Home  Investment Strategies Buying Gold
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Ways to Invest in Gold or Simply Trade It There are a number of methods you can choose to invest in gold. Some of these methods will expose you to more or less risk than others and can produce lesser or greater financial rewards than others, so it is essential to know your risk tolerance and which of these different approaches is best for you. I’ll begin with the most conservative approaches and end with the least conservative ones.
Buying Gold via “GLD” ETF GLD is a gold tracking stock that moves perfectly in sync with live gold prices as determined by the global markets. GLD has a low spread (the difference between the bid and ask price) and low commissions to trade. You can buy and sell GLD through any brokerage account such as Schwab, Scottrade, or Ameritrade. You can also buy GLD through your 401K or IRA account. GLD is by far the most liquid (easy to buy or sell in any quantities) form of gold investment there is, which means if you need to liquidate your investment to raise cash or take profit you can do so on any given trading day at the market price. Also, GLD is backed by at least as much gold as there is open interest in the ETF so it’s right on par with buying a gold certificate (maybe better). Should the gold market turn against you, if you buy GLD in a non-margin account at a 1:1 leverage (no leverage) then you are guaranteed never to see your investment evaporate completely because gold will always retain a certain base value no matter what. Since the gold is stored in a secure location and isn’t in your personal possession you don’t have to worry about providing secure storage.
PROS: Cheap commissions; small spread; low risk and low stress; extremely liquid; no security risk or concerns
CONS: Low reward; you don’t get to take your gold out and play with it ;)
Buying Physical Gold from a Precious Metals Dealer You may wish to buy gold directly from a gold dealer and take possession of it. If you do, keep in mind that you need some means of securely storing it that’s better than a coffee can. You may need to invest in a safe or put it in a safe deposit box at your bank. Either way you wish to proceed, you should consider the fact that storage will be an additional expense. Also, gold dealers charge a premium above the spot price to buy gold that is considerably higher than the commissions and spread on GLD. Be extra careful who you choose to buy your gold from. Don’t trust the company to do this for you, just because they have a 60 second ad spot on CNN Headline News doesn’t mean they’re a trustworthy company. If the money’s good, media outlets will promote anything! Search the Better Business Bureau (BBB) and RipoffReport for a complaint history on the company. Search Google for “INSERT_COMPANY_NAME_HERE fraud” and “INSERT_COMPANY_NAME_HERE scam” and read all you find to get a good idea if the company you want to do business with is reputable or not. Avoid Monex Deposit Company like the plague! Northwest Territorial Mint isn’t exactly a shining beacon for honor and decency either. Be extremely leery if a company seems more interested in convincing you to do a leveraged trade than selling gold for delivery. Shop commissions, but don’t assume the cheapest is the safest, Monex is cheap on commissions for metals on delivery but many people never get the delivery and boiler room salesman try to up sell customers to extremely risky leveraged trades. Reputable or not delivery times can often be fairly long no matter who you buy from, six weeks is not uncommon.
PROS: You get the gold in your hands; fairly liquid; if the economy collapses you still have something of value
CONS: Storage and security expense and liability; if anyone finds out you store your own gold you could become a target of criminals; commissions are fairly high; can only sell to a gold dealer and typically for less than spot; lots of crooked dealers to sidestep; long delivery times
Buying GLD Call Options Call options give you the right to buy the underlying asset at a given "strike price" for a fraction of the cost of the underlying asset, in this case GLD gold tracking stock. Options are a risky proposition but not as risky as futures. If you don’t have experience trading options you probably shouldn’t do any more than paper-trade them. When buying call options you need to be aware of a few basic principles of options trading. Options prices are subject to what are collectively referred to as “the Greeks”. The “Greeks” of most importance are “theta” and “vega”. “Theta” refers to time value and is subject to “decay” as the option comes closer to expiration. “Vega” refers to the premium built into the option price based on the market’s implied volatility or “IV”. If this is “Greek” to you then I suggest you take a pass right now!
The best thing about buying call options is the combination of limited risk with unlimited reward. The worst thing about buying call options is that your odds are 90% that you will lose the trade, which means even if you're right you often lose. 90% of all options expire worthless! Options are best suited for insider trading slime balls that already know what is going to happen!
