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How to Invest in Gold? Let Us Count the Ways: Metal, Options, Stocks ...

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August 3, 2017
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Gold. It’s the yellow metal, the “barbarous relic,” but it’s also a medium of exchange that’s been respected as a store of value since ancient Egypt, and an asset class that some investors might consider as part of a diversified portfolio.

But when it comes to investing in gold, there are many approaches, from direct purchase to investing in the companies that mine and produce the precious metal.

Yellow Fever?

Gold has an emotional attachment that can make it different from other investments. When we exchange wedding vows, we do it along with the exchange of golden rings. In school we learned of the “49ers” who flocked to the West Coast during the California Gold Rush. And we’ve all heard the radio pitch telling us that empires were built on gold and how, on a long enough timeline (or after the zombie apocalypse), gold will replace fiat currency as the chief unit of exchange. 

If you’re considering adding gold to your portfolio, you should look at it with the same care and consideration you give any of your financial decisions. And with that in mind, let’s take a look at some of the options available for investing in gold.

Physical Ownership

Traditionally ownership is the most common and straightforward way to invest in gold. Simply buy coins or bars from an online dealer, or from your local coin shop, and then put them away for safekeeping. But buying the physical metal is also the most inefficient way to own gold.

Markups and commissions on physical gold sales can be high, and depending on where you live, you may have to pay sales tax on the purchase as well. Uncle Sam collects when you go to sell your gold, too. The IRS considers gold bullion and coins “collectibles,” which are subject to federal taxes at your regular tax rate, up to a maximum of 28%.

The storage of physical gold is also a problem. Are you willing to keep your gold at your home, where it may be at risk of theft, fire, or natural disasters? Some companies will offer to store your gold for you, and you can always get a safe-deposit box at the bank, but in both scenarios you’ll be charged a fee and may not be able to access your gold if you need to sell it on short notice.

Derivative Contracts

When investing in gold via futures or options, you’re using leverage to control a larger amount of the commodity than you could with just the money you’re putting at risk. This can be an efficient way to participate in gold price fluctuations—up or down—depending on whether you’re bullish or bearish on the market.

Gold futures respond to volatility, and some investors often migrate to them as a hedge when the stock market falls. A recent example was during the U.S. elections, when the price of gold increased as the stock market dropped. But remember, it's important to know there are different characteristics associated with the pricing of futures and options. Plus, leverage works both ways. It can turn a small amount of money into a large gain, but the converse is also true—your losses are magnified as well.

Gold Mining Stocks

Gold mining companies come in two different sizes: junior and major. Junior miners are companies that are newer or more speculative, often mining unproven claims hoping to find a big score. Major miners are more established companies with production and infrastructure in place, mining on proven and sustainable claims. Both categories include a number of publicly held companies.

The theory behind buying mining stocks is that, as the price of gold goes up, the profit margins of the companies go up as well, which may be reflected in their stock prices. But the price of gold is only one component of the underlying value of these companies. Factors such as geopolitics, the cost of energy and labor, and even corporate governance can impact the profitability of individual mining firms but not necessarily the price of gold. As with any investment, it’s important to do your research before investing.

TD Ameritrade clients can research mining companies by using screeners. Log into your account and go to Research & Ideas > Screeners > Stocks. Then, under Sector, Industry and Sub-Industry, check Materials > Metals & Mining > Gold.

Gold ETFs and Other Exchange-Traded Products

Exchange-traded products (ETP) such as an exchange-traded fund (ETF) or exchange-traded note (ETN) can offer gold exposure, but not all ETPs are alike. Some involve physical ownership of the metal, while others use futures, options, and other investments to attempt to mirror the investment profile of owning gold.

TD Ameritrade also has a screener for ETFs. To screen for potential ETF ideas, go to Research & Ideas > ETFs and under Criteria, select Morningstar Category > Precious Metals.

Before investing in an ETF, be sure to carefully consider the fund's objectives, risks, charges, and expenses. For a prospectus containing this and other important information, contact us at 888-310-7921. Please read the prospectus carefully before investing.

Ultimately, if you’re looking to add gold to your portfolio, consider which products make sense and feel most comfortable for you. And let’s hope that zombie apocalypse never comes.

Sift Through Sector Candidates

Use Stock Screener to narrow selections based on sectors. Log in to your account at tdameritrade.com > Research & Ideas > Screeners > Stocks.

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