How to buy gold
Gold is roaring in the markets. But how do you invest in the precious metal? There are several options to explore.
See MoneyWeek's gold section for the latest news and analysis on investing in gold.
Plus, for free and impartial information on where and how to buy gold bullion coins and bars, see our comparison of leading gold brokers.
There is a great deal of confusion within precious metals markets regarding communicating properly as to contract months, terms, types of trading and specific ways to trade. We have had e-mails from readers saying you said sell gold and I sold my gold and now the prices went higher.
When unraveling facts in the aftermath we find readers' trading and investing decisions were made from misunderstood facts and not following directions. Unfortunately communications is the toughest part of any business as more things can go wrong from misunderstandings than most anything else.Today we will hopefully re-define common terms used for trading and investing in precious metals and work to avoid misunderstandings.
How to buy gold: price quotes
Price quotes are commonly expressed in the cash price or the front month futures price. These are two different prices and to compound the problem, these prices are always moving and changing. Within the gold futures there are several active months trading all at the same time with different prices. The daily cash prices are set in London each day and the futures markets and traders make decisions trading off these cash prices. Different time zones reflect different prices.
How to buy gold: cash priced gold and physical metals
A cash price is the price/value quoted for gold at that particular time and date. If you purchased gold bullion bars, the starting point is the cash price for that bar plus insurance, shipping, security and profit margins. Obviously all of these things can vary. If you purchase coins from a coin dealer, all of these costs must be included as well.
However, your final price for coins can vary from dealer to dealer depending upon profit margin, quantities purchased, quality of the coins and some other factors. This kind of gold is commonly referred to as "physical" as you are physically buying and taking possession of your gold.
The Tracks does not recommend purchasing gold bullion bars except for the largest of investors requiring a large amount of physical gold. For these very large buyers they are usually not moving bullion but store it in a bullion bank for storage and safe keeping. For most physical gold buyers you are better off buying fine coins originating from mints in the USA, Canada, Austria or Switzerland. The coins of other countries are fine as well, but as an owner of the most popular traded varieties it makes a subsequent re-sale much easier. If you own bullion bars and sell them, a fairly expensive process of assay, testing, shipping, insuring, etc. must be done all over again even if you recently had this work completed for your initial purchase.
How to buy gold: goldgrams
One of the easiest and simple ways to buy gold is purchase Goldgrams on the internet from Goldmoney.com and Kitco.com. This is a simple savings account where you open and account and deposit cash. The difference is your money is 100% backed by gold in a bullion bank in Europe. Fees are modest and fair and you can continually add to your account much like a monthly deposit savings plan. The value of your account moves with the daily price of gold. With gold prices in rally mode, the value of your account is rising much faster than an account processed in dollars or any other fiat currency. This is a much better bank for holding cash than the other kind.
How to buy gold: gold stocks
The growth of gold stocks in this long rally futures and commodities growth market is an excellent way to trade and invest for most people. The junior stocks are cheap on a per share basis with typical prices from $.50 to under $5 per share.
When good news arrives on these small exploration companies the shares can move swiftly. Larger gold companies may not rally quite as quickly but are a more conservative trade with shares in an operating mining company having major resources in cash and metal reserves. As these companies progress from a junior to an intermediate (larger share priced) explorer they list their shares on the more prominent stock exchanges like Nasdaq and the American Stock Exchange (AMEX) for buyer marketing exposure.
How to buy gold: stock options
The largest of the large mining companies often mine several ore types (usually related like copper, gold and silver) and offer a stockholder another investing product which is stock options. These options enable a trader to go long or short the company stock and move swiftly to take positions in far out months betting on much higher or lower prices at the designated dates. Further, this tool enables a trader to control a much larger share price with a fractional modest investment. The down side is time decay. If you are wrong on timing your entire option price premium (investment) can be lost. On the other hand your liability is restricted to only the amount of cost of your option(s) and your commission expenses.
How to buy gold: trading precious metals futures
Trading futures contracts in gold or silver is quite entirely different. They are traded on other exchanges like the New York Mercantile Comex Exchange, in London, or at the metals department of the Chicago Board of Trade. CBOT is a very large and traditional futures exchange trading fixed income products, agricultural, meats, metals and other commodities.
Foreign countries have exchanges trading gold around the clock, 24/7 including Australia, Japan, Singapore, and others. This type of trading is different than stocks as you are trading a contract (defined) in the base product itself not a stock. A standard gold futures contract is 100 ounces. A standard silver contract is 5000 ounces. Both in New York and Chicago you can trade smaller or mini-sized contracts on the internet virtually 24/7 except when they close briefly for daily settlements.
Futures trading in gold and silver are offered in the front month, the heaviest action month (not necessarily the same one) and further out months. The price movements are typically faster than stocks offering opportunity to earn or lose large amounts of money very quickly. For inexperienced traders this can be very dangerous, especially in silver which is a tiny market which can trade erratically at times. In essence for a very small amount of margin you are trading in and controlling a large valued futures contract.
