Investing in Gold: How Does Is Work?

One of the main differences between investing in gold several hundred years ago and today is that now there are many more investment options.

Gold – The Precious Metal

Few metals or minerals are endowed with the power and mystique of gold. It’s been valued and even worshiped for its beauty and durability, and most of all for its value.

Gold also has tremendous power in the financial world. Indeed, the gold standard is one of the main benchmarks for finance and currency everywhere, and investors from around the world have gotten rich trading in the gold market.

Given all that, its worthwhile to learn as much as possible about gold. What follows is a kind of primer about all things gold-where its found, what it looks like, some of its chemical and atomic properties, and the basis for its value in various economic markets.

What is Gold: The Basics

Let’s start with the fundamentals. Technically, gold is considered a transition metal, but it has its own chemical symbol, which is Au 79. Its atomic weight is approximately 196 g.mol-1. and it has a unique electronic configuration as well.

You’re probably familiar with at least a couple of aspects of the physical description, but we’ll supply a rundown anyway.

Gold is normally found as grains hidden in rocks and alluvial deposits, and it’s known for its unique yellow color and bright, radiant shine. Gold is also known for its durability, which is based in part on the fact that it isn’t affected a lot by either chemicals or humidity.

This durability is based on a variety of other factors as well. Gold has a high level of density, and its weight is approximately 19.3 at room temperature.

Gold has several states of oxidation that are completely unique, and its electronegativity can be measured at 2.5 using the Pauling scale. There are also unique rates of release for ion energy as well as unique values for the covalent, atomic and Van de Walls radius.

It has a very high boiling point (2856 degrees Celsius), and its melting point can be measured using one of three different options. To complete the chemical picture, gold fuses and vaporizes at 12.55 kj mol-1 and 324 kj mol -1.

The etymology and history of gold are as almost as colorful as the metal itself is complex. The word gold dates back to an old Anglo-Saxon word, “geolu,” which relates to the color yellow. The chemical symbol of gold, Au, can be traced to “aurum,” a Latin word which means gold.

The actual date when gold was first found has an interesting history of its own. For a time many believed that gold was first found in California in 1848, which was the beginning of the so-called “gold rush.”

But it has since been learned that gold was widely used by a number of ancient civilizations, most notably the Greeks and the Egyptians.

Why Gold Is So Expensive?

The Value of Gold

In part, the value of gold is based on the fact that it’s been used to make gold coins for hundreds, if not thousands, of years. Because of that it has became both an item of exchange and a method of payment, depending on the finance system being employed.

The weight of gold is typically expressed using gold and troy weight, but the expression of value most people are familiar with is the carat, which is the usually the main unit of measurement for gold.

If you’re buying jewelry, for instance, the popular expression “24-carat gold” means you’re getting pure gold, but gold is normally mixed with copper or silver in most jewelry applications.

In the world of finance, the price of gold depends on its current market value, which is measured and changed twice a day in the London market.

The price is also fixed by the several other financial institutions, specifically Barclays Capital and HSBC (A London banking conglomerate), among others. The final price is established by London Gold Market Fixing (Ltd).

Financial Markets and the Gold Standard

The gold standard has been an integral part of today’s financial markets for decades now, but the basics of how it works are actually fairly simple.

The gold standard is basically a monetary system in which specific currency is based on a fixed price of gold (Au). As mentioned earlier, the price is fixed by various financial institutions, and both cash and bank deposits can be exchanged for gold.

Historically, the gold standard dates back to the 1700s, when the three types of gold used for the gold standard were established: gold specie, gold bullion standards and the gold exchange.

Rare look inside Bank of England’s gold vaults

The Three Different Types of Gold Standards

Gold Specie

Let’s start with the gold specie, which is directly tied to the value of the different gold coins that are in use. The gold specie standard actually dates back to medieval empire, with the Byzantines and the British West Indies being two fairly well-known examples.

The doubloon in Spain would be another one, and in 1873 the United States adopted this system, choosing the American Gold Eagle as its currency unit.

Gold exchange

The second gold standard, the gold exchange, pertains specifically to the circulation of coins with a lower value than gold, e.g., silver.

Different countries make the choice to peg their currency units to the gold standard used in the U.S. and in Britain. One example of this would be the choice by Mexico, Japan and the Philippines to their exchange their silver coins at a rate of $0.50 per US dollar.

