If my last post hasn’t scared potential gold investors to death, I will describe the three ways to invest in the gold market — physical gold, a gold ETF and gold mining stocks. There are arguments pro and con for each.

Physical gold is just what it sounds like. You can buy gold bars or you can buy “bullion coins,” such as Krugerrands and Maple Leafs. These must be distinguished from numismatic coins that trade at a premium to the gold price because of their relative rarity. There is nothing wrong with them, but I avoid them because they involve factors I am not familiar with. The bullion coins are sold at a small premium to the gold price, but they have the advantage of liquidity. They are easy to sell and don’t need to be assayed for weight and purity as would physical gold in other forms.

One disadvantage of physical gold is that you need to keep it in a secure place such as a safe deposit box. For something that supposedly isn’t important any more, there are a surprising number of people who would be happy to relieve you of them. On the other hand, physical gold has the advantage of being just plain beautiful. There is something satisfying about holding an ounce of pure gold in your hand.

I need to say one last word about physical gold. There are gold proponents who say that physical gold is the only safe way to own it. Not safe from burglars, but safe from the government. They point out that during the Great Depression the ownership of gold was made illegal and that the best way to guard against that is have it in physical form and ignore any order that requires you to give it up. I personally don’t worry about that much, but paranoids aren’t always wrong.

The second way to invest in gold is to buy shares in a gold ETF, which is short for Exchange Traded Fund. These shares mirror the market value of gold. There are other gold ETF’s, but the most popular one is called StreetTracks Gold Trust and trades on the New York Stock Exchange under the ticker symbol GLD.

Each share of GLD represents the value of one-tenth of an ounce of gold, although not with mathematical precision. So if gold is selling for $650 an ounce a share of GLD will cost you $65, give or take. A hundred shares would then cost you around $6500 and be the equivalent of owning ten ounces of gold.

As shares of the Trust are purchased, the Trust buys physical gold that is held in vaults in London. You should be aware, though, that you have no direct claim on that gold. Your shares in GLD are basically a bet on the gold price. Also, profits are taxed at a higher rate than the usual capital gains rate because of some arcane provision in the Internal Revenue Code. That is not true for gold mining shares, which I will discuss next.

The third way to invest in gold is to buy shares in gold mining companies. You can buy shares in individual companies or in mutual funds that invest in gold mining companies. Mining shares more or less track changes in the gold price, but not with the mechanical precision of GLD. Gold mining is a business and involves enterprise issues that are not related to the price of gold as such. Sometimes those differences work in your favor and sometimes they don’t.

So there you have it. The easiest route is to buy GLD and/or a gold mining mutual fund. A few bullion coins, however, will give you the tangible feeling that you really own some gold.

This entry was posted on Monday, September 24th, 2007 at 8:31 pm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.