What is a Gold Exchange and Why Should You Care?
Like many people, you’re excited about the idea of investing in gold.
Maybe you have a few investment grade coins, but you’re a bit nervous about storing more of them at home.
There’s no depository nearby. And you aren’t crazy about paying storage fees anyway.
You want those hard assets and the safety and security of gold, but if you can’t take physical possession of your gold, how can you invest in it?
Well, actually, it’s easier than you might think.
Investing in gold is fun, exciting and can earn you a tidy profit. Don’t lose out on the benefits of investing in gold because you don’t want to take physical possession of your gold or you don’t have time to follow the market closely enough to time your investments. There’s a better way.
How, you may be asking? Who are these people who invest in gold without following the market closely? How do they buy their gold if they don’t own it physically? This is starting to sound complicated, right?
Own Gold Without Taking Physical Possession
Most people who invest in gold don’t buy the metal itself. Trading in gold on the open market has more ins and outs than many investors want to deal with on their own. These people may want the benefit of owning gold without the bother of managing the physical handling, transport and storage of the gold.
For investors with this mindset, there are trading groups that deal in gold. These groups are called Exchange-traded funds, or ETFs. Some of these exchanges deal only in gold while others branch out into other precious metals.
There are several types of gold exchanges. It only makes sense for all potential investors to know about the different kinds of exchanges before choosing where to put their cash. That’s what we’re here for.
Exchange-traded funds are securities that track a group of assets or an index. These funds are usually bought and sold over the counter on open exchanges similar to the way regular stocks are bought and sold.
Some gold ETFs actually own shares in gold mining companies. This is one step removed from owning gold itself. It is an option for people who want the benefit of gold investments but who feel more at ease with traditional stock ownership.
Or for people who listen to their brokers all the time.
We in the trade call those people “poor.”
Advantages of ETFs
One advantage of exchange-traded funds is that the expenses and fees are often lower than most mutual funds change. That’s always a good thing.
Unlike mutual funds that calculate NAV at the end of the day, the price for ETFs moves up and down during the course of the trading day in response to buy and sell orders.
This enables buyers who are actively engaged in the market to speculate on the direction of the price based on their market research. That’s the part the ETF handles for you.
You can also buy ETF shares on margin or sell them short. You do usually have to pay standard broker’s fees when buying or selling an ETF.
You can buy as little as a single share of an ETF. This allows buyers to invest in gold, for example, without having to buy a full bar or an entire ounce. It’s a great way to get started and build your stake in gold.
If you are interested in diversification, an ETF may be a good choice. Since the ETF mirrors an index or basket of goods, your investment automatically benefits from the mix of assets.
An ETF that shadows an index may be a good choice if you are interested in investing in a mix of commodities or in other precious metals besides gold.
There are also funds that track only gold. You may put your cash in an ETF, a closed-end fund (CEF) or an exchange-traded note (ETN). Most of these funds issue certificates that represent ownership of a certain amount of gold.
Owning a certificate instead of the gold itself means that you can enter the gold market with a small investment that buys a small fraction of an ounce of gold. As the price of gold rises, the value of the share rises along with it. You get the benefit of gold with low cash outlay. It’s a no brainer.
You can also add to your gold stash easily with a fund. You can buy more shares whenever you have cash available.
Not every fund or every fund in a specific class of fund has physical stores of gold.
Some may specialize in short sales or derivatives. ETFs often track gold using this method. Hat can increase your profit even more than the normal increase in gold prices will.
You should know that funds that take possession of physical gold often charge storage and handling fees in addition to the typical fees that most funds charge. Check out the fees before you buy. Lower fees mean higher returns.
Buying a gold ETF has some great tax advantages too. When you sell, the applied tax rate is usually the capital gains rate rather than the equity securities rate. Every tax dollar saved means more cash for you to invest in gold.
Don’t just assume that you will be taxed at the capital gains rate based on this article. The actual tax method may vary based on the fund’s structure.
Some investors prefer to take possession of their gold. For these investors, it makes sense to own gold coins or gold bullion.
Other investors are only interested in gold as a hedge against inflation of currency changes. For these buyers, shares in a gold ETF make sense.
Some buyers may want to invest in gold both ways. Having a few gold coins to admire helps to remind them of the beauty and power behind their ETF certificates.
Now that you have a clear knowledge of gold ETFs and their advantages, it might be time to put your spare cash into gold.
I don’t care what your broker says about gold, and neither should you.
Your broker can’t sell you gold. There is no incentive for a broker to learn about gold. There is no incentive for your broker to recommend gold.
You aren’t going to hear about gold from your broker. But that doesn’t mean you don’t need to own gold.
Owning gold is fun. It can lead to high returns. It provides a real hedge against inflation. Every portfolio should include some gold for safety and security.
Now all you need to do is decide if you want to invest in coins, bullion or ETFs. I say -- why not all three?