Ever since the 2008 financial crisis, both the American and global economy have remained highly uncertain, despite empty assurances from politicians and talking heads.
It is not surprising then, that in such uncertain times, that more and more people are looking at various methods of both safeguarding and growing their wealth, particularly those who are at or nearing retirement age. Gold is one such investment avenue that has become increasingly popular, and the goal of this site is to provide our readers with the best possible information on the various questions that people have concerning investing in gold. In today’s guide, we will be looking at:
- What is a gold investment company?
- What should I be looking for when evaluating gold investment companies?
What is a gold investment company?
In order for us to explain what exactly a gold investment company is, we first have to be clear about what exact method of gold investment we are looking for. Gold investment and gold investment companies can be a generic catch-all term so we have to break it down to specifics prior to answering that question. Before even considering evaluating gold investment companies, investors have to be sure which method of gold investment they are interested in first. Basically, there are four primary methods that an investor has at his or her disposal to answer the question: why invest in gold? They are:
1. Gold Coins and Bullion
A simple and the most direct method where an investor directly purchases physical gold, mostly in the form of gold coins and bullion. An investor can either buy the gold directly and store it on their own (a simple safe deposit box will usually suffice), or they can purchase the gold via a self-directed IRA, known as a ‘precious metals IRA’ or ‘Gold IRA’. In the second case, the funds in said IRA (which can be funded via rollovers from other accounts such as TSPs, 401(k)s, or other IRAs) are used to purchase gold from a Gold IRA custodian and dealer, and although the investor owns the gold directly, under IRS regulations, the investor cannot physically possess the gold and it would be stored with said custodian. When investing in physical gold coins and bullions, investors should ensure that the gold they purchase is of high quality, at least 99.5% (24 karats) pure. If investing via a gold IRA, the gold is ensured to be of high quality as that is mandated under IRS regulations. Hence, in this case a gold investment company would refer to a Gold IRA custodian.
2. Gold Exchange Traded Funds (“ETFs”)
An indirect method as the gold is owned by the ETF and not the investor. The investor instead purchases shares in the fund, and the value of the shares would trade in accordance with the market price of gold. Each share usually corresponds to 1/10 of an ounce of gold. Investors can purchase shares directly from the ETF or via a regular IRA. In this scenario, the gold investment company would refer to a specific gold ETF; popular gold ETFs include names such as SPDR Gold Trust and iShares Gold Trust.
3. Gold Exchange Traded Notes (“ETNs”)
An even more indirect method for investing in gold, and also a somewhat more complex investment type. ETNs are a type of debt security traded on exchanges which returns are linked to a market index or some other benchmark, in the case of gold ETNs, the benchmark would be the price of gold. It is worth highlighting that unlike gold ETFs, the issuer of the ETNs does not actually own any physical gold and such issuances are reflected as unsecured debt obligations on the issuer’s books. Unlike traditional debt instruments such as bonds, however, ETNs do not pay out regular interest payments and trade more like stocks. The gold investment company in this case would then be the issuer of the gold ETN; investors should note that as there is no physical gold involved, investors are directly exposed to the counterparty risk of the issuer. For more information on ETNs in general, the Financial Industry Regulatory Authority, FINRA, has issued a relevant investor alert.
4. Gold Miner Stocks
This is the simple method of investing in equity issuances of gold miners. If choosing to utilize this indirect method, investors should ensure they perform the necessary due diligence on each specific gold miner company, as each would have different profiles such as operating costs, production levels, and future mining projects. Generally speaking, gold miner stocks are more volatile compared to gold itself as they represent a leveraged investment in gold. In this method, the gold investment company would refer to the individual gold mining company.
Now that we’ve broken down what exactly a ‘gold investment company’ can refer to, you may be wondering which method is most appropriate for you. In our view, investing in gold via a Gold IRA is the most beneficial as it allows for direct ownership of physical gold as well as favorable tax treatments. For more, kindly refer to our guide on ‘Gold IRA Investing’. Hence, in the next section of this guide we will be focusing on the criteria for choosing the best gold IRA custodian.
What should I be looking for when evaluating gold investment companies?
From here on out, we will be referring to Gold IRA custodians when talking about gold investment companies, as we believe that Gold IRAs are the ideal choice for investing in gold. When evaluating such companies, there are 4 main criteria that we look at, namely:
1. Reputation and Track Record
In any industry, reputation is key. In the information age of today, peer reviews are one of the best ways to obtain first-hand information on the reliability and trustworthiness of a company. In the case of Gold IRA custodians, we like to check the custodians we are evaluating with three impartial sources: the Better Business Bureau, the Business Consumer Alliance, and TrustLink. When selecting a Gold IRA custodian, we encourage all potential investors to cross-reference the company with the three databases above. The highest rating possible on the Better Business Bureau would be A+ or a 5-star rating for the latter two. If a gold investment company has managed to achieve the highest rating on all three that would be a highly positive indicator as to its reputation and track record. Potential customers can also further scrutinize individual customer reviews on each site for a deeper picture.
2. Fee Policies
Hidden fees have the potential to really diminish your net returns on your investment. Hence, it is important to select a company that is upfront on the fees they charge. Looking for companies that charge in the neighborhood of $250 per year, for both administrative and storage fees, is a good starting point. Especially, be on the watch for companies charging a percentage, rather than flat fee, which can quickly accumulate beyond an acceptable limit.
3. Gold Storage Safety
Whenever there is physical gold, there is always danger of theft. Therefore it is paramount that a good gold IRA custodian stores their customer’s gold in a licensed and secured depository. A good example of one such depository is the Delaware Depository, the largest depository in the United States outside of New York, which is also a licensed depository of the CME Group as well as the ICE Futures US, backed by a billion dollar all-in insurance coverage policy. Potential customers should always ensure that their Gold IRA custodian only stores its gold in depositories with a similar reputation.
4. Ease of Liquidation
Many commodities are easy to buy, but hard to sell. To take an example, diamonds are easily bought, but their resale value is often extremely low compared to their retail value. Of course, in the case of diamonds, this is because of collusion within the industry to keep supply artificially low, and further, diamonds are not a publicly traded commodity such as gold. Nevertheless, the fact remains; the ease of liquidating your investment is a major factor to consider before investing in the first place. In the case of physical gold, investors should be confident that they will be able to liquidate their investment at prevailing market prices if they so choose. Hence, investors should choose a Gold IRA custodian with a generous buyback policy; an ideal custodian should be committed to buying back any client’s gold at the highest spot price of a particular trading day, with no fees attached.
Gold is a great investment choice in uncertain times, however there are various methods of adding gold to a portfolio, and investors should closely scrutinize the pros and cons of each one. Even after selecting an appropriate method, investors should then perform further due diligence in choosing their gold investment company to minimize counterparty risk. We hope that this article has helped educate you so that you are better equipped to make the right investment decision for your own financial needs and goals.