For gold at $600 per ounce in a standard contract of 100 ounces the value would be worth $60,000 for one. In silver on a 5,000 ounce contract, a price of $12.00 contract value would also be $60,000. When metals prices were much lower in recent years a daily gold move of $1-2 was common; meaning the price range was $100-$200 for the day. Now with faster trading action and wider price ranges, we see moves of $8-12 in one day offering a range of $800 to $1200 for just a few hours of trading. In silver a formerly modest move of $.05 to .10 was a good day. With a penny being $50 this gives a trader a daily range of maybe $250 to $500. Now we are seeing regular silver moves of 20-30 cents a day offering $1,000 to $1500 for one daily trading session.
Traders in these markets without protective stops to contain losses can quickly find themselves on the wrong side of a fast moving trade going negative for thousands of dollars or more. This is why these futures markets are not for amateurs. With some experience and basic skills they provide advantages and should not be feared. Entering futures with no plan, experience or strong brokers is a formula for disaster. Paper trading first is mandatory for no risk practice.
How to buy gold: futures options
To contain risk in the futures, options on those futures contracts are available. In rising rally markets like the present, a December gold or silver futures call option costs more than say 1-3 years ago. The sellers of these options are smart and normally the premium or price you must pay for your position(s) is skewed toward a seller's advantage.
With experience, even after paying the option seller a hefty premium you can still make some fine returns if you select your positions very carefully. However, you must know correct strike price, date month, time decay and when to exit with profits. Choice of month is option critical. This takes some serious effort to identify the right ingredients for a win.
How to buy gold: futures funds
If you prefer to let others trade futures for you it is possible to invest in unit shares of a professionally managed futures trading fund. This investment vehicle is much like a stock mutual fund except the fund managers are trading in futures on markets not the underlying stock or commodity.
You can also invest and trade in commodity index funds designated for gold, silver, base metals, grain, energy, cotton, cocoa, and coffee. These funds trade in very specific markets or in large groups of them. You can select your specific choice from a wide array of offerings.
After reviewing these trading terms and expressions can you see how it would be very easy to trade with the incorrect information? Most of our readers are stock traders and investors. Also, the majority of them will not trade often being in the buy and hold group or in the group trading 1-6 times per year. For this dominant group we can simplify the trading process by tightening up our references as follows:
1. Kitco is loaded with timely reference information. Click your way around the site and you will discover things you might not have been aware were offered.
3. The Wall Street Journal and Barrons always offer futures trading information stating high, low, open close and highest and lowest prices for a given contract season. Here you will find how gold is trading in far out months for trends along with the current open interest. Barcharts.com quotes futures and options in useful formats. This information can prove quite valuable if you know how to use it.
Elimination of Confusion
The most common mistake I see regularly is the mix-ups in referencing cash gold, gold stocks and gold futures.
As traders and investors of gold stocks you should concern yourself with:
1. Fundamental and technical aspects of your selected gold stock company.
2. Price of gold futures today and further out trends which affect your stock price.
3. Dates and time of year relative to gold cycle fundamentals. This is identifying major trends and their proposed longevity.
As a trader or investor in gold futures watch for: Fundamental and technical aspects of the gold the metal (not stocks.
1. Which month are we discussing? Is it the front month price most commonly posted? Is it the month with highest trading volumes (not necessarily the front months but it usually is)? Is it a further out month? Is it the cash price? Note the dates and time of year relative to gold cycles and fundamentals affecting futures prices.
Here are a few rules we work with each day.
1. Physical gold is to be purchased and stored for a rainy day. It is not for trading or selling in an off and on situation. We say buy physical and keep it forever. Ensure arrangements for your physical property to pass on to your kids or family.
2. Futures gold trading is for experienced traders. Do not do this without a very sharp broker. There are many rules if you trade futures. Risk control is the most important of all. The wins take care of themselves. If you let the losses pile up your trading capital is gone and you cannot trade any more.
3. Gold futures options can be traded if you have experience trading stocks. There are more things to consider but risk is effectively contained.
4. The Tracks believes you should buy and hold a core of gold shares in senior stock positions. These would usually be held through the entire gold rally which could be several years. Some traders can take profits twice a year on one half or 100% of these positions buying into the next rally on price dips. The less trading on a core holding the better.
5. The junior stocks should be traded twice or more per year as they are more volatile. I have seen certain stocks rise 500% and die out and never come back. If you buy and hold a stock like this you earn nothing and could lose more. It is imperative to learn when to take some profits and when to buy back a previously sold position.
6. Stock options on larger gold companies are for trading. When you see 50% profit you take some off the table and let the balance run upward. If you see 100% it is better to exit the whole position. We have had gold stock option calls earn more than 200%. We have also seen gains of 300-400% melt quickly back to a lot less. Learn to take profits and bank them. The best options traders are always busy and frequently in a trade from just a few days to a maximum of 90 days.
Long term leaps positions are different in that you buy a strike price 2-3 years out expecting major returns requiring years to achieve your proposed win.
As you can see, it is important to be very specific in your description of what you are doing with gold and the nature of your intentions. Brokers are in a position to provide a better service if they are not guessing as to what you are trying to accomplish. Also, never forget there are major differences between gold the metal and gold stocks. If someone says buy or sell gold, ask them buy or sell what?
Recommended further reading:
If you're new to gold, see veteran investor Doug Casey's tips in How to invest in gold. Or visit our section devoted to investing in gold for a full list of articles.
First published on Kitco.com
By Roger Weigand. For more information and articles by Roger visit Trader Tracks