Gold is a liquid form of investment and is usually incorporated in investment portfolios to hedge against other market positions. This is especially true when you have exposures in the currency and stock markets. But if you are planning to invest in gold as a primary investment vehicle, then timing is the key – as they say “Buy Low, Sell High”. But then again, it is not as simple as that. Lows and highs happen every hour – minutes even.
There are many gold investment products to choose from and they are primarily classified as “physical” and “paper” gold investment products. The appropriate gold product to invest in depends on how much you are willing to invest in, and how long you are committed to stay in the market. Deciding on your gold investment plan needs careful study – if not, an expert’s advice. Whichever step you take, starts with knowing the different gold investment products available in the market today.
Physical gold is gold which is in your possession and control. It is most often in the form of gold bullion and it is what most prospective gold investors start investing into. To invest in gold bullion means investing in gold bars and gold coins. Modern day gold bullion is easily distinguishable and therefore easily traded since they are carefully produced and marked according to specific standards.
Gold bars are imprinted with their manufacturer’s name together with their weight and gold content. Gold coins are also marked with their weight and minted with standard gold contents according to its class as specified by the issuing Mint. Most gold coins have imprinted face values but they are never really used as legal tenders since their gold content have much higher market values.
Rare gold coins are also physical gold investment products. However, their market value is higher than their equivalent gold content. Unlike gold bullion coins, they are priced according to their rarity and numismatic values which have been standardized by numismatic scholars and coin grading bodies. Any investor on rare gold coins must know how to determine what makes a coin rare and worth as much in order to make the most of his/her investment.
It may be true that most people don’t understand the other types of gold investment products aside from gold bullion and rare gold coins. But in the broader financial world, paper gold is the more heavily traded type of gold investment product. Paper gold is however speculative in nature and therefore riskier than physical gold. Investing in them could mean losing or gaining much more than investing in physical gold. You need financial advisers if you’re a novice and a broker to execute these investments in your behalf.
There are many “paper” gold products in the market today. Gold Certificates is one of these gold investment products which are issued by banks and financial institutions which may or may not have “allocated” gold to back it up. However, Perth Mint Gold Certificates are fully backed by the government of Western Australia. Gold Mining Certificates are also available but they are instead issued by gold mining companies.
Investing in Gold Futures is buying gold on credit; with terms and condition, including prices, volumes and specified due dates predetermined in the present. A “downpayment” which also serves as “margin” is required. The investor is subject to market fluctuations happening before the due date which is why “margin calls” are often made to tap probable “loses” along the way. But it could go either way and you can make more money if you make the right speculations.
There are also more complicated “paper” gold investment products like ETFs, ETNs and CEFs. These products also track the price of gold like Gold Futures and they may or may not also have 100% “allocated gold reserves with them. ETNs particularly track the price of gold using derivatives. They all carry risks which are beyond the intrinsic value of gold. They are however very helpful as hedge instruments – even against physical gold itself. They are useful in overall portfolio diversification.
Other Gold Investment Products
Professional bullion dealers and Central Banks around the world buy gold and directly store them in disclosed and accredited storage vaults around the world. The 400-ounce “Good Delivery” gold bars are always their primary choice of gold bullion. However, there is a recent trend where smaller investors can invest in “allocated” gold which are safely kept in accredited storage vaults around the world. It is important to note that “integrity” is the main issue in maintaining the market price of “Good Delivery” gold bars.
While an investor can invest in “allocated” gold through reputable banks, the storage cost are considered fairly high. BullionVault, which is a relatively new entrant to the gold market, offers investment opportunities at lower storage cost and also allows smaller investors to “pool” together to have a stake at lower priced physical gold – usually in the form of “Good Delivery” gold bars.
Another type of gold investment product which is creating a buzz these days is Digital Gold. It is considered paper gold since investors are issued Digital Gold Currencies by the issuing companies. They are however still considered a niche market but their promise of a new form of international currency which could replace the dollar and other leading currencies is creating a stir. They also promise 100% “allocated” gold reserves to back up their currency issuances.