Paper Or Physical? Different Methods Of Investing In Gold

| About: SPDR Gold (GLD)

When investing in gold, there are numerous ways to add the alternative currency to your portfolio. Investors can purchase physical gold bullion from a dealer, can purchase the physical gold ETF (NYSEARCA:GLD), go with the gold miners (NYSEARCA:GDX), or even buy numismatic (collectible) coins.

In my opinion, buying rare collectible gold coins (at reasonable valuations of course) can have numerous advantages over other methods of gold investing. The easiest way of going about this would be investing in $20 Saint Gaudens double eagle gold coins. These coins are just under an ounce of gold, and due to historically high gold prices, can frequently be found at prices near a regular $50 American Gold Eagle bullion coin. This is because increasing prices of gold generally cause premiums on numismatic coins to decrease.

The best, secure way to purchase these coins is to get the ones that are professionally graded, which provides an authentication of your gold. Privately owned company NGC and Professional Coin Grading Services (NASDAQ:CLCT) are two industry standard coin grading services.

The advantage in buying numismatic over bullion lies in the fact that a collectible coin will remain rare even if prices of gold retreat. A $20 Saint Gaudens in investment grade MS63 bought at about the same premium as a $50 American Gold Eagle bullion coin will get you about the same amount of gold, but will also have the rarity/collectible side to it that will retain relatively more value if prices go down.

If gold goes down, the premium on the numismatic coin will go up. As a final note, investing in numismatic coins will also require more research by the investor, in order to determine what the coins mintage and condition are and how to assign value. Most coin and bullion dealers in my experience are more than happy to help.

One disadvantage of holding physical gold (numismatic or ordinary bullion), however, is liquidity. Selling, if the investor wishes to lock in profits, requires that the investor sell the coin or bullion to a buyer or coin dealer. This takes much longer then simply clicking a button, and due to the volatile nature of metal prices, can lead to less profit or even more losses depending on the situation. Also, if the investor is looking to unload a large amount of gold bullion, he may have to find numerous buyers to get rid of it all.

This is where "paper" gold, such as the SPDR physical gold ETF, has an edge. If an investor doesn't want the hassle of having to locate a buyer or seller (as well as other problems that come with owning physical gold, such as the worry of theft and the extra space needed to store it), they can purchase GLD and add the yellow metal to their portfolio instantly, and can later sell it instantly with the click of a button. This is probably the best way to go if a speculative investor is looking to make short-term profits in gold. "Paper" gold, as the GLD is often called, also has an advantage in that it doesn't charge a premium over the spot price like physical gold coins do.

The GLD is a technically a trust, and according to Forbes:

"The trust seeks to reflect the price performance of gold bullion by holding gold bars and issuing shares backed by their holdings of physical metal. The gold bars are held in HSBC's vault in London, and shares are sold in baskets of 100,000"

One interesting aspect of the GLD trust that often deflects gold-dedicated investors is the fact that:

"Even though GLD is "physically backed," ordinary investors can't just go to London and redeem their bullion...Regular shareholders have no rights of redemption and the gold is not required to be insured by the Trust, which is not liable for loss, damage, theft, nor fraud. Shares are bought in the open market, only after Authorized Participants decide to place or sell them. Therefore a retail investor doesn't actually "own" gold, but an asset that is backed by gold and represents a certain quantity of the yellow metal."

This "asset" backed by gold, in my opinion, is better utilized as a trading tool than as a long-term method for holding gold as a hedge against inflation.

There are many different ways to get into gold, and each way has its advantages and disadvantages. The appropriate method of investing in gold should be determined by the individual investors goal and what they ultimately want to accomplish by trading or investing in gold. The highly-liquid GLD is great for the trader, but for the long-term investor, who prefers something concrete that they can actually hold in their hands, physical gold (numismatic or bullion) seems to be the best way to go.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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