Factors to investigate before investing in gold
David Ben Melech | November 25, 2016: You see ads promoting precious metals on TV, online, and on the radio, touting gold as a solid investment and 2016 has been a great year for investing in gold – rising nearly 20% and outperforming nearly every other asset class. It is true that sometimes people use gold to diversify their investment portfolio: they can help protect against inflation and economic uncertainty. But how much gold to buy, in what form, at what cost, and from whom are important questions to answer before making this investment.
You Can Buy Gold in Different Ways:
Stocks and Gold Funds – Buying stocks from a gold mining company or buying from an investment fund that invests in gold bullion is a common way of investing in gold. Most brokerage houses buy and sell these instruments. Gold reserves and mutual funds may offer more diversification than real physical gold, and it is not necessary for an investor to store or protect the gold investments purchased in this way. That being said, any gold stock or mutual fund investment can have an inherent risk and can lose value irrespective of the price of gold. “There are times when some investors may choose to own stock in mining companies instead of physical metals,” explains Anthony Allen Anderson, VP of Sales and Marketing at GSI Exchange, “it’s important to weigh the potential risks involved with buying shares in a company instead of the actual physical asset itself, because as a sector, mining stocks have significantly underperformed over the last ten years when compared to physical metals.”
You can check the registration status and disciplinary history of any futures broker company or by contacting the National Futures Association (NFA).
Ingots, Gold Bars and Bullion Coins – Bullion is a larger amount of physical precious metals, usually gold, platinum or silver, evaluated by weight and often cast as ingots or bars sold by distributors, some banks and bullion brokers. Coin ingots are minted with precious metals – usually gold, platinum and silver – and kept as an investment. They are not used in the trade every day. The value of bullion coins is mainly determined by its precious metal content rather than its rarity and state. Prices may change throughout the day, according to the prices of precious metals in world markets. Coin traders and some banks, broker-dealers, and dealers of precious metals buy and sell gold coins. The United States Mint has produced silver ingots and gold coins for investment purposes since 1986 and began producing platinum ingots in 1997. The United States Mint guarantees weight content and the purity of the precious metal parts they produce.
Collectible Gold, Silver and Platinum Coins – These items have a historical or aesthetic value of collectibles. Most collectibles have a market value that exceeds their face value or metal content. This collection of value is often called a numismatic value. Coin collectors usually have valuable coins graded by professional independent services, but classification may be subjective.
Facts about Buying Gold
Regardless of the many different ways you can invest in gold, keep in mind these important facts:
- The price of gold fluctuates over time. There is no guarantee that the price of gold will increase – or even retain its value.
- The prices charged by traders of coins, banks, brokerage houses and dealers of precious metals for gold products such as bullion and coins are almost always higher than the value of gold in the products. It is advisable to compare prices before making a purchase.
- Some vendors say the government can confiscate the gold. Others say the “declaration” transaction can lead to confiscation. Others claim that modern coins produced by the United States Mint are subject to seizure while old pieces or collections are not. Such claims sometimes lead people to buy coins at prices that exceed their value. No law or regulation of the Federal Treasury Department support these fanciful assertions.
Investigate Before Investing
Whether you buy stocks and gold funds, gold bullion coins, and collectibles or, do your homework first:
- If you buy coins or ingots of collector coins, ask about the melt value – the central value base of the coin if it is melted and sold. The melting value for virtually all bullion coins and collectible coins is widely available.
- Consult a trusted dealer or trusted a financial advisor who has specialized knowledge.
- Obtain an independent valuation of the particular gold product you are considering. The evaluation of the seller could be inflated.
- Consider additional costs. You may have to buy insurance, a safe or rent off-site storage to protect your investment. These costs will impact the cost basis of your precious metals investment.
- Some vendors offer ingots or bars to a secure facility instead of a consumer. When buying metals without taking delivery, take special care to ensure that the precious metals is of the quality that is described and that is adequately insured.
- Stay away from risk-minimizing sales pitfalls or sales reps who claim that risk disclosures are mere formalities. Sales representatives are known to minimize the risk of certain investments to close a deal. Always get a receipt for the transaction.
- Research the online reputation of the dealer by entering the company name in an online search engine. Read about other people’s experiences with the company.
David Ben Melech is a former securities attorney and has over 15 years of experience providing a wide range of legal and strategic advisory services to Fortune 500 companies and financial institutions on a broad variety of regulatory, enforcement, compliance, risk management and transactional matters.
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