Comprehensive guide to buying gold: Pros, cons, and Strategies (2024)

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• Individual investors can invest in gold in two ways: physical bullion or securities.
• Alternatives to buying gold include gold-backed stocks and funds.
• You should invest 5-10% of your portfolio in gold as a long-term hedge against inflation.

Ah, gold. It's rare and accepted everywhere, and governments can't print it at will. These are why some folks — fondly known as "gold bugs" — have always invested heavily in the honey-hued metal. And in times of financial chaos, they're not the only ones.

Gold is another appealing option for many investors because it represents the "purest" way to invest. You own the actual yellow metal — a commodity that can't be erased or hacked and survives catastrophic events that destroy paper currency and digitized financial accounts.

Let's dig into buying and investing in physical gold.

Why invest in gold

Not only is gold largely immune to inflation, instead hewing closely to the cost of living, but gold also serves as a hedge against economic disaster. When the rest of the stock market falls, gold often goes the other way, appreciating and protecting the canny investor against major losses in other financial assets.

"History has shown that during economic slowdowns, from the Great Depression to the COVID-19 pandemic, gold appreciates in value," says financial analyst James Jason of Mitrade.

Investing in goldcan be a smart way to diversify a portfolio — especially one that includes stocks, bonds, and mutual funds. No matter the economy's state, gold offers a good way to diversify your assets. Many financial advisors recommend keeping anywhere from 5% to 10% of your portfolio in gold — perhaps up to 15% in times of crisis.

Individuals can invest in gold in two main ways: physical gold (aka bullion) or gold securities (stocks, funds, and futures).

How to buy physical gold

Physical gold comes in many forms and sizes, each with its own characteristics and costs.

Gold bullion

Bullion often refers to gold in bulk form, usually bars or ingots. Typically, gold bars are poured and ingots are pressed (a cheaper production method). As a result, bars command a higher premium, or added cost, over the daily spot price of gold than ingots.

Ranging in size from quarter-oz. wafer to a 430-oz. brick, bars, and ingots are stamped with purity, origin, weight, and where the bullion was minted. Not all gold is equal, especially regarding purity and weight. Investment-grade gold is at least 99.5% pure.

Banks and gold dealers sell bullion bars and ingots. Banks often offer physical gold at a lower markup than dealers, but finding a branch with it may be harder.

Gold coins

Minted coins are another common way to buy physical gold. Not to be confused with old rare coins that numismatists collect, these coins are new, minted by governments for investors. The prices they fetch are based on their gold content —aka their "melt value"— plus a 1%-5% premium.

Although several governments issue gold coins for maximum liquidity, most buyers stick with the most widely circulated and recognized:

• American Gold Eagle
• Australian Gold Nugget
• Canadian Maple Leaf
• South African Krugerrand

Minted bullion coins are available from major banks, coin dealers, brokerage firms, and precious metal dealers.

Read our guide to the best online brokerages

Pros and cons of investing in gold

For many people, owning the physical stuff is the whole point of owning gold. It's the actual metal that has most of the inherent investment advantages.

Pros

• Hedge against inflation
• Counterweight to stocks
• Less volatile than stocks or bonds
• Physical durability

Cons

• Risky asset to hold
• Illiquid
• Doesn't earn interest or dividends

Advantages of physical gold

• Inflation hedge. Advocates argue that, as a tangible asset, gold maintains an intrinsic value that always reflects the cost of living. There's an old saying that an ounce of gold equals the cost of a quality business suit. That held in 1934 when men's suits fetched $35, and it does today too, with gold close to $2,000 an ounce (of course, that suit better be a Boglioli).
• Counterweight to stocks. Like other commodities, gold acts as a counterfoil to equities, usually moving in the opposite direction of the stock market. Case in point: When the subprime mortgage meltdown began in 2008, ushering in the Great Recession, gold—trading in the $400-600 range—shot up to $1,000 per ounce and continued for three years.
• Safe haven. Gold is seen as a haven in uncertain times or socio-political turmoil. For example, after the 2016 Brexit vote, its price rose over 10% in one month. "Owning gold," says Dennis Notchick, a certified financial planner at Stratos Wealth Advisors, "appeals to individuals concerned about the collapse of global markets or other threats to a government's ability to back its currency."
• Virtually indestructible. "Physical gold cannot be hacked or erased," says Charles Stevens, COO of Bullion Box Subscriptions. (Remember, we're thinking in catastrophic terms here.) "A natural disaster cannot destroy gold and will not get worn down in time."

Drawbacks of physical gold

• Expensive to hold. Storing gold at home carries enormous risks of theft or loss. Keeping it in a commercial facility incurs storage costs, often based on the size and value of the holdings (anywhere from .5% to 2%). If you're not using a professional storage facility, you'll want to insure your gold, too — another ongoing charge.
• Illiquid. Physical gold can't be sold with a press of a button or a call to a broker. Even with dealers acting for you, a sale can get days or weeks to settle, plus you have to arrange for shipping.
• Does not produce income or profit. A $1,000 investment in bullion buys $1,000 — period. Physical gold doesn't generate interest or dividends. The only potential for appreciation is if there's a jump in prices that lets you sell at a profit (and even that can be compromised by the time, effort, and various assessment costs that accompany selling).

