Buying Gold as an Investment: What to Watch For

When the stock market seas get choppy, investors often flock to gold. The "safe-haven" asset is seen as a reliable store of value during times of market turbulence.

Chuck Czajka, founder of Macro Money Concepts, calls it "wealth insurance" because of its ability to hedge against "inflation and economic uncertainty like we are currently experiencing."

Today, you have three primary ways to invest in gold: the traditional route through physical bullion, the stock market route through gold stocks or funds, or the hybrid approach using digital gold investment platforms. Each approach has its benefits and drawbacks that can affect which is best for you.

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Investing in physical gold: Traditional security with logistical challenges

Owning physical gold — whether it's a U.S. Mint-issued American Gold Eagle coin or a hefty bar — is the classic way to invest. It’s tangible, and for some, that's the ultimate security, but this security can come at a cost.

"Often, when investing in physical gold, purchase price premiums and sell-back spreads — which occur when a gold purchaser pays below market price — can significantly reduce final return," says Scott Hefty, co-founder of Serae Wealth. "These costs can be in addition to custodial holding fees, a service that is required when investing in physical gold inside a qualified retirement account."

You'll likely need substantial capital to cover the cost of a single coin or bar. You also need to find a secure storage solution, like a home safe, bank safe deposit box or gold storage service. Each method incurs additional costs or security risks.

When you're ready to liquidate, selling physical cold can be a hassle, too. You need to find a reputable dealer and may end up selling for a price below the current market price.

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The stock market route: Trading stability for convenience

Investors looking to avoid the liquidity and storage challenges of physical gold ownership may turn to the stock market for relief. Gold ETFs, mutual funds or mining stocks make it possible to add the precious metal to your portfolio without ever touching a single piece of bullion.

"Gold-backed ETFs can be a way to efficiently create diversification within an overall investment account, allowing you to use gold’s non-correlated nature to bring more balanced returns," Hefty says. "They typically have much lower ongoing expense and transaction costs compared to their physical counterpart" and "provide the security of large institutional management."

All you need to invest in gold funds or stocks is a brokerage account. Best of all, selling involves a click of a button. Assuming there is a counterparty to your trade, this can be a far more liquid approach than buying physical gold.

That counterparty risk can be a significant drawback. If no one is willing to buy what you have to sell, you may be stuck with the asset or forced to accept a lower price. You also don't own the physical metal when you invest this way, and the value may be impacted by broader market events.

Digital gold investment platforms: Where physical ownership meets digital convenience

As often occurs, modernization has developed a Goldilocks alternative to the previous two options. Digital gold platforms allow you to own a claim to physical gold that is securely stored in a professional, third-party vault.

Your ownership is represented either by a digital token on a blockchain or by a share of a commingled gold pool. This makes it possible to invest whatever dollar amount suits you.

These platforms also solve the liquidity issue of traditional physical gold ownership. Many allow 24 hours a day, seven days a week access, so you can monitor, buy, and sell at your convenience. You can sell your share for cash or possibly have the physical metal shipped to you.

This convenience isn't free, however. Digital gold platforms charge a fee for their service to cover storage and transaction costs. These fees vary, but may be less than the expense ratio on a gold ETF or mutual fund, or finding your own storage solution.

There may also be a fee at the time of sale. For example, you may pay 0.3% of the redemption value at the time of sale.

Trust is paramount here, as well. Your investment is only as secure as the platform through which you invest and its chosen storage partner.

What to watch for: A head-to-head comparison

There are key elements to watch for when buying gold as an investment, regardless of the method you use. Here’s what to look for when evaluating each approach:

Ultimately, the best way to invest in gold depends on your personal goals and risk tolerance. If you want a tangible asset you can hold, physical bullion is for you.

If you want the convenience and familiarity of the stock market, gold funds or mining stocks are a solid route. If you want a physical asset with digital conveniences, consider a digital gold investment platform.

Regardless of the investment method you choose, be aware that while gold does tend to perform better during market uncertainty, it is not always a smooth ride. "Gold can be extremely volatile and can often experience periods of double-digit declines like the stock market," Hefty says.

It's best to keep your allocation to no more than 5% to 10%, according to Czajka and Hefty.

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