Gold has served as a store of value since before recorded history. It is not surprising that people should turn to it when economic problems arise.

There are many ways to invest in gold, including bullion, coins, exchange-traded funds (ETFs), derivatives, and shares of gold mining stocks. Each of these methods have their advantages and disadvantages.

Gold prices are typically quoted in US dollars per troy ounce. Troy ounces are different from the avoirdupois system of ounces and pounds that Americans use for most measures of weight. There are approximately 14.6 troy ounces in an avoirdupois pound, as compared with 16 avoirdupois ounces in a pound. In other words, the troy ounce is almost 10 percent more than the familiar avoirdupois ounce.

The most widely followed gold price is the London fixing of the London Bullion Market Association, which is published twice daily on the web in many places. This is a spot price for immediate delivery of large quantities of bullion: Usually 1,000 ounces or more. Those of us who purchase smaller quantities must pay a higher price.

Gold Bullion: Ingots of nearly pure, 0.9999 fine gold bullion can be purchased in sizes from one gram up to several hundred ounces. The larger bars are a better deal. They carry a lower premium over the London fixing than the smaller bars. Examination of a bullion dealer’s website shows that 10 one-kilogram bars can be purchased for a premium of only 0.84% over the London fixing. You should only buy bars made by well-known refiners such as PAMP Suisse, Johnson Matthey, or Engelhard.

If you have a safe place to store them, gold bars are one of the best ways to invest for people with at least $10,000 to put into gold. There are companies that will purchase and store the bars for you for a fee, but then you must be concerned with their trustworthiness.

Gold Coins: In this article, we are only concerned with coins that sell for a small premium over their intrinsic value, i.e. the value of the gold in them. Some people push investments in rare coins that have collector’s value far in excess of their intrinsic value. Since we are talking about gold bullion, we will not consider rare coins in this article.

There are many gold coins that have reasonable premiums over their intrinsic value: American Eagles, South African Krugerrands, Canadian Maple Leafs, etc. They come in sizes ranging from 1/10 ounce to one ounce. The premiums can be considerable higher than for bars. If you purchase 10 one-ounce coins expect to pay a premium of at least 6%, and more than that for smaller quantities. Still, this is one of the best ways for people to purchase less than $10,000 worth of gold.

Exchange-Traded Funds: During the last 10 years, a number of exchange-traded funds have been formed that sell shares to investors and purchase and store gold bullion. The prices of these funds track the spot bullion prices very closely. Since they trade in large quantities of gold, they are able to get the best prices when they purchase. The two largest funds both charge an annual 0.40% management fee. The investor must also pay a brokerage commission when he buys or sells shares. In spite of these fees, an ETF may be a more cost-effective vehicle for people investing small amounts, rather than purchasing gold coins. An ETF may also be more cost-effective than purchasing gold bars, if the investor does not have an inexpensive way to store the bars.

The potential drawback to an ETF would be if a Bernie Madoff were managing the fund and failed to purchase any gold. Since most investors who purchase gold buy it as an insurance policy against a financial system meltdown, this is a genuine concern.

Derivatives: There are a wide variety of derivatives based on gold prices that are available on the exchanges as well as over the counter. Forward contracts, futures contracts, options, options on future contracts, swaps, you name it. For the individual investor, these vehicles are very useful if you want to make a leveraged bet that the price of gold will increase or decrease. Large amounts of money can be made or lost on even a small fluctuation in the price of the metal. For most investors, derivatives are not a good choice unless you are a day trader who is willing and able to monitor market conditions closely.

Gold Mining Stocks: Buying shares of companies that mine gold can be another way to make a leveraged bet that the price of gold will increase. For example, suppose that XYZ mining company is working a mine that costs $850 per ounce of gold bullion, and the current market price of gold is $900. It has a gross profit of $50 per ounce. Now suppose that the market price of gold increases to $1,200 per ounce. Assuming the company’s expenses do not change, its profits will increase by 600%. But if the price of gold dips below $850 per ounce, the company will likely suspend operations and profits will go to zero.

The big drawback to gold mining stocks is that they are not a pure play on the price of gold. When you buy a company’s shares, you are also betting that they will be able to exploit the mine skillfully, and keep costs under control. Those investors who wish to make a leveraged bet on gold prices will probably be better served by derivatives.
Recommendation: Every investor should buy a small amount of gold, no more than 5% to 10% of his portfolio. Buy a few gold coins and keep them in a secure, easily-accessible place. You will have liquid assets that will maintain their value in a financial catastrophe. If you invest more than a few thousand dollars in gold, buy gold bars or ETFs.