There are a number of ways in which to invest in bullion but beware some ways it can carry more risk than others. I prefer to hold physical bullion that you can actually trade or swap for real tangible goods, and when the time is right convert into something else.
Stocks and gold-mining shares: If you do your research into the myriad of gold mining companies around the world and are happy with your choices after thorough due diligence, then owning a gold mining stock may be for you. The ideal gold mining company would need a low production costs, large deposits, and a tolerant government, with these in place and the right purchase price, large amounts of money can be made with a little luck. There is an ever increasing problem due to costs, geology and politics for these mining companies, it’s no wonder bullion has outperformed them in recent years.
Exchange-traded funds: These are securities that trade much like stocks, and are supposed to track the index price such as the Dow. Alternatively, the (ETF’s) may be designed to track a commodity such as gold or silver. The ETF’s for gold and silver can be a great vehicle for trading but are less successful for investing. If you have a brokerage account already set up this makes the ETF’s a convenient option. ETF’s are not gold or silver, they are simply shares in a trust that is owned and run by the bank, which might be holding gold or silver.
Gold certificates and pool accounts: This cheap and easy way to invest as some pitfalls, customers think they are actually buying gold or silver, but they’re not, what they are buying is a promise to deliver the gold or silver in the future. These gold certificates remain unallocated, the bullion remains on a balance sheet indefinitely and provides great risk to the investor if the provider should become insolvent. If there is no storage fee then there is no bullion, and if you should take delivery of the bullion that you supposedly own, you will be asked to pay a fabrication charge.
This charge will bring the big/ask spread to what it should have been had you purchase gold or silver in the first place. The problem with the pool accounts is that the company that run them don’t go out and buy real money, i.e. gold or silver, and store it for you. It’s the same as selling gold or silver short. When that day comes when you want to cash out, it’s possible that the price may have risen significantly, the company would then have to go to the market and buy the metal that the going price for stump up the difference in cash.
Trouble arises when an existing investor wants out, the issuer uses new investor cash to cover the spread, sooner or later there will be more investors who will want out than there are investors joining as the gold or silver reaches a tipping point. I would not want to hold any certificates when this happens! Above I have listed some common ways a small investor can get involved bullion investing. There are more ways to invest that are best left to professionals and people with experience who know what they are doing. Among these are:
Gold Futures: These futures are contracts to deliver a specific commodity, at an agreed price, in an agreed quantity, at an agreed date in the future. You don’t have to pay in full just yet and the seller doesn’t have to deliver just yet either. The exchange usually takes place up to 3 months ahead on the settlement day.
Bullion purchased on a margin: Here, we can borrow money to increase our leverage when purchasing the bullion, say 5 to 1. (you borrow 80%). If the price rises it in our favor, your borrowings will start to be paid off and reduce, but if the price drops significantly, your broker will invite you to bring your position up to the minimum margin requirement (handing over more cash), or he will liquidate your position (foreclose).