In A Guide to Precious Metal Investment: Part 1 – The Pros and Cons of Investing, we looked at the different factors to consider before investing in gold and silver. Once you decide to invest in precious metals, you must then consider the different holding methods.
Three main ways currently exist to hold precious metal investments. We’ll explain what these holding methods are and how they work.
Holding Method #1: Physical Gold and Silver Coins or Bullion
This is the oldest method by far for investing in gold or silver. You simply buy physical gold coins or bars and store them. The advantage to owning and storing physical bullion is it is safest and least complex way to hold precious metals. However, investors who seek to store large amounts of gold or silver at home should think otherwise. Be sure to store sizeable quantities of precious metals offsite professionally and with security.
Diversifying your emergency fund by owning physical precious metals could help in the case you need to flee the country or protect your wealth from rapidly depreciating currency. For example, 5 ounces of gold is worth over $7,500 dollars and could easily fit in your pocket. By buying precious metals such as gold, you have the ability to concentrate your wealth into a physical, valuable and portable asset you can use around the world.
Holding Method #2: Gold and Silver ETFs and Options
An easier way to invest in gold or silver is to buy one or more exchange traded funds (ETFs). An advantage of this method is that ETFs are incredibly liquid and can be bought or sold within your brokerage account. ETFs allow for easy portfolio rebalancing an inexpensive, smooth buying and selling process.
In the past, investing in ETFs was expensive, but they are now falling in price. Here are the main options:
· iShares Gold Trust (IAU), Expense Ratio: 0.25%
· SPDR Gold Trust (GLD), Expense Ratio: 0.40%
· SPDR Gold MiniShares Trust (GLDM), Expense Ratio: 0.18%
· Sprott Physical Gold Trust (PHYS), Expense Ratio: 0.46%
· Sprott Physical Silver Trust (PSLV), Expense Ratio: 0.68%
· iShares Silver Trust (SLV), Expense Ratio: 0.50%
The trend is for ETFs to become cheaper as they grow more common.
A disadvantage in ETF investment is that they are usually not redeemable for gold and silver. This means you never physically have them in hand, so if catastrophe strikes, you won’t have anything to use. One exception is Sprott funds. Their expense ratio is slightly higher, but they store their metals entirely in physical bullion and can be redeemed for gold and silver.
A possible way to earn income with more liquid ETFs like GLD and SLV is you can sell their options.
Holding Method #3: Mining Companies
You can also choose to invest in gold and silver mining companies. Several ETFs contain a subset of miners. An advantage of investing in a mining company is that it helps circumvent many of the problems with precious metals investing. While precious metals do not produce cash flows and require money to be managed, mining companies produce cash flows and usually pay dividends.
A major disadvantage of investing in mining companies is that the benefit of cash flow could actually turn against an investor. Mining companies are levered against the price of their respective precious metal. When you invest in a mining company, you’re not really invested in the precious metal they harvest, you’re invested in the performance of the company. The price of a precious metal could plummet and the company may not be able to withstand the decline in price. They’ll start losing money quickly, pile up debt and potentially go bankrupt before prices recover.
On the other hand, if you invest in physical precious metals, you could wait out a downturn in price.
Weighing Your Options
Each of these three holding methods is viable for precious metal investors. In the end, it’s the responsibility of the investor to understand the risk factors of each method before making a decision.
If you are leaning towards investing in physical precious metals, consider buying gold bars from a refinery like Manhattan Gold & Silver. Regardless of the provider you choose, make certain you are buying your precious metals at a reasonable price and purchase secure storage for them.