Investment in Gold for Beginners

"Gold gets dug out of the ground in Africa, or someplace.
Then we melt it down, dig another hole,
 bury it again and pay people
to stand around guarding it. It has no utility.
Anyone watching from Mars would be scratching their head."
Warren Fuffett

Whether it’s coins, bars or ETFs, investing in gold is a hot topic these days as it’s almost up to $1,000 an ounce.  What’s interesting about this commodity is that unlike others, gold is not consumed or used.  Therefore, pretty much every ounce of gold ever minded is still potentially available.  Therefore, the price of gold is more a reflection of availability than the need for consumption.

Why Invest in Gold
Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social or currency-based crises. These crises include investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest. Investors also buy gold early in a bull market and aim to sell it before a bear market begins, in an attempt to gain financially.

However, since gold doesn’t have any earnings power and there is no consumption of this metal, this commodity should only be a small portion of anyone’s portfolio.

Ways to Invest in Gold
When it comes to investing in gold, the best way to make it happen is to spend some capital on many different gold products. One of the biggest mistakes that investors make when investing in gold is that they put too much faith in one product.

Gold is nice because you can invest in things like coins, bullion, and bars, but you can also buy gold certificates and gold-related funds, too. If you want to be as diversified as possible, you will combine all of these things, while also investing in some of the gold stock that are out there on the market today. Each has its advantages that you can exploit.

Picking the best blue chip gold stocks
Talk to savvy investors and it will become clear and apparent the best way to get your money into the gold market. These people buy coins and bars, but they go a little bit further than that. Buying blue chip gold stocks is a solid option because these companies have consistently posted nice returns over the last decade. Blue chip gold stocks are in a better position right now than they have been in the past for one reason. With their economic superiority, they are able to buy out the small exploratory companies and completely dominate the marketplace. This stranglehold on the market gives them power and bargaining ability.

Using exploratory gold company stock as a growth option
Few items in the gold investment world offer a competitive chance at growing your money. There is one exception, though. Exploratory companies sell stock to the public and they go out to find gold all the time. If you put in the time to research and find good up and coming companies, you can reap the rewards when they do well. Most of these companies will eventually be bought out by the big gold mining firms, so the stock will explode in value when that happens. This is a riskier strategy, but it is something worth considering as a small part of your overall gold buying plan.

Buying gold coins
Probably the most common and popular way to invest in gold is through the purchase of gold coins. These are available through a host of different sellers, with some of them being on the internet and some of them being out in the “real” world. Buying coins is a good way to go about gold investment because it provides you with something that is highly liquid and highly portable. Gold coins have the same value as things like bars, but you can keep them in a little sack or you can store them in a safe without taking up too much room. For those who are worried about the safety of their gold, this is a nice choice.
With coins, it is easy to buy and sell them when you see an opportunity. Most folks who want something tangible to add to their investment portfolio will purchase a certain dollar amount of these, since gold coins are pretty valuable all around the world. You are definitely not limited in when and where you can sell gold coins, which adds a lot to their practical value.

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Buying gold bars
A slightly less common way to buy gold is by purchasing bars. You can buy pure gold bars known as bullion, as well. The downside to purchasing bars is that it requires a lot of space to store them. With each gold bar having a lot of value, it is important that you keep these items locked up and in a safe place. Just leaving them around is a good way to have a lot of your gold portfolio stolen out from under you.

Bars and gold coins can usually be purchased from similar sellers and the benefits are basically the same. As tangible gold assets, they are a nice security blanket, because their value is not going to plummet. Even if the markets go bust, these items will retain their value all over the world.

The smart investors will choose a few of these investment avenues and break things up. Gold itself is a nice tool for diversification, but it is even better if you can diversify within your gold investment itself. Go for tangible assets to feel comfortable with your value and choose some of the more high-yield stocks to give yourself a chance to grow. This method has proven to work for many people and it’s something that is highly recommended.

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In the old days, the only way to invest in gold is through buying the actual commodity, or owning some type of gold jewelry.  However, with the advent of more advanced financial instruments, gold, along with other commodities, has become much easier to invest in without having to buy the physical metal. There are now exchange traded funds (ETF), that replicate the movements of the underlying commodity, giving investors direct exposure. While not every commodity has an ETF, both gold and oil have ETFs. For example, the streetTRACKS Gold Shares (ticker symbol GLD) trades on the New York Stock Exchange and can be traded at any time throughout the trading day. Each share of the ETF represents one-tenth of an ounce of gold, so if gold is currently $600 an ounce, the gold ETF will trade at $60 per share. This investment product is one of the easiest and least expensive ways to access the gold market.

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Ten Rules for Investing In Gold
1.      An investment in gold should be based on macroeconomic considerations. If one expects or fears rising inflation, destabilizing deflation, a bear market in stocks or bonds, or financial turmoil, gold should do well and exposure is warranted.
2.      Understanding the internal dynamics of the gold market can be helpful as to investment timing issues. For example, the weekly position reports of commodity trading funds or sentiment indicators offer useful clues as to entry or exit points for active trading strategies. Reports on physical demand for jewelry, industrial, and other uses compiled by various sources also provide some perspective. However, none of these considerations, non monetary in nature, yield any insight as to the broad market trend. The same can be said for reports of central bank selling and lending activity. Central banks are bureaucratic institutions and in their judgments they are essentially market trend followers.
3.      Excessive reliance on trading strategies to generate returns can be dangerous and counterproductive. Returns from a "buy and hold" strategy should be more than sufficient to compensate for the inherent volatility. Many who have tried to outsmart this market by hyperactive trading have under performed. Success is dependent in large part on the occurrence of "fat tail" events that lie outside the parameters of trading models.
4.      A reasonable allocation in a conservative, diversified portfolio is 0 to 3% during a gold bear market and 5% to10% during a bull market.
5.      Equities of gold mining companies offer greater leverage than direct ownership of the metal itself. Gold equities tend to appear expensive in comparison to those of conventional companies because they contain an imbedded option component for a possible rise in the gold price. The share price sensitivity to a hypothetical rise in metal price is related to the cash flow from current production as well as the valuation impact on proven and probable reserves.
6.      The carnage of the last twenty years has simplified the task of individual stock selection because so few have survived the gold bear market. Although a rising tide may lift most boats, financial statements should be reviewed with special attention to hedging arrangements that could undermine participation in higher gold prices or even jeopardize financial stability. Individual stock selection is less important than identification of the primary trend.
7.      Even though gold itself is a conservative investment, "gold fever" attracts a crowd of speculators, promoters, and charlatans who only want to separate investors from their money. Avoid offbeat "exploration" companies with little or no current production and gargantuan appetites for new money.
8.      Bullion or coins are a more conservative way to invest in gold than through the equities. In addition, there is greater liquidity for large pools of capital. Investing in the physical metal requires scrutinizing the custodial arrangements and the creditworthiness of the financial institution. Do not mistake the promise of a financial institution to settle based on the gold price, for example, a "gold certificate" or a "structured note", (i.e. derivative), for the actual physical possession of the metal. Insist on possession in a segregated vault, subject to unscheduled audits, and inaccessible to the trading arrangements or financial interest of the financial institution.
9.      Gold is a controversial, anti establishment investment. Therefore, do not rely on conventional financial media and brokerage house commentary. In this area, such commentary is even more misleading and ill informed than usual.
10.    Don't settle for too little. Should outlier events now deemed unimaginable by consensus thinking actually occur, the price target for gold would be several multiples of its current depressed price. Gold represents insurance against some sort of financial catastrophe. The magnitude of the upside is a function of the amount of paper assets that would be converted to gold irrespective of price.

Sources and Additional Information

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