If you are thinking about buying gold, it can seem more complicated than buying a traditional investment such as stocks or bonds. But it doesn’t have to be. The Internet now makes it just as simple to buy gold as it is to deposit money in a checking account.
So here’s several “easy” ways to buy gold.
Allocated Online Holding Services.
Probably the simplest way of all to buy gold is to use an allocated online holding service like GoldMoney or BullionVault. These services allow you to buy gold in small quantities at very low cost. And they allow you to easily liquidate your gold holdings if you ever need to dip into your savings.
Gold is normally traded in the futures market in the form of 400 oz. “good delivery” bars. With a current price of $510,192 per bar, these products are outside the price range of most individual investors. So companies like GoldMoney and BullionVault buy these bars and store them in secure vaults all over the world. They then sell small parts of these bars electronically, lowering the cost to the investor tremendously.
In essence, these services work like savings accounts. You deposit money in them each paycheck and watch them grow over time (through deposits and through the appreciation of the gold price). Then you transfer the funds to your checking account or, in the case of GoldMoney, redeem them to a prepaid debit card when you want to spend them.
The main advantages to buying gold this way are price, simplicity, and ease of use.
There are a few disadvantages, however. While the gold in an online holding is legally owned by you, it is not physically in your possession. So by using a service like this, you are assuming that the banking system will continue to function normally and that the holding service can be trusted to transfer your funds to you whenever you need it.
The biggest problem would occur if if there was a widespread banking collapse. If this were to happen, your only option for getting your gold from one of these services would be to take physical delivery. But because you probably wouldn’t own enough gold to withdraw an entire 400 oz. good delivery bar, you would have to redeem your gold in the form of another gold product, such as a 1 oz. coin or bar or 10 gram cube.
These services will allow you to do this. But they charge a small fee for it, and it might take a week or two to receive your gold in the mail. Meanwhile, you’d be stuck with no money. So this is a drawback that ought to be considered.
GoldMoney Vs. BullionVault
So let’s say that you decide to use one of these services. Which one should you choose?
One consideration to take into account is price. BullionVault only charges 0.5% commission each time you buy or sell gold, whereas GoldMoney charges 1%. However, BullionVault also charges a minimum $4 per month storage fee, whereas GoldMoney has free storage up to 1000 grams.
To be fair though, the storage fee at BullonVault does fall to 0.12% per year once a customer has more than $40,000 worth of gold in the account. So if you want to store more than $40,000 worth of gold, BullionVault may be the better option because it allows you to buy and sell at half the rate of commission.
Another consideration to take into account is ease of use. GoldMoney allows you to have a prepaid debit card that you can redeem your gold to. This is very convenient if you need to dip into your savings to pay bills or if you just want to reward yourself a little when the price of gold goes up, as it can otherwise take a few days to get an ACH transfer to your bank.
BullionVault does not allow use of a prepaid debit card at all.
Regardless of which service you end up using, they are both very easy ways to start saving gold.
Buying Physical Coins and Bars.
If storing all that gold in a vault in some other country makes you nervous, you can always buy physical coins and bars in small denominations to store in your home. These coins and bars are made by private mints such as Sunshine Minting, RMC, and Valcambi or by major world governments. For example, three of the most popular products are the 1 oz. gold American Eagle, 1 oz. gold Canadian Maple Leaf, and 1 oz. gold Valcambi Combibar.
These products can be bought from a variety of reputable bullion dealers. Here are four of my favorites:
There are several advantages to buying gold this way. First, it allows you easy access to your gold in the event of a catastrophic emergency, such as a worldwide banking panic or the sudden collapse of the dollar. In such a scenario, you will probably have no trouble bartering the gold in your house for whatever you need. But if your gold is sitting in a vault in Switzerland, this advantage is not available.
Second, physical gold has an allure to it that a gold holding account can never fully match. It’s nice to be able to take your gold out of its secret hiding spot and watch it sparkle in the light. There’s just no way modern payment systems can replace that feeling.
Despite these advantages, however, there are also significant disadvantages.
First, small-denomination coins and bars are sold at a significant premium over spot. As just one example of this, 1 oz. American Gold Eagles are currently selling for around $1,344 while the spot price for 1 ounce of gold is only $1273.55. This premium is a reflection of the fact that it costs the mint money to produce the coin.
However, as long as you buy coins that are from reputable mints, you can also sell them back to dealers at a premium, paying only a very small spread to allow the dealer to turn a profit.
