The best ways to invest in gold right now

In the context of recent history, the precious metal is at a low point as the market for equities has soared.

By MSN Money Partner Jul 23, 2014 2:46PM
Hundred dollar bills surrounded by gold © Anthony Bradshaw, PhotographerBy Elizabeth MacBride, CNBC

Gold prices rose again last week on news of the downing of Malaysia Air Flight MH17, the latest in a series of geopolitical shocks that have sent the price of the precious metal up this year.


The price of gold rose 4 percent in the year preceding July 17. On news that the airliner had been shot down over Ukraine, it rose 1.2 percent to $1,315 per ounce, according to Morningstar data based on the London Fix. (It's since fallen a little as investors have started taking profits.)


The volatility is a sign of the most fundamental fact about gold. It is possibly the most emotionally driven asset class -- the refuge of apocalyptic worriers, as well as of serious traders who look at it as a portfolio diversifier and alternative to paper currency.


"You cannot discount the psychosis that exists around gold," said Ben Johnson, Morningstar's director of manager research for passive strategies. "We call it the oldest continuous 2,000-year-old investment bubble around here."


Ray Olson Jr., a financial advisor in Midlothian, Virginia, said he fields regular inquiries about investing in gold and tries to dissuade his clients. "The problem is when they want to invest in gold is usually the worst time to invest in gold," he said.


The biggest knock against gold is that it is a nonproductive asset: There's no productivity underlying its value, which is set by perceptions of its relative safety.


Olson said his clients tend to get worried about the value of paper currency and the banking system when there's turmoil in the world. But if you're worried, chances are others are too and have already driven the price up.


In the context of recent history, however, gold is at a low point. The price of the precious metal -- historically a very volatile asset class -- has tumbled in the past three years.


As the market for equities improved, the price of gold fell at an annualized average rate of 6.4 percent, according to Morningstar. Last year investors pulled $23 billion out of the largest gold ETF, SPDR Gold Shares Trust (GLD).


"That's a record for outflows from a single fund that I don't think will ever be broken," said Matt Hougan, president of San Francisco-based ETF.com, by email. "There's been a massive bloodletting in gold-related assets over recent years," he said, but he believes gold will rise in the next few years.


If you want to invest in the safe-haven metal, for whatever reason, your options continue to grow. You can seek out investment products, jewelry or buy gold coins. Demand for the precious metal in all its forms was virtually unchanged between 2013 and 2014, at 1,074 tons, according to the World Gold Council.


Here are five ways to hold gold:


1. ETFs

According to ETF.com, there are 33 ETFs that invest in gold, including GLD, the largest, with an expense ratio of 0.4 percent. Direxion Daily Gold Miners Bear 3X (DUST) and Asian Gold Trust (AGOL) are two others. That's up from 16 ETFs in 2010.


"There are a growing number of investors who use it in their portfolio," said Johnson. The main advantage to holding gold through an investment product is liquidity.


Axel Merk, president and CIO of California-based Merk Investments, said those who buy gold are usually using it as a substitute for currency. "They think the bigger risk is holding cash."

Merk, whose firm has just introduced a new gold ETF, said he holds 40 percent of his non–real estate portfolio in gold.


2. Closed-end funds

There are closed-end funds that invest in gold. These funds typically trade at a discount or premium to the underlying asset, depending on the market. So if you find one trading at a discount and you believe the price of gold will go higher, this could be an option. But fees in closed-end funds typically are 1 percent to 2 percent higher than in mutual funds or ETFs.


If you are considering a closed-end fund, one of the prominent ones in the market is the Sprott Gold Bullion Fund (SPR216), said Morningstar's Johnson. It has a three-year compounded return of minus 1.8 percent and a five-year return of 4.4 percent. As an illustration of the volatility typical of gold investments, consider the largest one-month gain, 14.8 percent; its largest one-month loss is 10.7 percent. It has a front load of 2 percent and a 1.09 percent expense ratio, according to the company's website.


3. Single stocks

You can also invest in gold miners (the small ones are known as junior gold stocks), but this strategy holds all the regular risks of single-stock investing, plus the added risk of investing in a highly volatile sector. As a rule of thumb, gold mining stocks can have as much as a 3-to-1 leverage to gold's spot price to the upside up and down.


Picking these stocks takes smart due diligence. The best performers are companies with strong production and reserve growth. They must have good management and inventory supported by production.


4. Gold coins

If you want to bury the gold in your backyard or keep it in your safe, gold coins may be the way to go. So far this year, the U.S. Mint has sold more than 500,000 gold coins, known as American Eagle coins, down from last year. If you want to buy a gold coin, you have to purchase it through a network of authorized dealers that include wholesalers, brokerage companies, precious metal firms, coin dealers and participating banks. 


The most popular and liquid 1-ounce coins are Krugerrands, Canadian Maples and American Eagles. The U.S. Mint provides a listing of authorized gold American Eagle bullion coin dealers. To get a snapshot of the vast market, you can browse the online marketplace APMEX.


5. Gold jewelry

Jewelry remains the most popular way to hold gold, accounting for nearly half of gold demand, according to the World Gold Council. The percentage of pure gold the item containsor karat number -- ranges from 24K for pure gold to 10K, which means it contains 10 parts gold and 14 parts of one or more additional metals, making it 41.7 percent gold.


When buying jewelry as an investment, understand the karat amounts and how it affects the price and durability of each piece. Keep in mind: Gold jewelry is usually weighed in grams -- the higher the gram weight, the more expensive the piece. Ask the retailer for certificate of authenticity to ensure you are buying a quality piece of solid gold jewelry.


