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Beginners Guide to Investing in Gold

written by: Brian Nelson•edited by: Rebecca Scudder•updated: 9/20/2011

When the flight to safety becomes the scramble for safety, investors run to purchase gold. But investing in gold can be a little tricky if you are a beginner. Fortunately, a little knowledge goes a long way.

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    Gold Mutual Funds

    The first place many investors head when they decide to invest in gold is the familiar world of mutual funds. While gold and precious metals mutual funds abound, many investors are dismayed to learn that they don’t really invest in gold; they invest in the stock of gold industry companies. Considering how many of these investors are looking for a gold investment precisely because they don’t want to be investing more money in stocks, this can be disconcerting.

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    Gold ETFs

    A better alternative is gold exchange traded funds, or ETFs. While there are many gold and precious metal ETFs that have the same investing composition as gold mutual funds, which is that they invest in gold related company’s stock, there are some that actually invest in real gold bullion.

    iShares is one of the biggest ETF outfits in the market, and their COMEX Gold Trust (IAU) ETF actually invests in gold bullion. However, even an investment in IAU won’t exactly track the price of gold. After all, expenses have to be paid.

    Recent performance data from 12/31/08 demonstrate the subtle lag with IAU returning 19.08% over a 3-year period versus gold’s 19.55% return.

    The major drawback to ETFs for some investors is that they suffer from the same problem that mutual funds, stocks, and other financial instruments have. All of them represent nothing more than pieces of paper in your mailbox that say you have money. For some people, nothing less than actually having the gold in their hands will do.

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    Real Actual Physical Gold

    For investors looking for real metal they can hold in their hands, the answer for gold investments are gold coins. Whether US Government minted Eagles, Canadian Maples, or other government minted gold coins, the investor need not worry about details like assaying or sampling their gold.

    Purchasing gold coins in the volume required for investment is not always as easy as it sounds. For starters, there is a markup on gold coins ranging from 3% to 10% depending on who you buy them from and how much you are buying. There is a similar spread when selling the coins. When compared to a commission on a stock trade, this can be pretty high, but with a stock trade, no one is required to hand you any chunks of metal either.

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    Buy Gold Bars

    Want to skip the coins and buy gold bars like you see in the movies. Theoretically, it can be done. However, considering a London good delivery bar weighs 400 troy ounces that might be a bit out of your league. At current rates near $1,000 per ounce, a single bar will set you back $400,000! Even at lower prices of $800 an ounce, you are still looking at $320,000. But, that’s not all. Shipping, storing, and securing your gold bars is all your expense as well.

    Maybe those coins are starting to look better?

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    Investing in Gold is Risky

    Whatever gold investment choice you make, remember that investing in gold is very risky.It may seem like it is the safest thing you can buy, but gold prices respond mightily and quickly to government actions which are not taken with the price of gold in mind.Interest rate changes, monetary policy announcements, and even regulatory changes can cause huge movements overnight.

    When people say gold is safe, they don't mean the price. They mean that something you physically own can't disappear in the middle of the night with a crooked investment manager, or a collapsing government. Make sure your portfolio is not too risky for your goals.

    For more tips and advice, be sure to check out Bright Hub's Guide to Investing in Precious Metals.

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