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How to buy gold

Answers to the 5 most important questions to ask before buying gold

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Written by Danni White
Edited by Jon Bortin

Gold and other precious metal IRAs are an investment and carry risk. Consumers should be alert to claims that customers can make a lot of money in these or any investment with little risk. As with any investment, you can lose money and past performance is not a guarantee of future performance results. Consumers should also obtain a clear understanding of the fees associated with any investment before agreeing to invest.

gold jewelry and cash

You can buy gold in a few different ways. Some investors are looking for gold-related stock or funds, while others just want something tangible that they can sell quickly in the event of another economic crisis. Either way, buying gold is thought by some to be a proven method for hedging your bets and ensuring financial security.

We interviewed Don Durrett, long-time investor and author of the book “How to Invest in Gold and Silver,” to help answer the five most common questions about buying gold.

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When should you buy gold?

There are two main reasons people buy physical gold: as insurance and as an investment. Those concerned about the recent economic crisis tend to view their ownership of precious metals as an insurance policy: As long as you have physical gold or silver to sell or trade, you’ll never be broke, even if the economy collapses. It’s relatively easy to buy a gold bar, and once you do, all you have to do is store it.

As with all investments, the general rule of “buy low, sell high” applies to gold, whether in coin, bullion or stock form. To know the right time to buy, research the type of gold you want and keep your eye on the market.

Since gold tends to perform well when the economy is in a recession, most people buy gold as a type of financial insurance policy to hedge their bets against the value of the dollar in the market. As a hard asset, gold holds its value even during times of inflation. For instance, the early 1970s would have been a great year to buy gold — its value increased from $35 per ounce in 1971 to $180 per ounce in 1974.

What type of gold should I buy?

Bullion coins and ingots are a relatively safe way to buy gold, though some investors prefer to invest in gold funds, such as mutual funds or exchange-traded funds (ETFs).

One benefit of investing in stocks over physical gold is that it's easier to sell. When you have physical gold, you need to find a physical buyer, which can be difficult and time-consuming, especially when the market starts to go south. In contrast, selling stocks is as easy as a few keystrokes.

  • Gold bars and coins: Gold bars are a quantity of gold in any shape that meets standard purity requirements. A gold coin is a wafer or disc made almost entirely out of gold. Two of the most straightforward coins to buy and sell are the Canadian Maple Leaf and the American Eagle gold bullion coins. The 22-karat Canadian Maple Leaf typically sells well in countries outside of the U.S., while the 24-karat American Eagle bullion coin often sells well within the U.S. Gold bars, also called bullion or ingots, are typically purchased in larger quantities than coins.
  • Gold jewelry: In general, jewelry is not a lucrative form of investment. Retailers add up to a 400% markup on gold jewelry, making it unlikely that you will be able to recoup your investment or make money on top of it later. It is possible to find valuable gold jewelry at estate sales or antique shows that don’t have the added markup, but this is time-consuming and only works if you really know what to look for.
  • Gold mining stocks: Instead of just owning a piece of gold, stockholders own a share of the process of mining gold by investing in companies that own mines. Gold stocks are a riskier, potentially high-profit investment.
  • Gold mutual funds: With gold mutual funds, investors pool their money together to buy precious metals. Mutual funds are available through a financial institution or commercial bank.
  • Gold ETFs: Gold ETFs are a type of commodity fund. It’s a relatively low-cost way to diversify with metal investments. You can buy and sell them directly through the stock exchange or through a brokerage firm. In the U.S., the first exchange-traded funds for gold were introduced in 2004.
  • Gold futures: Futures are contracts that are traded on exchanges. Gold futures specifically relate to the price of gold on a predetermined date. Like with gold funds, investors don’t own physical gold, but they can buy and sell at their own discretion.

Buying gold bullion vs. mining stocks

While many people prefer to have a tangible asset such as gold bullion or jewelry, investing in mining stocks can be a more lucrative investment opportunity that sometimes leads to greater wealth.

Investing in mining stocks is riskier than buying physical gold bullions or coins, but the payoffs can be more significant and include dividends you won’t get when you buy a piece of gold. According to Durrett, “Mining stocks are potentially the investment of a lifetime opportunity because of the cash flow.”

Still, this option may not be for everyone. During our interview, Durrett described successful investors of mining stocks as “contrarian” and “speculative.” He further noted that a successful investor would pay attention to their particular mining stock's daily and external factors, such as oil prices, geological events and natural disasters that can affect the price of gold.

“You can have total control over it; If something crazy happens in the world you still have your gold bullion.”
— Hunter Riley III

Because of the risk involved, some investors recommend starting small: Investors “really want to start out using money they can afford to lose until they get an understanding” of how mining stocks work and what causes their prices to rise and fall, according to Durrett.

Even though he invests in mining stocks, Durrett recommends that people begin investing in bullion before jumping into stocks: “I always tell people to buy some physical gold or silver coins — buy them and stick them in a safety deposit box and see how it feels."

Hunter Riley III, longtime investor and author of “Stack Silver Get Gold: How to Buy Gold and Silver Bullion Without Getting Ripped Off,” said that one of the main things gold bullion has going for it is that it’s a tangible asset you maintain control of, no matter what happens to the global economy.

What influences gold price?

