3 Rules for Buying Gold

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Gold bullion on American dollar banknotes close up
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Wondering how to buy gold? Investors often flock to the precious metal during times of financial insecurity as a hedge against risk.

But not everyone agrees on the best way to add gold to your portfolio. In this article, we’ll lay out money expert Clark Howard‘s specific recommendations if you want to own some of the shiny commodity.

How to Buy Gold: A Primer

The truth is, gold is not really an investment; it’s more of a speculative venture.

Remember the old maxim about buying low and selling high? You likely wouldn’t be doing that with gold at today’s prices.

“I always talk trash about possessing physical gold because you pay a massive buy/sell spread — which is the amount of money people are paying above the actual cost of gold,” Clark says. “The spread has tripled in the last few weeks. That’s why you’re much better off buying gold funds than buying actual gold.”

That said, public interest in gold dies hard. That’s because gold trades on fear.

Our team also spoke with certified financial planner Wes Moss and he put the latest gold trend into context. Moss says gold is gaining traction right now for two reasons:

  1. As an inflation hedge, and
  2. It can pay off more than much of the bonds market

The idea of gold as a hedge against inflation is one that “sometimes works and sometimes doesn’t,” Moss points out.

For example, he points out that gold only kept up with inflation during four of the past nine decades — the 1930s, 1970s, 2000s and 2010s. However, it did not keep up with inflation in the ’40s, ’50s, ’60s, ’80s and ’90s.

Meanwhile, for the first time in economic history, gold actually pays more than much of the bonds market — by simply paying nothing. That’s because much of the bond market actually has a negative yield (aka interest rate), the certified financial planner notes.

His suggestion?

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“I think…the right answer is own some gold as a hedge,” Moss says. “But gold is not the be all and end all. Just because gold has gone up over the past 10 years, doesn’t mean it will always go up, as gold, like most other investments, is highly cyclical.”

Follow This Advice If You Want to Buy Gold

If you’ve got gold on your mind, here’s what Clark Howard wants you to know…

1. Stick to the 5% to 10% Rule

The consumer champ is not opposed to having a small percent of your portfolio in gold, on the order of 5% to 10% of your overall portfolio.

But to take everything you’ve got and dump it into gold is to be a speculator — and that’s something Clark never encourages.

2. Don’t Physically Hold the Gold You Buy

Buying actual bars of gold is not recommended. Why? Storage can be cumbersome and there’s a huge spread on the buy and the sell.

“People are getting ripped off buying actual physical gold,” Clark says. “It’s my belief you’re much better off buying gold funds than you are buying actual physical gold.”

3. Buy Through an ETF

That’s why Clark’s preferred way for you to own gold is through a gold exchange-traded fund (ETF).

ETFs are the fastest growing area of investing, and Clark likes to call them “a mutual fund for the next era.” You buy ETFs exactly like you would a stock —  preferably through a zero-commission broker — and you can sell them at any time.

With a gold ETF, you let the fund store the physical bars of gold at minimal cost to you. And then you can buy and sell at will — without worrying about getting clobbered on the spread.

Below are some ETFs that let you invest in gold or precious metals.

With these gold funds, you pay a tiny management fee each year. And that’s much cheaper than you trying to secure actual physical gold.

Final Thought

Gold is something investors buy when they’re feeling the emotions of fear and insecurity. But you shouldn’t let the troubles of today — as frightening as they may be — cloud your long-term perspective.

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“Even in this time of uncertainty, I want you to be careful how much money you put into physical gold,” Clark says. “Having too much of your assets in physical gold means that you’ve lost all confidence in the future of America and the world. And I hope your head isn’t there.”

Meanwhile, if you have additional investment and retirement questions, reach out to our Consumer Action Center.

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