Gold is one of the most versatile assets available on the market today – and there are many different ways to invest in it. These options include buying physical gold, as well as other alternatives like gold stocks, mutual funds, and exchange traded funds. In some forms of gold investment, you are not required to take actual receipt of the metals or storage. Some investors may also trade gold futures in the commodities market.
In comparison to other investable commodities, gold is more accessible to regular investors. One reason is because individuals can buy gold bullion (the actual yellow metal) in the form of gold bars or coins from a precious metals dealer. In some cases, investors may buy gold bars and coins from a bank or brokerage firm.
Physical gold can take several forms:
- Gold Coins
- Gold Bullion
- Gold Bars
- Gold Jewelry
There are many different types of physical gold to choose from. But these are not all approved by the IRS for inclusion in a self-directed IRA or retirement account, because gold and other bullion are considered “collectibles” under the IRS’s Individual Retirement Account statutes.
The law discourages holding collectibles in IRAs. But, there is an exception for certain highly refined bullion – as long as it is in a bank or an IRS-approved non-bank trustee’s possession.
So, when you are investing in a gold IRA or retirement account, it is important to consider the rules of the Internal Revenue Service that pertain to what is and is not allowed to be inside of the account.
According to the IRS, “Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins that are minted by the U.S. Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.”
So, the types of gold that are allowed in an IRA or retirement account include:
- American Gold Eagle bullion coins
- American Gold Eagle proof coins
- British Gold Britannia coins (from 2013)
- British The Queen’s Beasts coin
- British gold Sheng Xiao Lunar Series (British coin)
- Canadian Gold Maple Leaf coins
- Austrian Gold Philharmonic coins
- Australian Kangaroo / Nugget coins
- Chinese Gold Panda coins
- American Gold Buffalo uncirculated coins (proofs are not allowed)
- Gold bars and rounds that have been produced by a NYMEX or COMEX-approved refinery or a national government mine, and that meet the minimum fineness requirements
You may also hold other types of precious metals in a self-directed IRA or retirement account. These include silver, platinum, and palladium. For instance, allowable silver investments include:
- American Eagle coins
- Canadian Maple Leaf coins
- Australian Kangaroo Nugget coins
- Austrian Philharmonic coins
- Mexican Libertad coins
- Bars and rounds that are manufactured by either a NYMEX or a COMEX approved refiner or assayer, or by a national government mint, and that also meet the minimum standards for fineness.
Likewise, allowable platinum includes the following:
- American Eagle coins
- Canadian Maple Leaf coins
- Australian Kangaroo Nugget coins
- Austrian Philharmonic coins
- Isle of Man Noble coins
- Bars and rounds that are manufactured by either a NYMEX or a COMEX approved refiner or assayer, or by a national government mint and that meet the minimum standards for fineness
Allowable palladium investments, according to the IRS, include:
- Bars and rounds that are manufactured by either a NYMEX or a COMEX approved refiner or assayer, or by a national government mint, and that also meet the minimum standards for fineness
Based on Internal Revenue Service rules, the minimum fineness standards for gold and precious metals IRA accounts is:
- .995 for gold
- .999 for silver
- .9995 for platinum for platinum
- .9995 for palladium
You are required to follow the IRS guidelines when purchasing physical gold and other precious metals for a self-directed IRA or retirement account. If the IRS discovers that a non-allowed metal is in the account – regardless of whether this investment was purchased intentionally or unintentionally – the IRA could lose its tax-advantaged status.
One important component about purchasing physical gold for an IRA is storage. The IRS mandates that you may not store IRA gold at your home, or even in a safe deposit box at a bank. Rather, you must store physical gold at a bank or in an IRS-approved non-bank trustee.
You will usually have to pay a fee for storing the gold. This cost is usually between $100 to $250 per year, depending on the type and amount of gold you own. Once you turn age 59 ½, you are allowed to liquidate the precious metals from your self-directed IRA account. You can do this by selling the metals for cash, or by taking physical possession of the gold and other metals.
There are many advantages to purchasing and owning physical gold. There are also some potential drawbacks. So, it is important to consider both the pros and cons of physical gold investing before you purchase it.