Gold bullion

The gold bullion standard was first used in 1925 by the British Parliament, and it dictates that gold bullion be sold using fixed prices based on demand.

In 1931, though, the British government decided to banish the gold bullion standard to curb the flow of gold beyond the Atlantic Ocean, and that in turn resulted in the beginning of what became today’s modern gold standard.

The financial system of standards used today has several advantages. One is the ability to deal with inflation-because currency isn’t directly tied to gold, inflation can now be curtailed by limiting the amount of paper currency in circulation. In addition, exchange rates play a significant role in this process, for they develop fixed, stable patterns that help reduce economic uncertainty at a global level.

Contrast that with the gold bullion standard, for instance, which comes with its own set of limitations. Most economists believe it would be ineffective as an economic stabilizer because it has a limited effect on monetary policy.

In a true gold standard the availability of (Au) would be the sole factor determining the availability of money. But in today’s economy a more complex, interactive system is used, with the value and price of gold being one of the more important variables in that system. That doesn’t diminish the importance of gold in any way–it merely gives it a very important but fairly specific role.

Investing in Gold

how to invest in gold

It is never too late to invest in gold, at any price, and in any way. The years pass, but gold surely continues to exert a definite fascination for investors and non-investors. Cyclically, it returns to being a highly sought-after safe-haven asset.

Moments of crisis, such as the current post Coronavirus one, have encouraged many savers to buy gold. But, how does gold investing work in practice? There are several methods, and many reasons, to bet on the yellow metal and secure your money.

How To Invest in Gold?

Investing in gold is a safe operation. To be precise, gold investing can take place in different ways. To date, the most common form of investment gold includes buying:

  • gold jewelry
  • gold coins
  • gold bars

Then, there is the possibility of financial investment in gold (Nonmonetary Gold). This option allows for buying real-time traded securities as if they were shares. Of course, the safest and most recommended investment gold is the physical one.

Best Gold Investment Practices

When preparing to invest in gold, it is essential to follow some precautions. First of all, it would be appropriate to have some knowledge of the gold market. For instance, study its fluctuations so that you can know when to invest.

The value of gold is constantly changing. Thus, it is important to keep yourself posted with the financial market. The first thing you need to know before investing in gold is, therefore, the price of the metal at that historical moment. On gold dedicated websites, it is possible to obtain the updated gold price in real-time.

Next, let’s talk about purity. Often, gold does not appear in a state of purity. Especially in the case of ordinary jewelry, you would be surprised how common this is. In reality, blacksmiths generally mix gold with other metals.

This detail will make or break your deals. Karats are the standard unit of measurement of gold purity. On the positive side, there are several ways to determine the purity of your gold. Here are some methods:

  • Find the stamp. It contains a number engraved on your jewel. Usually, it resembles a rhombus indicating the karats of gold present in the object.
  • Test it with the magnet. Gold, like silver and platinum, is not magnetic.
  • Nitric acid test. By any means, this is not a DIY test. A drop of nitric acid (a corrosive acid) on the jewel will reveal the gold purity. If the drop remains as it is, the test indicates that it is gold.
investing in gold

Why is Gold Investing Worthwhile?

Gold is considered the safe-haven asset par excellence. Indeed, it has survived thousands of years of socio-political, financial, and technological changes (see Bitcoin for example). Almost every time, it came out of it as the safest bet for investors. Can we say the same about any other currency on the market or stock? I do not think so.

Gold is a precious metal. Given that metals are limited in nature, the available stocks decrease over time. Thus, its monetary value is bound to increase. In fact, the demand for gold from emerging countries does nothing but fuel this constant growth.

Gold has always played a fundamental role during inflation crises. When the cost of living increases, the price of gold also grows. Historically, its value has gone hand in hand with rising prices. On the contrary, equities have always suffered from inflation.

How Much Gold To Buy For Properly Investing in Gold?

Most financial analysts and various savings gurus recommend converting 5% to 10% of your investments in gold. Conversely, the optimists even go up to 20-30%.

Furthermore, one of the rules of the model investor is to constantly invest portions of his or her budget monthly over time. It is the only way to avoid the risks caused by excessive volatility that could affect gold in the short term. In other words, when you invest in gold, you still have to think about the return of the investment. Therefore, frequently selling and buying gold in small batches will limit the risk of you losing money.

