A lot of people have come to realize that investing in Gold or other precious metals can be a great way to protect their assets and wealth. Still, even if one decides that they want to invest in Gold, they are often confronted with the question of “how” to invest. With precious metals there are numerous options, including bullion, futures, stocks in Gold mining companies, and funds in Gold mining companies. In this article we will explain why bullion is the best option for most investors. Let's start by outlining some of the distinct differences between the four previously mentioned ways of investing Gold (or other precious metals).
Bullion is probably the most straightforward type of investment. When you purchase bullion, you purchase coins or bars of a specific carat of Gold. Most bullion coins are pure Gold and all high quality forms of bullion are weighed out to a very exact amount. You should not underestimate the time and care that is taken to ensure that the coin features both an exact weight and exact carat. The biggest risk with Gold bullion may be storing and securing your investment. Still with all of the advanced safes and security measures now available, this should not deter you.
Futures are a bit more difficult to explain, but in essence a futures contract is a contract that ties two parties to buy and sell something at agreed upon prices at a future date in time. So, if you think Gold prices are going to rise from USD 1,300 today to USD 1,800 within a year, you can buy a futures contract to guarantee the sales price in today's prices. Then, if Gold prices rise, the value of your futures will also rise. Usually you will then sell your futures contract to another investor. Once the end date comes due, the Gold will need to be delivered to whoever owns the futures contract. Does this sound complicated? In many ways it is, and this is one reason why many investors shy away from futures contracts.
Investments in stocks and funds means that you invest in a financial instrument that is tied to the mining of Gold. For example, you might buy stocks in Barrick Gold, the largest publicly traded Gold company in the world. The basic theory behind investing in such companies is that if Gold prices go up, stock prices in Gold mining companies should also go up. Why? If Gold mining companies are able to sell Gold at a higher price, their revenues and profits will increase. Gold mining funds are portfolios made up of the stocks of numerous Gold mining companies rolled up into one package. In general, funds help hedge risk against the failure of any one company.
We will be blunt, if you are looking to make investments based on the actual value of Gold, you should quickly strike stocks and funds off of your list. There are simply too many factors involved in stock investing that could derail your investment even if Gold prices go up. For example, you might decide to invest in Barrick Gold and suddenly Gold prices start to rise dramatically, pushing Barrick's stock prices up. At first your portfolio looks great but then news breaks that a major accounting scandal has been uncovered at Barrick Gold. Suddenly, the company's stocks are tanking, even as Gold prices continue to rise. In this situation, you correctly predicted that Gold prices would rise but lost money anyways.
And besides scandals, numerous other things could have a severe impact on Gold stock mining prices, even as Gold values continue to go up. Consider this, a civil war might break out in a nation with rich Gold deposits and it turns out that the companies you have invested in obtain most of their Gold from this nation. Suddenly, their mining operations have been disrupted. Now Gold prices are rising because supply is decreasing, but your stocks are plummeting because the company you invested in just lost its mines to an armed rebel force. There are also many more other circumstances that can affect Gold mining stock prices, even if Gold prices are going up. Bad management, a workplace accident, and numerous other things could devalue your stocks.
Futures might be a good investment for some people in certain situations. If you are afraid that you will not be able to properly secure your investments, for example, futures may be a good investment. Still, futures undermine one of the most important aspects of investing in Gold. As the last few years have proven, financial markets are extremely risky and there is a genuine risk that a financial crisis could emerge that could literally wipe out financial markets. If this happens, there is a huge risk that you will lose most, if not all, of your investment in futures. One of the most important reasons investors invest in Gold is to protect against disruptions in financial markets. Investing in futures ties you to these very same financial markets that Gold investors are trying to diversify away from.
This leaves Gold bullion as the best possible Gold investment. With Bullion you will have physical precious metals that will stay in your possession even if world financial markets tank. Further, you will not be vulnerable to the individual circumstances, such as scandals, that can quickly overwhelm individual companies. Instead, you will be tied to the swings in general market prices.
As a side note, the same arguments outlined above apply to Silver, Platinum, and other precious metal investments. So if you are considering an investment in precious metals, bullion should be at the top of your list!