Pros and Cons of Investing in Physical Gold
|Physical Gold Investment Advantages||Physical Gold Investment Drawbacks|
|Provides a hedge against inflation||Storage requirements and costs|
|Security of value||Not a passive asset|
|Diversification||Only certain items allowed in a gold IRA account|
Gold Mutual Funds
Instead of buying physical gold in your retirement account, you could buy shares of one or more gold mutual funds. These are mutual funds that directly or indirectly invest in gold reserves.
Gold mutual funds are “pooled” investment vehicles that offer investors a way to gain exposure to gold without incurring the cost of storage and insurance. So, gold mutual funds can provide a safer method of purchasing gold-related investments.
There is a wide variety of gold mutual fund types that are available in the marketplace today. For example, shares of gold mining companies’ stock and/or physical gold are types of gold mutual funds. So are gold futures contracts.
Gold funds represent a convenient way to buy gold and gold-related investments, oftentimes at a lower dollar commitment, as compared to the direct purchase of physical gold.
You can conveniently invest in gold through mutual funds, without having to take possession or store the physical items. But there are also some potential drawbacks with this form of gold and precious metals investing. So, it is important to consider the pros and cons before you buy a gold mutual fund.
Pros and Cons of Investing in a Gold Mutual Fund
|Advantages of Gold Mutual Funds||Drawbacks of Gold Mutual Funds|
|Lower principal outlay required||Commissions and/or other fund management fees|
|Convenience||No control over positions that are bought and sold within the fund|
|No storage (or the cost of storage) required||Mutual funds price only once per day (as versus stocks and ETFs that can be bought and sold throughout the trading day)|
|Spreading out of risk|
Gold ETFs (Exchange Traded Funds)
Exchange traded funds, or ETFs, have only been around since the early 1990s. The first gold ETF came about in 2004. But even within a short time, this option has become a popular method for owning gold. One reason for this is because investors are not required to own any physical gold to earn a profit from the changes in its price.
An exchange traded fund (ETF) is a type of security that includes a collection of securities – such as stocks. ETFs often track an underlying market index. ETFs can invest in any number of industry sectors or use various strategies.
In many ways, exchanged traded funds are like mutual funds. But, ETFs are listed on stock exchanges and their shares trade throughout the day, like shares of stock. ETFs are marketable securities, meaning that they have an associated price that allows investors to buy and sell them conveniently.
A gold ETF is a type of exchange traded fund that moves up and down in price as the market price of gold bullion moves up and down. It is one of the most popular forms of exchange traded commodities, or ETCs.
Gold ETFs work like any other form of ETF by tracking the price of a benchmark index. In this case, the index is gold. Gold ETFs also include various assets that can help them with achieving this goal.
For instance, the simplest gold ETF will hold only bullion. When investors buy shares of this fund, they take ownership of part of that bullion. So, the value of the shares will track the market price of gold. There are other types of gold ETFs, though. These hold assets such as gold futures or stocks in gold mining companies.
For example, so other types of gold exchange traded funds may include:
- Gold miner ETFs. Gold miner exchange traded funds buy stocks in gold mining companies. These stocks will tend to move in price as the price of gold moves up or down. But because the gold miner ETF doesn’t actually hold any gold, it will not track the price of gold exactly.
- Inverse gold ETFs. The goal of an inverse gold ETC, or “short gold ETF,” is to move in the opposite direction to the market price of bullion. So, if the actual gold price drops by 5%, the shares of an inverse gold ETF should increase by 5%.
- Leveraged gold ETFs. Leveraged gold ETFs aim to deliver amplified returns to the price movements of gold. As an example, a double gold ETF will attempt to double any move that spot gold makes. You can also find leveraged inverse gold ETFs that achieve this same result, but in the inverse of gold’s price movement.
- Smart beta gold ETFs. Smart beta is a type of investment that tries to outperform its benchmark index by taking more factors into account than a traditional gold ETF. For example, a smart beta gold ETF may hedge its gold exposure with some equities that are unrelated to the commodity market.
When you buy a gold ETF, you can get all the benefits of gold ownership, along with the benefits of an exchange traded fund. These can include:
- Diversity in your portfolio and/or hedging against negative stock market movements using gold
- An easy way to buy and sell the ETF – including selling the ETF shares at any time during the marketing trading day
- No need to invest large sums of capital
- The ability to invest in more than gold bullion along, because the ETF may include assets like currencies or gold mining stocks
Purchasing a gold ETF, is like buying shares of stocks or mutual funds in your IRA or retirement account. You can complete most gold (and other) exchange traded fund trades in just a few minutes. You can also process the entire transaction online.