Nevertheless, it's best to buy jewelry with an eye to wearing it, not primarily as an investment. Because it is so illiquid, you run the risk of losing money on your gold jewelry if you need to sell at an inconvenient time. "You could take a major haircut on the price," Johnson said.


If you are motivated to buy gold, just be aware of what's driving you -- the desire for owning a precious commodity that can be a hedge against risk in a volatile marketplace. The good news is there are a multiple number of ways to diversify your portfolio in gold. The one you choose depends in part on how much liquidity you need.


More from CNBC

Tags: DUSTGLD
25Comments
Jul 23, 2014 9:44PM
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Gold is not an investment. It is money. It is the only financial asset that isn't someone else's liability. It is insurance, a store of value and a way of preserving purchasing power.
Jul 23, 2014 3:11PM
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Did you know that banks and other entities "rent" gold to each other?  Essentially, if you're a bank, you can own a gold bar, lease it out to another bank, and still keep it on your books as an asset, even though you don't have physical possession of it.   You might imagine the mess that gets created when the same gold bar is leased and sub-leased and sub-sub-leased multiple times.  It's a great way to confuse things and make it appear as if more more gold exists, when it really doesn't.

Imagine if Bank A leases a few hundred pounds of gold to Bank B.  Bank A still has the gold listed as an asset on their books, even though they don't have physical possession of it.  Then, imagine they sell you a share of the gold that is on their books (a perfectly legal transaction).  What exactly do you own?

I would encourage anyone who is considering an investment in gold to do their research.  Especially make use of alternative-media and know what you're getting into.  Be sure that you understand that much less actual gold exists than what is on paper.  

If you own gold and don't have physical possession of it, you really just own a piece of paper.
Jul 23, 2014 5:13PM
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TO reiterate....there really is something to be said about
Trading the paper but owning the physical.

Jul 24, 2014 6:17AM
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If you decide to buy gold,buy only physical gold,and I suggest pre 1939 U.S. coins. Not only will they appreciate as gold values rise,but their numismatic value rises even faster. Of all the gold I own,every single early gold coin I have ever bought is worth more than i paid for it.
Jul 23, 2014 10:41PM
Jul 23, 2014 6:43PM
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"Apocalyptic worriers" should not be investing in a gold ETF, stock, fund, etc. Those are paper assets.

Of course, if you own physical gold, in any large quantity, you might worry about how to keep it a secret and prevent theft.

If you are really worried about the Apocalypse, gold would not be the first thing you should be hoarding or worry about. It's way down the list.
Jul 23, 2014 10:10PM
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Only way to invest is with Obama greenbacks and they aren't worth much......
Jul 23, 2014 9:19PM
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Elizabeth


Nice article. But if you are real worrier maybe you ought to stock up on food, build a bunker to hide in and a couple of guns & and lots of ammo wouldn't hurt.


The best time to have bought gold would have been immediately after 911.


Life is good!

Jul 23, 2014 10:27PM
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Not surprising, they left way too much information out of the article (or maybe they don't know).  The ETFs purchase gold bullion and store it in vaults.  So, when you purchase shares it is backed by what is actually in the vault.  I own shares in iShares IAU which has an expense ratio of .25 compared to SPDR GLD at .40.  One would have thought they would have mentioned that had they done their homework because that is a sizable difference for an unmanaged fund.  These things make nice trading vehicles.  The IAU SLV ETF (silver) has a higher expense ratio but is more volatile.  Not many weeks ago it had dropped to NAV 18.00.  Just before I pulled the trigger it popped to 20 - damn.  Oh well.
Jul 23, 2014 3:23PM
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I have heard of these schemes before, and really makes you start scratching your head, or brain..
Jul 24, 2014 12:25PM
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"THE BEST WAY TO INVEST IN GOLD"

Steal it. 
Jul 24, 2014 10:57AM
Jul 24, 2014 7:19AM
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Gold and Silver have been true value for thousands of years. It wasn't until the Aristocratic Bankers better know as Castithans over the past 100 years tamed the majority of the masses here that the fools accept nothing else. 

Now you may disagree and become angered at my statement; but none the less it is very TRUE!  They have simply removed you from the true value of money; so that you can be controlled and manipulated like Pavlov Dogs.The Money of kings has and shall remain Gold and Silver and other hard assets. 

The computer your typing on has plenty of Gold and Silver in it and thus it holds real value. I don't think I could get one paper dollar recycled out of it even if I tried.   
Jul 24, 2014 8:38AM
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Make it part of your dental work, that way when you retire you will have a net worth !
Jul 24, 2014 12:44AM
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Coins work best if held more than 10 years due to transaction costs.  I'm not rich, so my 6 coins fit in a safe deposit box.  ETF's are good for shorter time periods.  You should have more money in the stock market than in gold.
Jul 23, 2014 10:35PM
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Always pays to have a little Gold, and/or Gold investments; Pick your poison or pick them all...

But like I've usually said, it's more of a "trade" then an investment.

And it can always help get you through the "tough times".

Jul 24, 2014 2:13AM
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AS LONG AS THE U.S. KEEPS REDUCING IT DEFICIT SPENDING,
WHICH MEANS LESS GOVERNMENT BORROWING & LOW INTEREST
RATES, THE PRICE OF GOLD WILL CONTINUE TO GO DOWN.

Jul 23, 2014 10:40PM
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The thing about ETFs (ie; GLD) and not sure about Mutuals or Index Funds...


The ETFs only hold about 10% of the value of your investment in their Vaults...Where's the other 90%?

At least that's what I've read or heard all the time...??

Although it may be the basis or value of the shares/units price, still confusing.

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