How to Invest in Gold: Advice and Important Information
It is the most malleable of all metals. A single ounce can be flattened into a sheet 300 feet square.It has been a valuable and highly sought-after precious metal long since the beginning of recorded history. Used for jewelry, at times to mint coins, at other times the basis of monetary policy for countries, kingdoms and empires, it has been one of the world’s most sought-after metals and one of its most enduring assets.
In modern times, it is used in a variety of industrial, electrical, chemical, even medical applications.We’re talking, of course, about gold. And it should not be surprising, with such an exalted history, that gold is such an attractive means of trade and investment in today’s financial supermarket. And gold as an investment can be had in a variety of ways.
This article will discuss several ways of investing in gold with an emphasis on what is arguably the best way (but with its own limitations): through the modern practice of trading on a commodities futures exchange. But, before we get to investing in gold via a commodity futures exchange, let’s look briefly at a few alternatives.
One of the ways you can invest in gold is by buying bullion or gold coins. This allows you to get “up close and personal” to the metal because in this form, you can hold it, take it home with you and look at it any time you’d like. This means of investing typically occurs at the “retail” level and allows you to do so in very small quantities, and therein lays the caveat: the markup on the purchase can be prohibitive to this means of acquiring gold as an investment.
And selling bullion or gold coins back to a retailer will incur further erosion of your investment in the probable markdown on the sale. And while this is a very brief outline, the easy-to-figure economic picture we’re painting should illustrate that the retail route is hardly an efficient means of acquiring “investment-grade” gold.
Another way you can invest in gold, albeit somewhat indirectly, is through the ownership of gold mining company stock or gold mining company mutual funds. This investment certainly can give you exposure to gold, but it also gives you exposure to mining companies’ operating risks, the decisions companies’ managers make, equipment quality and efficiency, and a host of other forces completely unrelated to the price of gold.
It’s not impossible, for example, to see share prices in mining companies decline in the face of rising gold prices – and vice versa, just to add to the commotion. One other related means of investing in gold – a more recent entry – is via exchange-traded funds (ETF’s), a type of mutual fund.
However, when you own gold ETF shares, you do not actually own any gold. When you redeem your gold ETF shares, you do not receive the precious metal in any form. Instead, you receive the cash equivalent.
This brings us to investing in gold via a commodity futures exchange. And probably the biggest advantage to investing in gold by trading on a commodities futures exchange over any other means is the integrity of the actual price of gold. This is because the exchange brings together so many buyers and sellers of the precious metal and guarantees every transaction that takes place between them.
One exchange in particular, the Chicago Mercantile Exchange (CME), has become one of the world’s benchmarks for determining the price of gold at almost any moment of the day.
To give you an idea of the scope of participation among buyers and sellers trading at the CME, on any given trading day during this year’s third quarter, on average, more than $23 billion dollars in gold were traded, which translates to roughly18.5 million ounces per day, based on recent prices. Other international exchanges function similarly to the CME, in terms of trading gold and determining its price.
The exchanges also offer different-sized amounts of gold you can invest in. Available for trading at two major exchanges – the CME and NYSE Liffe – you can invest in 100-, 50-, 33.3- and 10-ounce contracts. Exchanges also function as safe depositories for the storage of gold. With the help of firms specializing in holding gold, like Brinks, Inc., Scotia Mocatta, J.P. Morgan Chase and others, exchanges can store and secure gold under title of the owner.
Certainly another important aspect to trading gold via a commodity futures exchange is the leverage offered by the exchange when you take a position in the market. Instead of requiring the equivalent cash value in order to take a position in gold, the exchanges set an amount in the form of a margin requirement in order to take a position.
Take the 33.3-ounce gold contract, for example. At current prices (gold is trading currently at about $1,325 per ounce) 33.3 ounces of gold is valued at over $44,000. But, the current margin requirement to take a position in a 33.3-ounce gold contract is $3,025 – barely 7% of the value of 33.3 ounces of gold.
Another major advantage that trading gold via a commodity futures exchange has over any other means is that you can take a short position – and profit on a decline in the price gold – as easily as you can buy gold.
The margin requirement and leverage are the same. With that said, it’s important to understand that leverage increases both the potential risks as well as the rewards when investing in gold.
Gold still holds almost universal appeal among the world’s markets and today there are several ways of participating in its price movement. Despite the range of options, trading gold via a commodity futures exchange is possibly the best means of doing so.
