trade gold

Best & Worst Ways to Buy Gold & Silver

Click “traders” or “investors” column header in order to sort methods by their value to you.

Method Advantages & Disadvantages Traders Investors
Gold bars Pros:
  • Gold bars are tangible, we can be sure they exist
  • Their value will never fall to zero
  • They are neither a liability nor a security
  • Lower margin than bullion coins
  • Low risk
Cons:
  • Relatively low liquidity, especially for bigger bars
  • Shipment, storage and insurance costs
  • Burglary or theft risk
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Bullion Coins Pros:
  • Bullion coins are tangible, we can be sure they exist
  • Their value will never fall to zero
  • They are neither a liability nor a security
  • Low risk
  • Higher liquidity and elasticity than gold bars because of their smaller size
Cons:
  • Relatively low liquidity (better than gold bars, though)
  • Shipment, storage and insurance costs
  • Burglary or theft risk
  • Higher price than gold bars caused by higher production costs
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Numismatic Coins Pros:
  • Can be considered collector’s items
  • Potential return, especially for very old coins, may be much higher than the return on gold bars or bullion coins
Cons:
  • Numismatic coins' value depends on many other factors, not only the metal they are made of (their main value is collector value)
  • Relatively low liquidity
  • Requires a lot of knowledge about numismatics
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Jewelry Pros:
  • Apart from an investment item they can also be considered a collector’s item
  • The potential return that can be achieved on old, rare jewelry is very high
Cons:
  • Relatively low correlation with the price of gold, their value depends mainly on demand and supply of a given type of jewelry, it's brand and age
  • Their main value is collector value
  • In order to achieve high returns a lot of knowledge about jewelry and numismatics is required
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Certificates Pros:
  • No shipment and storage costs or risks
  • Relatively high liquidity
  • Low tracking error
  • Backed by physical gold (theoretically, see cons for details)
Cons:
  • Fees and commissions
  • The risk that bars backing up certificates do not exist in reality
  • Some certificates are only partially backed by gold
  • The risk that the firm managing certificates defaults
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Mutual Funds Pros:
  • Mutual funds are widely available
  • Highly liquid
  • Low price compared to the price of ounce of gold (low barriers of entry)
  • Diversification
  • Leverage, at least in theory
  • Various investment strategies available
Cons:
  • Mutual funds usually invest in gold mining stocks
  • Generally, they don’t have gold in physical form
  • Low correlation with gold
  • Lack of control over investment decisions of the fund’s management
  • Fees, commissions
  • Fund bankruptcy risk
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Pool accounts Pros:
  • Theoretically pool accounts are backed by physical gold
  • No storage costs or risks
  • High liquidity
Cons:
  • Theoretically some accounts are only partially backed by gold
  • The risk that the gold bars and coins in the pool / unallocated account really do not exist
  • The risk of not recovering invested capital in the case of bankruptcy of the entity operating the pool accounts (counterparty risk)
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E-gold Pros:
  • Theoretically backed by gold
  • Transparent exchange rate
  • No tracking error
  • Wide availability, they can be accessed using a computer with Internet connection
  • Low entry barriers, even small amounts of money can be exchanged for digital gold currency
Cons:
  • The risk of not recovering invested capital in the case of bankruptcy of the entity operating the pool accounts (counterparty risk)
  • No sufficient laws or regulations, digital currencies issuers are not banks
  • IT security issues, hacking risk
  • The risk that gold bars that should be backing the account do not exist
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ETFs Pros:
  • Exchange Traded Funds usually invest in physical gold (theoretically)
  • Wide availability, ETFs are quoted on stock exchanges
  • Low price of one share compared to the price of one ounce of gold
Cons:
  • The risk of having insufficient backing by gold
  • ETF price may not always follow the price of gold
  • Often have a very complicated structure
  • Fees, commissions (generally lower than in case of mutual funds, though)
  • Fund bankruptcy risk
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ETNs Pros:
  • Wide availability, Exchange Traded Notes are quoted on stock exchanges
  • Leverage
  • No tracking error
Cons:
  • ETNs do not have physical gold nor silver, they are just debt instruments
  • Monitoring firm's bankruptcy risk is essential in case of significant positions
  • Relatively new financial instrument, lack of much historical data
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Gold & Silver Mining Stocks Pros:
  • Wide availability
  • High liquidity (senior mining stocks)
  • Can be bought or sold on stock exchanges
  • Miners offer, at least in theory, leverage, which can be seen usually in the short run
  • Miners' price can grow even if the price of gold doesn’t rally
Cons:
  • Miners' price does not always follow the price of gold
  • Company-specific risk (strikes, obtaining environmental permissions)
  • The risk of not finding gold
  • The need to analyze various aspects of company’s activity
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Structured Products Pros:
  • Preservation of invested capital, at least its nominal value
  • High potential return
  • Low initial investment (compared to gold bars)
Cons:
  • Relatively low availability, they can be bought or sold only during so-called subscription periods
  • Structured products are usually designed as a long-term investment, but they expose investors to long-term risks (issuer bankruptcy risk)
  • The risk that the assumed scenario doesn’t take place and having to incur the cost of a decrease in real value of invested capital and opportunity cost
  • Usually no backing in physical gold
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Futures Pros:
  • Futures provide high liquidity
  • Futures can be bought or sold on stock exchanges
  • They can be used to hedge against future price changes
  • Futures provide leverage
Cons:
  • The need to main a margin
  • The risk of losing more than initially invested
  • The risk that futures markets rules and regulations will become less favorable
  • The risk that in case of a severe turmoil in the financial markets, obligations based on futures will not be honored
  • Relatively complicated for beginning investors
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Options Pros:
  • Options provide relatively high liquidity
  • Options can be bought or sold on stock exchanges
  • Options can be used to hedge against future price changes
  • Leverage
  • Unlimited profit potential and limited loss potential when buying them
Cons:
  • Unlimited loss potential and limited profit potential when writing options
  • Options are difficult to value
  • The risk that options markets rules and regulations change
  • The risk that the other party doesn’t fulfill their obligations
  • Relatively complicated for beginning investors
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CFDs Pros:
  • Contracts For Difference offer high liquidity
  • CFDs can be used to hedge against future price changes
  • Leverage
  • No expiration date
Cons:
  • The need to maintain a margin
  • CFDs are not exchange traded
  • CFDs are not standardized
  • Betting against the market regulator (!)
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Summary

For long-term investorsthe best way to make gold & silver investments  is by buying physical gold, especially gold and silver bars and coins (and diversifying geographically). 

For traders, the best solutions are those that provide high liquidity and offer leverage:

Please note that in the above table gold and silver mining stocks are featured as a proxy for metal ownership. We believe that miners provide opportunity to diversify one's gold and silver portfolio, so it may be a good idea to purchase them in addition to owning physical metals. They can also be successfully traded in addition to taking positions in the metals, because it is often the case that the short-term price swings in the miners are more volatile than the one's seen in the underlying metals - in other words, at times, they can be traded even though metals don't move much.

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Dear Sunshine Profits,

gold and silver investors MARCH 15TH, 2011
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