How to invest in gold

Gold is priced by the troy ounce, a special unit 2.75 grams higher than a traditional ounce. The amount it's fetching on the open market is known as the "spot price."

But equipping yourself to purchase gold means knowing more than just the price. Here are some tips:

1. Know when to buy

2. Understand how gold prices are determined

The price of gold is determined by the supply and demand cycle, so if you're buying at a busy time, all that competition drives up the price. Also note that when you purchase gold, you'll be paying for the asset itself, plus a premium of 1% to 5%, so make sure you budget for the full amount.

3. Find the right dealer

Your regular brokerage or financial services firm probably doesn't deal in gold. Bullion is typically only sold at banks and gold dealers, while minted coins can be purchased at coin dealers, brokerage firms, and precious metal dealers as well. Wherever possible, try to purchase from a bank first, as they often offer lower markups than dealers.

Banks won't always have the exact coins or size bars you're looking for, however, so if you do turn to a dealer, do your research to find someone reputable. That means looking closely at online ratings in trade journals and sites and checking the dealer for complaints.

4. Have a storage plan

Stashing large amounts of gold in your home leaves you vulnerable to theft, so insure it, and locate an off-site storage location where you can rest assured it's protected. In fact, if you want to hold gold in an IRA account, the IRS mandates that gold can be stored with a metals-specialist custodian through a gold IRA.

Check out our guide to the best gold IRAs

How to invest in gold securities

Given the hassles and limits of bullion, gold securities — in the form of stocks, funds, or options — are often a better choice, especially for novice investors.

They may not be as pretty, but they're infinitely more practical:

Gold stocks

One way to play is to buy shares of companies in the mining, refining, or other aspects of the gold production business. About 300 companies, aka "miners," are listed on major stock exchanges. Their share prices generally reflect the movement of the metal itself.

However, the World Gold Council, an industry trade group, notes that "the growth and return in the stock depend on the expected future earnings of the company, not just on the value of gold. "

Gold ETFs and mutual funds

More conservative investors can buy shares in gold-oriented mutual funds or exchange-traded funds (ETFs). These funds have varying investment approaches: gold-backed ETFs tend to invest directly in physical gold, while mutual funds favor gold mining stocks.

Some funds invest in both. But all offer a liquid, low-cost entry into the gold market that is more diversified and, therefore, lower-risk than buying equities outright.

Gold options

More seasoned investors might consider an option on a gold futures contract. Like any financial option, these represent the right — but not the obligation — to buy or sell an asset (gold, in this case) at a specific price during a specified time window. You can buy an option to bet on whether gold's going up or down; if the market moves the opposite way, all you've lost is the small amount you've paid for the option.

Gold options trade on a division of the Chicago Mercantile Exchange (CME) known as COMEX. Gold options can be bought on gold bullion or gold ETFs.

Pros and cons of gold securities

Like any financial asset, gold securities have both benefits and drawbacks.

Pros

• More liquid than physical gold
• Earns dividends
• Low initial investment

Cons

• Increased volatility
• Reflects political and economic conditions
• You don't own the gold

Advantages of gold securities

Along with some of the general benefits of gold ownership, securities offer:

• Liquidity. Gold securities are easier to buy and sell than bullion when trading as they do on major exchanges. No storage costs, either — aside from any management or account fees your broker or fund manager might charge.
• Compounded returns. While dividends offered by miners are typically average at best, they are greater than no dividends at all, which is what you get from physical gold. And there is also the possibility of appreciation in the share price.
• Low initial investment.The most cost-efficient way to invest in general, like mutual funds,index funds, and ETFs, let you in on the game at a far lower cost.With the spot price of an ounce of gold around $2,000, nearly $180 for a share of the SPDR Gold Shares ETF (GLD) — equal to 1/10th of an ounce of gold — is spot on.

Drawbacks of gold securities

• Volatility. Just as with any company, a miner's operating costs, reserves, and management all play a factor in its performance. As a result, share prices tend to be more volatile: If bullion sinks 10%, gold stocks often plummet 15%. Miners definitely "have a higher speculative aspect to them," says investment strategist Lyn Alden, who follows precious metals and currencies.
• Systematic risks. A gold mining company's share performance is also reflected in political and economic conditions in its native country. Some of the biggest operations are in Africa, Russia, and Latin America — places that have known their share of turbulence and are often avoided by socially responsible and institutional investors.
• You don't own gold. Gold securities are less of a pure play. They represent physical gold, but you don't have the right to redeem them for the actual metal. So they don't protect a paper currency or financial market meltdown that the metal itself does.

Other ways to own gold

More sophisticated investors might consider purchasing an option on a gold futures contract. An option allows its owner to buy or sell a particular asset at a specific price (it's an opportunity but not an obligation).

Buying an option is a bet on which way an asset — in this case, the price of gold — will move. Correct guesses trigger a payout. And if you guess wrong, the option just expires worthless and all you're out is the option cost.

FAQs about investing in gold