You can encounter both advantages and drawbacks with investing in gold EFTs. For instance, management fees can erode the value of gold. The typical expense ratios for ETFs can range from a low of 0.05% to approximately 1.00% per year. So over time, these fees can really add up, in turn, making gold ETFs a poor vertical for longer-term investing.
The advantages and drawbacks of purchasing gold ETFs can include:
Pros and Cons of Investing in Gold ETFs
|Advantages of Gold ETFs||Drawbacks of Gold ETFs|
|Convenience||Commissions / Trading fees|
|Liquidity||Could be tied to unknown or untested index(es)|
|Reduced volatility (as compared to an individual gold mining stock)||Leveraged returns may be skewed|
|No need for storage (or the associated cost)||Gold may not actually exist, or it may have been “sold” to multiple investors (because the ETF does not take delivery of the physical gold)|
|Can buy and sell during the trading day|
Gold Miner Stocks
Another way to invest in gold without having to buy physical metals is through gold miner stocks. These are shares in gold mining companies. There are two broad categories of gold miner stocks. These are:
- Seniors – Seniors are stocks of large commodity-producing gold mining companies that have an established position and a large market capitalization.
- Juniors – Juniors are stocks in smaller gold mining companies that have a short history and little capital. Juniors can oftentimes be riskier than seniors, but they can also provide the opportunity for larger profits.
Investors can also buy shares of gold exploration companies if they don’t want to take physical receipt of gold and/or want to diversify. These companies may focus on acquiring, exploring, and developing gold projects in the U.S. and around the globe.
When you buy gold miners’ stocks, your investment is not in the gold (or other precious metal) itself, but rather in the company(ies) that are digging the bullion out of the earth. So, the profit and losses with this type of investment will not necessarily always track changes in the price of the actual commodity.
Although you have more control over investments when you buy and sell individual stocks (as versus owning stocks through an ETF or mutual fund), you could also be taking on more risk with these investments. This is particularly true in a volatile market environment.
So, you can have more diversified gold mining holdings with gold ETFs, but more control with individual shares. Before buying any individual gold miners’ stocks, you should consider both the pros and cons.
Pros and Cons of Investing in Gold Mining Stocks
|Advantages of Gold Mining Stocks||Disadvantages of Gold Mining Stocks|
|Potential for higher return||Volatility / downside market risk|
|Liquidity||Can require a larger capital outlay to diversify (as versus investing in ETFs or mutual funds)|
|Control over buying and selling||No / limited diversification|
|No storage requirements (and the corresponding cost)||Mine closing or going out of business|
|Possible income from dividends||Country risk, whereby the country where the mine exists could take over or impose significant taxes and fees|
Gold Royalty / Streaming Companies
Gold royalty or streaming companies could be another alternative for investors. Royalty or streaming companies are a specialized type of financier that helps with funding exploration and production projects for cash-strapped mining companies.
A royalty company receives royalties on whatever the project produces. They may also receive the rights to a “stream,” which is an agreed-upon amount of gold, silver, or other precious metal.
Pros and Cons of Investing in Gold Royalty / Streaming Companies
|Advantages of Investing in Gold Royalty / Streaming Companies||Disadvantages of Investing in Gold Royalty / Streaming Companies|
|Usually less risky than investing in gold miners’ stocks||Fewer choices for investors (i.e., few royalty companies exist)|
|Correlated with gold price and demand||Royalty company has little control over the actual exploration and mining of the gold|
|Lower / more predictable costs and higher profit margins||Royalty companies do not have as much leverage to metals prices as mining companies have|
Gold Futures Contracts
Another way to invest in gold is to buy gold futures contracts. Futures contracts are financial vehicles that investors may use to make money. You can hedge against certain other investments with gold futures contracts. For example, these financial vehicles allow investors to buy a specific investment at a specific price by a certain date.
A futures contract requires an investor to buy shares from a seller on a specific date in the future, unless the holder closes their position before the expiration date. The buyer of a futures contract is not required to pay the full amount of the contract up front. Rather, a percentage of the price is paid to the investor. This is referred to as the initial margin.
Gold futures are “standardized, exchange-traded contracts where the buyer of the contract agrees to take delivery of a specific quantity of gold from the seller, on a future date, and at a pre-determined price.
