Gold Investing: A beginners Guide to the Gold Market

Gold Certificate from a $100 tender

The first part of investing in gold will be understanding the price of gold and what effects the price of gold. The price of gold is set by a benchmark known as the London Gold Fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day.

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding play a much bigger role in affecting the price, because almost all the gold ever mined still exists and is potentially able to flood the market at the right price.

Given the huge quantity of above-ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. Investors mainly buy gold as a method of diversification, while others might buy gold for emotional reasons like fearing a depression or supporting a political ideal.

How to Invest in Gold

There are several avenues for investing in gold: gold coins, mining stock, Gold ETFs, Gold Mutual Funds, certificates, gold accounts, and options or futures.

To start out with Gold Coins are, as many experts believe, the best way to start investing in this precious metal. First, because of the simplicity of the gold coins. Starting out you need not worry about the complexity of many other types of gold investing like ETF expense ratios, undue leverage, options timing or futures speculation. Instead, by starting out with gold coins, you’ll skip all the complex forms of gold investing and move straight into holding an ounce of gold in your hand.

The Top 10 Gold Coins for Gold Investing:

  1. The 1 oz American gold eagle
  2. The 1 oz gold buffalo
  3. 1 oz gold Canadian maple leaf coin
  4. 1 oz British Britannia coin
  5. 1 oz gold south African gold krugerrand
  6. 1 oz Austrian Gold Philharmonic Coin
  7. The 1/2 oz Canadian Gold Maple Leaf Coin
  8. 1/2 oz American Gold Eagle Coin
  9. 1/4 oz Canadian Gold Maple Leaf Coin
  10. 1/4 oz American Gold Eagle Coin

Gold Mining Stocks are the next step up from investing in gold coins. Investing in mining shares takes a little more sophistication but as long as you stick with mining companies with strong balance sheets and positive cash flow you’ll be ahead of most other investors speculating on unproven mining companies. There are investing opportunities with junior mining companies, but those shares take an even more sophisticated investor.

Gold ETFs are in line with gold mining stocks we just talked about. Gold ETFs are attractive because of the ease and liquidity of trading the fund. However, beware of any paper touting the amount of gold backing that paper. Remember that’s exactly what the U.S. Dollar was, and now it’s lost 95% of it’s value over the past few years. But if you must buy into a gold exchange traded fund, be sure to look for a fund with a low expense ratio. That way fees won’t eat into your wealth.

Gold mutual funds are so attractive to the investor who either cannot buy physical gold, or who simply wants to take a shot on the leverage that gold-mining stocks can offer. With gold mutual funds, you get a variety of gold-mining stocks all at once, chosen and traded by professional managers—you diversify your holdings within the realm of gold-mining stocks, mitigating the company-specific risk that buying one, individual gold-mining stock brings with it.

Gold Certificate from a $100 tender
Gold Certificate from a $100 tender

Gold Certificates haven’t been around in a while, but basically it’s a piece of paper that guarantees the holder a certain amount of gold. The gold certificate was used extensively in the U.S. between 1882 and 1933. In 1933, it became illegal to own gold, thus all gold certificates were withdrawn from circulation. In 1964, it became outright illegal to own the certificate. I can’t help but wonder if in 1964 the government wanted less people to remember dollars used to be backed by something.