use the public company vehicle to hunt here and there for gold. If they actually hit it big, do you really think they are going to share that gold with investors? Think of most of these penny stocks as one man operations that hire a few independent contractors. Let’s say they hit it big in “Area 51.” That’s maybe one of 75 gold claims they have access to and are checking. They just don’t mention it. They let that lease “expire” in a few months, possibly buying that lease themselves. 

I don’t trust most of the GOLD penny stock operators. I have heard about fraud where they find gold and that gold ends up going to a privately-owned entity.  The expenses of such an operation go to the public company and are put on investors. 

 

Buying Gold Funds – both Mutual Funds or Exchange Traded Funds: 

This is the easiest and probably the safest way to buy gold stocks. They generally move with the value of gold. They generally fall before the price of gold actually falls. 

Exchange Traded Notes for gold companies are not the same as gold equity stocks. It is a debt instrument. It’s more like a utility and less like a gold stock. 

 

 

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