Striking Gold: A Wise Investor’s Handbook for Buying and Owning Gold

We often are asked by clients, usually after seeing an ad for gold, whether they should have more gold in their portfolio. With its long-standing value and ability to act as a hedge against inflation and geopolitical turmoil, gold remains a popular choice for individuals seeking to diversify their portfolios. Some individuals may choose to hold physical gold as a substitute for cash in the event of certain economic or monetary events. However, buying physical gold requires careful consideration and knowledge. In this blog, we will discuss various things to consider when buying gold.

Ways to Hold Gold:

There are several ways in which you can hold gold as part of your portfolio.

1. One method is to hold a precious metals fund such as Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR) or SPDR Gold Shares ETF (GLD). These funds are backed by actual precious metals held in bank vaults.
2. Another method is to own physical precious metals within a Self-Directed IRA. SD IRAs offer unique control & flexibility over the owner’s investment choices, but often require high fees and a high level of knowledge and savvy due to their complexity, especially when it comes to account setup & asset movement.
3. A third way would be to hold physical gold coins or bars, personally secured or vaulted at another location.
4. Lastly, you could own shares of companies involved in precious metals, such as mining company funds. However, the majority of “precious metals related” funds are comprised of a combination of assets related to precious metals including physical metal, stock in operating miners, exploration companies and mining finance companies, as well as futures contracts and even currencies of countries in which precious metals related industries operate.

Determine Your Investment Objectives:

It is very important to understand what your purpose is to own gold in the first place. Then, make sure that your purpose for owning gold matches the investment vehicle you choose.

If your objective is diversification and hedging against inflation, the easiest method is to include precious metals in your portfolio in the form of ETF funds. For example, the Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR), holds gold, silver, platinum & palladium. The metals you “own” are held in the fund company’s vault. You never take actual possession of the metal itself but buy and sell the fund in the marketplace within your investment accounts. This is a cost-effective and convenient way to invest in precious metals without having to be concerned with storage and finding reputable sellers.

If your objective is to have gold as a substitute for cash due to an economic or monetary event, physical gold bars and/or coins would be the best way to hold gold.

However, now you must deal with the issue of how to store the gold safely as well as finding reputable dealers with whom to buy and sell. Reputable local gold and coin dealers can be a good option and resource for you. You would want to be able to quickly take your metals to a dealer to exchange for local currency when needed. In this case you would ideally want smaller denominations (think 1 oz bar or coin of $2k value vs a 10oz bar of $20k value) to make for easier transactions.

Know the Pitfalls of Owning Gold:

While investing in gold can be a wise decision for many investors, it’s important to be aware of potential dangers and downsides associated with this investment. Here are some factors to consider:

1. Volatility and Price Fluctuations: Like any investment, gold prices can be volatile and subject to significant fluctuations. Though gold has historically maintained its value over the long term, short-term price movements can be unpredictable. Investors should consider gold to be a long-term investment.
2. Lack of Income Generation: Gold does not generate income such as dividends or interest, as other stocks and bonds do. If you are an investor needing a cash flow or income stream, you may not find owning solely gold suitable for your needs.
3. Storage and Security Costs: Whether you choose to hold your physical gold at home or at a business which provides vaulting, additional costs will be incurred to ensure it is well protected.
4. Counterparty Risk: When buying physical gold, there is a risk of being sold counterfeit gold or becoming a victim of unscrupulous practices. Performing due diligence and purchasing from trusted sources is essential.
5. Limited Liquidity: Although gold is generally considered a liquid asset, it might take time to convert your physical gold into cash, and finding buyers willing to pay fair prices can be challenging. Investors should be prepared for potential liquidity constraints.
6. Lack of Control and Potential Restrictions: There may be external factors such as government regulations and potential restrictions on gold ownership or export which could impact you.
7. Opportunity Cost: Owning too much gold may lead to poor investment returns, as other investment opportunities such as stocks, real estate, or bonds may offer better returns over the long term. It is always important to be well diversified and have an appropriate amount invested across asset classes.  

Research Reputable Dealers:

Finding a trustworthy dealer or seller is crucial when buying physical gold. There is not a standard certification or authorization process for sellers.  The US Mint, “recommends using your preferred internet search engine to find a local or national coin and precious metal dealer that fits your needs.”  Many sellers use online auction sites such as eBay or may sell direct via their own (bullion dealer) website. Check for industry affiliations, customer reviews, and ratings to ensure legitimacy. Reputable dealers will offer a transparent pricing structure, disclose all fees, and provide secure storage options. Meierotto Jewelers is an example of a local well-established dealer in the Kansas City area.

Storage Options:

Certain dealers and businesses will vault gold you own for you. This may be fine if you are holding it for diversification and hedging against inflation. Professional storage facilities offer added security, insurance, and peace of mind. Evaluate the costs and benefits of each option to make an informed decision. Some examples are: OneGold, Vaulted, and Schiff Gold. However, if you need to get to your metal quickly, such as in the event of an economic collapse, then having it safely stored at home or at your bank in a safe deposit box would be a better option. Ensure that adequate security systems are in place if you choose to store gold at your home.

Understand the Pricing Mechanics:

The price of physical gold is determined by the spot price (the current market price) plus a premium. The premium accounts for various factors such as the form of gold (plain bullion vs collectible coins), brand recognition, and market demand. You can stay up to date on the spot price through financial news sources or sites such as APMEX, MONEX or KITCO.

If you are buying the ETF version of precious metals, the price will be different than the spot price of gold, as the ETF is an investment wrapper that represents a basket of securities and it typically tracks the performance of an index.

Verify Authenticity and Purity:

You should always ensure the authenticity and purity of the gold you intend to buy, before finalizing any purchase. Look for reputable hallmarks or certifications, such as the stamp of a recognized assay office, which guarantees the quality and purity of the gold. Reliable dealers should provide proper documentation and certificates of authenticity.

Consider Professional Guidance:

It is always a good idea to get advice from a financial professional when making decisions about your investments. We would love to have a conversation with you about your investment goals and strategies. Make an appointment with one of our advisors to see if our approach to investments is right for you.

In summary, investing in physical gold can provide a tangible and reliable means of diversifying your investment portfolio and safeguarding against economic uncertainties. By understanding the different ways to hold gold, identifying your investment objectives, knowing the pitfalls of owning gold, researching reputable sellers, considering storage options, understanding pricing mechanics, verifying authenticity and purity, and seeking professional guidance when needed, you’ll be better equipped to make informed decisions and maximize the potential benefits of your physical gold investment. As with any investment, thorough research and due diligence are key to a successful gold-buying experience. Contact us today if you would like to speak with a wealth advisor to help you with these decisions.

Special thanks to Ben Buethe for his contribution to this blog.

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