The current price of gold is called the “spot price,” and it’s constantly fluctuating. The spot price reflects the most recent average bid price, according to global professional traders.

Several things can influence the spot price on any given day, including war, the central bank, supply/demand and the size of the average transaction. When you buy gold, you buy it at a percentage (generally 5% to 8%) above the spot price, and you sell it for exactly the spot price.

As with other commodities, increased demand causes gold prices to go up. Likewise, when supply is high and demand is low, gold prices go down.
The cost of gold is typically inversely correlated to the value of the dollar. When the value of the dollar goes down, the gold price goes up.
James Fraser and Kevin Pederson, authors of the book “The Mining Stocks Investor Guide,” recommend that investors stick to “the old saying ‘sell in May and go away’ as the summer months set in and prices tend to flatline.”
It might seem like buying common mints of coins would yield a lower return than buying less common mints. However, the benefit is you can easily sell one of these more popular mints when you need cash.
According to Fraser and Pederson, “First, you want to determine which region of the world the project is in and avoid regions of the world where there is political and social unrest, dubious law enforcement, confiscatory royalty mindsets, nationalization ‘rumors’ and high taxation.”
According to Durrett, companies focused in Mexico and South America have low price structures but high energy costs, which can affect the bottom line.
Fraser and Pederson advise investors to remember that “the number one goal of any management team should be to maximize shareholder value.” Durrett also says to pay attention to the websites of management companies and consider it a red flag if a company doesn’t send out newsletters and update its website with market trends and news.

Do you pay tax when buying gold?

In his book "How to Buy and Sell Gold and Silver Privately," internet marketer and business coach Doyle Shuler explains many of the complexities surrounding taxation and buying gold. Some states apply sales tax for gold bullion, and others don’t.

Some gold buyers are critical of the U.S. government and therefore don’t want their purchase to be noted by the IRS. According to Shuler, simply paying cash isn’t enough to keep you off the grid.

By law, precious metals dealers are required to report purchase amounts over $10,000 cash to the IRS. However, they only report the amount of money spent per transaction, not what was bought or who bought it. Shuler recommends paying with a bank wire or check if you’re purchasing more than $10,000 worth of gold in cash since banks don’t report to the IRS.

I'm ready to buy gold. What should I do next?

You can buy gold online and from local gold dealers, pawnshops and jewelry stores. Here are some things to think about before you buy physical gold:

Check current gold spot prices

It's a good idea to follow the price of gold for some time before deciding it's the right time to invest. You don’t want to buy at the peaks, so it’s good to understand what factors affect the price.

For instance, gold coin dealers maintain that numismatic coins are worth more than just the metal contained inside them, which is how they can justify charging a premium when you buy. There's really no getting around this, so be cautious of any dealer that claims it isn’t charging a premium.

Shop around dealer websites to make sure you're paying a fair price for gold. Check exchange sites to find out what the spot price is, and expect to pay a 5% to 8% premium above the spot price for a gold coin.

Find the right gold dealer

Durrett advises gold bullion buyers to buy from online companies and to sell locally, explaining that local retailers can’t compete with online stores and typically charge customers more. But because you’ll always sell your gold at the spot price, it doesn’t matter where you sell.

Take some time to research reputable gold dealers to find a fair price on gold coins. In general, avoid buying gold online through bidding sites; you can end up in a bidding war and pay more for a gold coin than it’s worth. Here are a few things to consider when you’re looking for a gold dealer:

  • Dealer buyback policies: Before buying from a gold dealer, investigate its buyback policies. Some dealers charge a premium for you to sell back your gold, while others won’t add any additional charge. Get the buyback policy in writing, and keep it in a safe place for the future.
  • Reputation: Buying anything online poses risks, so be sure to do thorough research before deciding on a dealer. The U.S. Mint’s listing of gold dealers is a good place to start. While these dealers aren’t affiliated with the U.S. Mint, it has done some research to ensure the dealers are trustworthy. Reading reviews on reviewconsumerservices is a helpful way to figure out which gold dealer is right for you.

Consider storage options

Where will you store your precious metal? Bank safety deposit boxes are an option, but some precious metals investors don’t trust banks. You might prefer purchasing a home safe for your gold, which adds to the overall cost of your investment.

Remember, home insurance might not cover the loss or theft of your gold, so this also may affect where and how you store your bullion.

Avoid gold scams

Even though it’s relatively easy to find and buy precious metal, there are some risks to consider. Avoid Craigslist, online dealers offering massive discounts, pawnshops, TV ads, cold callers and any dealer without a brick-and-mortar location, since there’s no way of verifying that the dealer actually exists.

Dealers that offer free storage or delayed delivery might not be legitimate, and you may never see the gold you paid for. 

And don't give in to the pressure of late-night telemarketers insisting you call them immediately for a limited-time discounted rate on gold. Take your time to find a reputable dealer.

Bottom line: Is gold a good investment?

Gold has been a commodity for thousands of years. Its value has been relatively stable historically, and it tends to perform better when stocks are down. For these reasons, gold is a popular investment strategy for many people who want to diversify their portfolios. However, most financial advisors don’t recommend putting more than 10% of your assets in gold.

If you’re looking to invest in gold for retirement, you might consider a gold IRA. These work similarly to a traditional or Roth IRA but hold bullion or coins instead of paper assets. To learn more, research how to find the best gold IRA company.

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