If you must trade options you can improve your odds by buying “in the money” (ITM) options that have more intrinsic value and less time value. Time is always proportionately cheaper on ITM options.
PROS: Limited risk; unlimited reward; no margin call
CONS: Time decay; “volatility crush” risk; horrible odds of success; you can lose even when you're right (just not right enough); high commissions; very high spread; leverage makes them stressful to trade
Trading Gold Futures Gold Futures are highly leveraged and therefore VERY risky. If you don’t have at least a few years trading experience under your belt, including trading with leverage, you really shouldn’t take the risk. Gold futures were not intended for speculators but instead for gold producers and gold products manufacturers that wish to lock in a certain future price to stabilize it for future sale and purchase. If you are a jewelry manufacturer and you know you will have to purchase a certain quantity of gold six months from now you may wish to lock in the price now so that you can project retail pricing going forward without having to make surprise adjustments that your retail distributers may not appreciate. As a gold mining company you might wish to lock in a future sale price, especially if the current price is favorable, so that if the market price should fall you don’t lose money on your currently in stock product.
The leverage works like this, you put up say $200 per ounce to control a gold futures contract with gold at $800 an ounce. If gold rises to $900 an ounce you gain $100 on a $200 investment. However, if gold drops to $700 an ounce your $200 investment is now worth $100. If you don’t have additional cash in the futures account you may be below margin requirement and thus subject to a margin call (automatic liquidation of your position due to equity dropping below margin requirements), and if the market comes back in your favor it doesn’t matter because your position was automatically liquidated by the trading firm. If the market moves extremely fast against you, you can even go negative in the account resulting in you having to send additional payment to the trading firm to cover the debt. In particularly volatile markets you may experience a “limit up” or “limit down” move. This means the market has moved so fast that, in case of “limit down”, the exchange will not allow traders to sell their contracts. On a semi-rare occasion this has even been known to happen sometimes for several days in a row! This can happen when panic selling grips the market and even many margin calls cannot be executed. This means that by the time a margin call is executed your account value is not only obliterated but horribly negative.
If you choose this method of trading gold, use a stop loss. Don’t let margin calls be your stop loss. Keep in mind that on any given weekend a major news event can cause the market to gap significantly enough against your position to force a margin call even if you have a stop loss in place. This means that in the futures market you are never truly safe from a margin call. Make no mistake about it, trading futures is not investing it’s gambling. As in traditional gambling you must always combat the powerful emotions of fear and greed and these emotions more often than not lead to poor decisions and lousy money management. You may start with a toe in the water and find yourself in up to your neck from averaging down a losing trade.
PROS: Big leverage = big reward; commissions are low on futures
CONS: Big leverage = BIG RISK; margin calls; odds of success are less than 50% due to margin call risk and commission and spread; you probably can’t afford to be wrong and probably won’t recover if you are; good luck sleeping at night if you’re “all in”; you’ll be a slave to the charts and it will likely have a negative effect on your productivity at work; over weekend event risk; limit moves can wipe you out
Trading Gold with the Monex Atlas Account Take some of the negative risk factors of options trading such as time decay (in the form of monthly finance charges) and high spreads, combine them with all the negative risk factors of futures trading such as margin calls, add in astronomical commissions, and then throw in an account representative that intentionally mismanages your money to make his exorbitant commissions, then top that off with a legal agreement that has you signing your legal rights away, and you have the Monex Atlas Account. Basically you should just draw your money out of the bank and use it for kindling in your home fireplace. At least you’ll get some use out of it.
PROS: Beats playing Russian roulette with a fully loaded .45
CONS: Unlike futures trading firms Monex is not government regulated; you’re going to lose most or all of your investment; you sign away your right to a class action; you sign away your right to court proceedings in favor of arbitration; you sign that you agree to pay for arbitration proceedings if there are any; you are recorded over the phone agreeing to things you shouldn’t agree to and then Monex uses your words against you in arbitration; you may end up playing Russian roulette with a fully loaded .45; you can’t “legally” smash your Monex account rep’s face in
Recommendations Even Investors Business Daily calls the Monex Atlas Account a stupid investment. Take their word for it, they know what they’re talking about!
At the time of this writing I don’t own any of the above trading instruments, but if I were to make a choice it would be between buying GLD and taking delivery of physical gold. Personally, I like GLD as it makes life simpler, but to each his own.
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