Under normal circumstances, this shouldn’t pose a problem. But it can be an issue if you need money fast and happen to live in an area with no local bullion dealers. In this case, you may not have time to ship your gold coins or bars to a dealer…and may have to take them to a recycling center or scrap gold dealer instead. If you do this, you will only get paid the spot price (or worse) and will take a loss from not being able to recover your premium.
Second, storing gold in your house carries the risk of robbery or theft. So you might have to pay for a safe and be very secretive about the amount of gold you’ve got saved up. If the fear of theft causes you too much anxiety, you may feel more comfortable storing your gold in an online holding.
Another option to avoid the risk of theft is to buy coins and have them shipped to a professional vault. Most dealers provide this service, but it also kind of defeats the purpose of holding physical bullion in the first place.
Regardless of these disadvantages, it is a good idea to keep at least some of your gold in physical form in your home. You never know when you might need it.
A Note About Taxes.
The I.R.S considers gold to be a “collectible”, like art or baseball cards (I know…it’s ridiculous). This means that taxes on the gains you make from the appreciation of your gold can be as much as 28%, depending on what your income is and various other factors. In addition, if you use a standard GoldMoney or BullionVault account to store your gold, you usually can’t deduct your deposits from your taxable income the way a 401k or IRA would allow you to do.
One solution to this problem is to create a “gold IRA”, which is basically a self-directed IRA that invests in physical precious metals. This way, you can deduct all of your gold purchases from your taxable income. In addition, if the price of gold tops out at some point in the future, you can sell your gold and buy stocks, bonds, or whatever else you want to invest in without having to pay capital gains tax right away. Instead, the capital gains tax is deferred until you retire.
You should always talk to your tax adviser before making a final decision.
Most physical gold dealers have relationships with companies that can provide self-directed IRAs. In addition, both GoldMoney and BullionVault offer versions of their services that are compatible with IRAs.
Unallocated Holding Services.
While I’ve already described allocated holding services in detail, I should also note that some companies allow you to hold so called “unallocated” gold. The difference between the two is that in an unallocated account, you don’t legally own any particular bars or even pieces of bars. Instead, you simply own a partial claim on a pool of gold that has been paid for by multiple investors. This is similar to having loaned your gold out to an institution, instead of owning the gold and having the institution hold it for safe-keeping.
The claim that there’s a difference between “safe-keeping” and “borrowing” might seem to be splitting hairs. But from a legal perspective, it matters. If you own unallocated gold, and the institution that is holding it is in danger of bankruptcy, it has the right to liquidate your gold holdings in order to keep itself running, as long as it pays you back later. But then again, it might never be able to pay you back.
Nevertheless, having an unallocated account from a reputable company can provide one benefit that is worth considering: it usually does not charge a storage fee – no matter how much gold is being stored.
For this reason, some gold savers with a lot of capital may find unnalocated accounts to be their best option.
If you want an unallocated account, the Perth Mint in Australia is a good choice.
I listed this option last because it’s something I personally try to stay away from.
Similar to an unnalocated account, if you own a share of a gold exchange-traded fund, such as SPDR Gold Shares (stock symbol “GLD“), you don’t own any actual gold. Instead, you own shares of a company that invests in gold.
When the share price falls faster than the price of gold or rises slower than the price of gold, the company sells gold and buys back its own stock until its share price becomes equal to the price of gold. Conversely, when the share price rises faster than the price of gold or falls slower than the price of gold, the company sells its stock and buys gold until its share price is equal to the price of gold once again.
The idea behind such ETFs is to make it easy for people with stock-trading accounts to “get in on the action” and gain exposure to gold without having to set up a separate account.
The biggest disadvantage is that, well, it just doesn’t provide much security against macroeconomic emergencies. If the gold price were to suddenly go parabolic and approach infinity during a dollar collapse (as it almost did in 2011), there’s no way an exchange traded fund would be able to buy gold fast enough to keep its share price even remotely close to that of gold.
Nevertheless, I include ETFs as a legitimate option because they may be useful for some people. For example, if you like to trade in and out of gold and use the profits to buy stocks, you might want to keep at least some of your portfolio in gold ETFs. In some circumstances, doing so could allow you to save on commissions. It may be more convenient than other options as well.
However, I would never keep a majority of my gold holdings in an ETF. It’s just too risky.
Buying gold can seem complicated. But it doesn’t have to be. Choose one of these options and you can make saving in gold easy.