Golden Rules for Investors: 8 Things to Consider Before Buying Actual Gold

By Alert Investor Markets Fool.com

It's a fantasy that may resonate with children of a certain era: swimming in a vault piled nearly to the ceiling with glittering gold bullion. It was a regular pastime of the cartoon character Scrooge McDuck in the late-1980s animated classic, Duck Tales.

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In fact, his mammoth holdings of the precious metal helped propel him to the top of at least one list of theworld's richest fictional characters.

For mostrealinvestors, of course, amassing and storing swimming-pool-sized portions of gold is impossible. But there are those who do take an interest in holding at least some of the glittering asset. Ranjan, a northern New Jersey man, inherited a South African gold coin known as a Krugerrand from his great uncle and has considered buying more gold coins, perhaps from the U.S. Mint. The gold would help him diversify his portfolio, but his main motivation for buying, he added, was sentimental.

"My intent is to do something similar to what my great uncle did -- to keep them and then hand them down to my children," he said.

If you're considering buying gold, whether it's as part of an investment strategy, for sentimental reasons, or both, here are a few points to consider.

Image source: Getty Images.

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1. It's often considered a "safe haven" investment

When markets hit turbulence, investors often turn to gold and gold-related investments -- such as gold mining stocks and mutual funds or exchange-traded funds made up of gold-related businesses, or gold exchange-traded funds. This is based on the assumption that gold's price will hold steady or climb even as the value of other investments drops.

The price of gold "reflects global uncertainties," formerFederal Reserve Chairman Ben Bernanke saidin 2011. "The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection."

Indeed the price of gold reached a new high during the 2008 financial crisis.

2.But it's still vulnerable to price swings

Despite its reputation, gold is not impervious to price declines. The price of gold is nearly double today what it was a decade ago, but in between, the price saw major peaks and valleys. Gold prices reached a record high above $1,900 an ounce in 2011, but more recently have hovered around $1,200.

3. You'll pay a premium

The price you see gold trading at on commodities exchanges (called its "spot price") is not the price you'll pay. Individual investors typically buy gold from dealers -- as opposed to buying it on the wholesale market. Dealers charge a premium above the spot price, which often includes a dealer fee, as well as charges for the manufacture and distribution of the yellow metal. Similarly, if you'd like to sell your gold, you'll likely be selling to a dealer who will pay you a certain percentage below gold's spot price.

4. Your choices include gold coins and bars

Gold coins weigh about an ounce or less. Those popular among collectors and investors include the American Eagle made by the U.S. Mint, the Canadian Gold Maple Leaf, and the Krugerrand. Not interested in coins? Gold bars weighing in at 1 kilogram or less are often marketed to the average investor, but bars as large as 100 ounces are also available, according to gold industry group the World Gold Council.

Institutional buyers such as financial institutions, central banks, and exchange-traded funds are in the business of buying even larger bars. The standard for over-the-counter gold bar trades is the London Good Delivery (LGD) bar, which ranges in size from 350 fine troy ounces (about 10.9 kilograms) to 430 troy ounces (about 13.4 kilograms), according to theLondon Bullion Market Association. At current prices, a single such bar would cost roughly $478,000.

Though individual investors may also be eligible to purchase London Good Delivery bars (assuming they could afford them), they might have trouble complying with the strict regulations in place regarding the bars, which must be kept in LGD-accredited vaults or transferred through a chain of custody that meets LGD standards.

5. You'll need a place to store it

Where will you keep your gold? Some might prefer using safes in their homes, renting safety deposit boxes at banks, or using precious metals storage services offered by banks as well as companies outside the banking system. How quickly you wish to access your gold -- would you want to be able grab it right away during an emergency? -- may determine how you decide to store it.

"There's a full spectrum," said Juan Carlos Artigas, director of Investment Research at the World Gold Council. "Some people really want to hold it very, very close to home. Others are comfortable with the benefit that gold brings to their investment [portfolio] and they do not necessarily need to sleep next to it."

6. Funds may be an option

Investing directly in physical precious metals such as gold can be difficult and costly, which in turn can make it harder for you to diversify your portfolio.

Mutual funds or exchange-traded funds (ETF) that invest in precious-metals companies or a variety of physical precious metals may help you avoid putting too many precious metal "eggs" in one basket. Unlike physical precious metals, mutual funds and ETFs are registered securities that come with legal protections and ongoing disclosure about the investments.

Furthermore, mutual funds and ETFs can provide a cost-effective way to diversify among different types of physical precious metals and companies involved in mining and other aspects of the precious-metals business. It's important to note, however, that the performance of such funds doesn't always track that of the physical commodity.

That said, all securities that offer exposure to commodities such as precious metals carry the risk that you could lose some or all of your investment. Commodity futures-linked securities in particular may employ complicated investment strategies for achieving their investment objectives and can be volatile. They may have different tax treatment than your standard stock, as well, so it may be worth discussing your plans with a tax professional.

7. Beware signs of fraud

While there are a number of legitimate ways to invest in gold, there are also a number of gold-related investment scams.

These scams may center on inflated claims regarding stocks of gold mining companies, claiming the stock's price is linked directly to gold prices. Or they may claim you can make a lot of money with little risk through a "financing agreement," or that a company will store your gold for you.

You should always be wary of theseven red flags of fraud, but for more information on gold fraud, be sure to read thisCFTC advisory.

8. Be sure to vet your gold dealer

Generally, there is no centralized, regulator-approved list of gold dealers, Artigas warns, but there are steps investors can take.

Just like other businesses, you can find some gold dealers accredited by the Better Business Bureau. The U.S. Mint, meanwhile, maintains a searchable database of coin sellershere.

FINRAsuggestsyou also check the National Futures Association's (NFA)Background Affiliation Status Information Center (BASIC)to check whether the firm or individual is registered with the CFTC or is an NFA member. You can also check whether a firm or individual was the subject of any disciplinary actions.

And it's always a good idea to check an investment professional's background using FINRA'sBrokerCheckand to do a general internet search.

"You have to do your due diligence," Artigas said. When it comes to any investment, doing your homework is worth its weight in gold.

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