Investing in Gold

Gold is highly valuable as an inflation hedge, and this commodity is the oldest currency known to man. World governments used to settle their debts each year with a delivery a specified amount of gold. Previously, many of the world's currencies were backed by the metal as an even exchange. The US Dollar was backed entirely by gold until the gold was eventually spent, and since 1971, the US dollar has not been backed by a single ounce of gold.

Today, gold remains a solid investment, which never moves up in down in value; rather, the value of paper currency relative to the amount of gold changes. The gold supply is running short, thus making it the perfect currency because it cannot be created like paper.  This is why gold has been the world's currency since the beginning of time.

Buying gold can be done in a variety of ways. Buying stock in gold miners and producers is one way to make money when the price of gold rises. Likewise, gold can be bought in hard metal form or on the various futures trading brokerages. There are pros and cons to every way to own gold. Here is the breakdown of each way to profit off the yellow metal.

Gold Bars

Buying gold in physical form has increased in popularity. Holding physical gold is one way to profit on gold, but is usually much more expensive per ounce than buying it on the futures market. When buying gold bars, there is often a large spread between the bid and ask prices and a very limited amount of dealers who sell ounces of pure gold. Coin shops and a few banks are the best places to buy gold bars and coins, but the prices generally run $20 an ounce over the current market price of gold. Gold dealers often have a hard time selling gold in a short time period, thus have to set large commissions to offset the daily change in prices. Storing physical gold also becomes a delicate task; safety deposit boxes are a great way to store gold, but the costs of monthly or annual rent add up.

Gold Futures

The futures and spot metal markets are a great way to buy gold. The biggest problem with gold futures and spot metals is that investors never take physical delivery, and thus, do not know if the "ounces" they hold in their accounts could really be honored. Gold futures are similar to trading paper back and forth, where no one actually takes delivery of the gold, but rather make money on the changing prices. One benefit is that gold futures are highly leveraged, meaning you can put up as little as 2% of the current price to control one ounce of gold. This also carries some risk, as high leverage means big wins and similarly big losses.

Gold Stocks

Buying gold stocks is the best way to invest in the metal. Gold producers rise and fall disproportionally to the price of gold and offer a natural type of leverage. When gold prices rise $50, it is possible that the profit margins of a gold miner will increase two fold, even on just a 5% increase. This gives investors a good way to be hedged to gold without actually owning it, and buying and selling your gold stock is as easy as selling any stock. Gold miners also pay dividends, something that you won't get out of physical gold or even gold futures.

Buying gold in economically unstable times can give you a hedge against currency devaluation and inflation.  By purchasing gold stocks, you can capitalize upon the changing prices in gold, as the mining company's profits instantly change just with one tick upwards of gold's price.