Here is a tip on how to invest in gold like a pro. As a rule of thumb, always buy a whole gold bar instead of little pieces for the same weight. In general, production costs will make the price rise a little bit more for smaller items.

Gold Hits All-time Highs

More Details on The Means of Investing in Gold

For those of you who want more detail about how to invest in gold, here is a section about specific methods such as a gold account or a gold certificate. Plus, we will see the difference between GETF and CFD for a savvy investment in gold. But first, let’s start with the more basic methods.

Buying Gold Coins

Some of you would immediately think about the weight of a gold coin. However, that is not all that comes with gold coins. In addition to their weight in gold, gold coins are also a valuable investment because of coin collectors. In essence, there is a market within the gold market for gold coins.

The prices of gold coins greatly vary, as is the variety of coins that you can find on the market. Markedly, they range from the gold pound sterling, which is the most sought after as the best known in the world, to coins from all over the world such as the Austrian crown, the Krugerrand, the Swiss franc (Marengo) or the American Eagle.

The price of gold coins can range from a few hundred dollars and up to more than 1,500 dollars. The reason for this difference depends on the quantity of gold contained in them, the thickness or weight that is characteristic of each coin. In other words, it is also directly proportional to the gold price itself. The more gold they contain, the higher the monetary value.

Buying Gold Bars

Buying gold bars is an increasingly growing buying trend. Besides, collectors and small savers choose the precious metal par excellence as their investment or for a luxury gift of great and highly appreciated value.

Every gold bar contains a high economic value. Plus, you can easily sell your gold bars to bullion dealers. They will give you immediate liquidity guaranteeing the recovery of your investment.

By far, buying gold bars is the most common form of investment. However, you should be aware of the factors that influence the purchase of gold bars. These factors include the highest standards of production, refining, purity, and transport of each gold bar placed on the market. The hardest part of buying gold bars is to find legitimate proof of validity.

gold bars

Managing a Gold Account

You might be familiar with the clichés related to the rich banks in Switzerland. Surely, a gold account is one of them. Some banks let you open a gold account. Within it, you deal with gold as you would with a foreign currency. Allocated or unallocated physical gold deposits may also come in the picture. Moreover, each gold account differs in terms and conditions. Usually, there is a minimum limit of purchase, and users can manage their account electronically.

The Traditional Gold Certificate

Until the 1930s, banks issued gold certificates daily. To explain what they are, they gave the full right to exchange them for gold. Gold certificate owners just went to the counters to withdraw the quantity of physical gold corresponding to the value printed on the certificate.

Some banks based in Switzerland, Germany and other foreign countries can issue you a modern gold certificate. As a result, you would receive a paper document. The gold certificate certifies the virtual ownership of a certain quantity of gold. Thus, physical gold is still not purchased personally by the investor. Instead, you get a certificate of ownership on a portion of the gold bars kept in the vaults by the financial institution. In the end, you have the convenience of buying nonmonetary gold rather than physical gold. In this case, you only have to securely store a document.

Gold Exchange Traded Funds (GETF)

Physical investment in gold can take the form of an exchange of electronic forms of storage for gold. Does it sound complicated? Actually, it is not that complex of a concept. If you know how the stock market works, you are already ahead of the curve.

In detail, you invest in gold digitally without having to worry about its storage. That is so because each unit of GETF equals one gram of gold. Indeed, it is a great way for beginners to start dealing with the real price of gold.

There are plenty of online brokers that sell GETFs. Generally, you can buy them through trading platforms that can be more or less intuitive. Thus, it is critical you find one that you can easily use to trade in GETF. Annual fees for commission and storage may apply.

Invest in Gold with CFDs

A contract for difference (CFD) is a speculative tool to invest in gold. Essentially, they are contracts based on the price changes of an underlying asset. Because you only bet on the value of that asset, you don’t have to buy or invest directly in that asset.

With this in mind gold is just another asset. As such, you can buy a CFD related to it. Ultimately, you bet on the price change of gold. Either you think it will rise or fall. The gold price will change and reward some investors while playing against others

It is widespread in many financial institutions. Especially in the United Kingdom. For this market to exists, buyers and sellers are necessary at all times. The difference between the price of gold and the value of your CFD generates the gain or loss of money.

Investing in gold can be a complicated process if you are new to it, so we have put together this guide on purchasing gold as an investment.

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