You can gain a lot of leverage using gold futures contracts, because you can trade the commodity without having to pay the full price right away.35 Rather, you deposit only a certain amount – referred to as margin. A futures broker holds the margin when you open a futures contract position. The margin requirement is not a down payment, nor does the investor own the underlying commodity.
Futures contracts are risky, so you should only get into these investments if you are an experienced investor who is familiar with the risk of downside loss.
You should also consider all of the potential pros and cons of investing in gold futures contracts before you move forward.
Pros and Cons of Investing in Gold Futures Contracts
|Advantages of Investing in Gold Options and Futures||Disadvantages of Investing in Gold Options and Futures|
|Potential for high return||High risk of loss|
|Liquidity||No control over future events|
|Hedge for risk||High price fluctuations / volatility|
Comparing Gold Ownership Options
Gold tends to perform very well during times of low interest rates. In fact, in some cases, when real rates have been negative, gold has returned twice as much annual as the long-term average on bonds. Over time, it has only been during periods of higher real interest rates that gold returns have been negative.
Buying physical gold can provide you with many advantages, such as simplicity and a store of value. But if you own physical gold in a self-directed IRA account you must store these physical assets, and pay a fee for that storage.
It is often more convenient for investors to purchase gold mutual funds, shares of miners’ stock or royalty / streaming companies, and/or exchange traded funds. These investments are also more liquid. But you are also betting that these financial vehicles will be well managed.
Gold mutual fund returns can also depend on market conditions – including extreme situations like the recession of 2008 and the 2020 COVID-19 pandemic (and corresponding stock market drop).
So, owning physical gold in an IRA or 401(k) can oftentimes be the safest way to own this precious metal. It can also give you more control over your investment, such as when to buy or sell.
Because there are both pros and cons associated with all forms of owning gold in your IRA, many investors go with more than one ownership method. For instance, you could buy physical gold for investment, and also buy shares of gold ETFs and/or mutual funds. Doing so can offer further diversification, as well as an added hedge against risk.
All investors’ goal and needs are different, and because of that, there is no single “right” way to own gold in an IRA. So, you should discuss your short and long-term objectives with a gold IRA specialist. You should also learn about all your potential gold IRA purchasing options with a specialist in this particular field.
Why Now is the Right Time to Add Physical Gold to Your Portfolio
If you had money in the stock market during the 2008 recession and/or during the Coronavirus pandemic in early 2020, you are likely familiar with the market’s extreme volatility.
While nobody likes to lose money in an investment, if you are getting closer to retirement, you do not want to experience a large loss of value in your portfolio.
This is where an investment in physical gold can be highly beneficial. People have used gold as a bartering tool, and a form of currency, for thousands of years, and it has continued to withstand the test of time.
Even though gold no longer backs the U.S. dollar (or other worldwide currencies), it is still important in today’s society. Gold is also still important to the global economy.
You can validate this point by looking at the balance sheets of central banks and other financial organizations – such as the International Monetary Fund. You will find that these entities hold nearly 20% of the world’s supply of above-ground gold.
Also, several central banks have added to their present gold reserves. This reflects concerns about the long-term global economy. While gold has preserved wealth throughout thousands of generations, paper-denominated currencies or equities have not done the same.
Investors have achieved positive results with gold, during good economic times and during times of economic downturn and market volatility. Unlike stocks, mutual funds, or ETFs, physical gold is a tangible asset that people tend to invest during hard economic times. This precious metal has appreciated in both the short and long term time horizon. It can also serve as a hedge against inflation.
Considering the ups and downs of the stock market over the past dozen or so years, now could be an ideal time to purchase physical gold for investment. In fact, according to financial experts, gold is described as “the currency of last resort,” and now is the time to buy gold as fear spreads across global markets.
With the constant uncertainty of the stock market, interest rates, and the overall domestic and global economy, many investors have turned to gold as a “safe haven” asset.
As such, both the near-term and the long-term outlook for gold appear to be positive. When you purchase gold in an IRA or other type of qualified retirement accounts, you can expand your benefits even more. This is due to the tax-deferred (traditional plan) or tax-free (Roth plan) nature of these types of accounts.
For investors who do not want to purchase physical gold, there are several gold buying alternatives that are convenient and liquid, as well as lower in price.
While gold can be an integral component of most investors’ portfolios, you should have a good understanding of how gold investing works. Likewise, you can also narrow down which type of gold may (or may not) be right for your specific circumstances.