Investing 101

Investing 101: Build Your Pot Of Gold

Written by Mint.com
Published Nov 19, 2010
4 min read
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Gold prices are at all-time highs, and historical experience tells us that investing in gold has been an excellent way to hedge against severe market downturns or economic crises.

After the stock market crash of 1929, the price of gold rose from $21 per ounce to over $25 per ounce over the next few years — far outperforming the stock market. Gold also fared well — reaching over $850 per ounce — during the period of stagflation and economic turmoil in the U.S. during the 1970s.

Even as the stock market plummeted during the past recession, the price of gold continued to flirt with record high.

Here are the answers to some of the most frequently asked questions posed by beginner gold investors about building your pot of gold.

Where is the gold I’m investing in?

One of the ways to invest in gold is to own the physical asset, but gold bars are not for sale at the local grocery store.

And even though you likely already own some gold in the form of jewelry or other items, buying jewelry is not a practical way to expand your gold portfolio. With the markups and labor costs built into jewelry production and sales, you are more likely to lose money than gain.

One way to purchase investment-grade gold fairly easily is go to the U.S. Mint. It issues American Gold Eagle coins, official gold bullion that are literally worth their weight in gold. These coins can be purchased from most banks or authorized retailers. A full listing of authorized brokers and distributors is available at the U.S. Mint web site. Gold bars are also available for sale, typically through banks and authorized brokers, and can be held by you directly or on your behalf in a vault.

What do I need to do first before investing in gold?

Before stocking your safe-deposit box with gold coins, make sure you get familiar with current events, both domestically and internationally. Global events and economic data drive the price of gold on a day-to-day basis. When the economy looks like it’s heading south, the price of gold will typically perform well. If we are on the road to economic prosperity, the price of gold will typically weaken.

If you want to build your pot of gold, you should check up on the stream of economic news as it relates to unemployment figures, economic growth and currency valuations. You probably do not want to drive yourself crazy doing this daily, but you need to have a strong grasp of geopolitical events shaping our global economy. If you come to a solid understanding about where we‘re heading, you will be able to make an informed decision about investing in gold.

How can I invest in gold?

As discussed earlier, you can own the actual gold, through gold coins or gold bullion bars. However, this is not the only way to build your pot of gold. There is an array of mutual funds, exchange-traded funds and individual stocks that are linked to the price of gold or serve the gold industry in some form.

For instance, the most popular gold exchange-traded fund represents ownership of actual gold and, therefore, the price is tied almost directly to the price of gold. Mining companies and businesses that service the gold industry trade on the New York Stock Exchange, among other exchanges, can be purchased through a stock broker. Gold-focused mutual funds and common stocks are also viable ways to invest in the gold market without actually owning any gold at all.

go for the gold

The thought of building your pot of gold may be exciting, and it seems to be the trendy thing to do, but it’s a whole different ball game than investing in straightforward equity or bond funds. Gold is a commodity and is subject to very volatile price swings during the short term, as we saw with the price of oil last summer.

The price of gold surges during tough times, but once things get better, the price of gold can bottom out. Many conservative investors like to own some gold as part of their portfolio due to its history of performing well as a hedge against inflation and economic turmoil. As with any investment, you should understand the dynamics that drive the price of gold and proceed with caution to avoid any scams.

Investing 101: Build Your Pot Of Gold was provided by AskMen.com.