Gold Prices Plunge: Here Are 5 Ways to Buy It At a Bargain

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Each of these five ways to add gold to your portfolio has pros and cons. But if you see the value of having gold among your investments, they're all worth considering to give you the gold exposure you want.
Nelson Ching/Bloomberg via Getty ImagesA gold bust of Mao Zedong, former leader of China, right, is displayed for sale at a department store specializing in precious metals and stones in Beijing, China.
The bull market in gold since 1999 has made many gold investors rich. But Monday's big plunge in the price of gold -- prices dropped more than $100 in a single day, sending gold below $1,400 per ounce for the first time in two years -- have some experts thinking that the good times for the yellow metal have come to an end.

Fears about the health of the Chinese economy prompted Monday's gold-price collapse, as the emerging-market nation has become an essential driver of commodities prices around the world.

But gold prices had already been performing badly, with a $60-per-ounce drop last week resulting from word that the central bank in Cyprus would likely have to sell off some of its gold reserves in the aftermath of its banking crisis.

Experts disagree about where gold will go next. Analysts from Goldman Sachs and Societe Generale both predicted falling gold prices recently, although they didn't specify that the declines would come as quickly as they did. But others point out that the rapidly rising costs of producing gold could put a floor under its price, setting the stage for a potential bounce in the future.

Even at current levels, gold has still held onto most of its long-term gains, having traded at around $250 per ounce in 1999. But with prices down more than $500 an ounce from its highs during 2011, you can now pick it up at a relative bargain.

To take advantage of this potential value opportunity, here are five ways you can add gold exposure to your investment portfolio, along with the pros and cons of each.

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Gold Prices Plunge: Here Are 5 Ways to Buy It At a Bargain

What's involved: You can buy gold bars or coins from coin dealers across the country. Many coin dealers have online businesses that will ship gold directly to your home.

Pros: You have the gold in your possession, avoiding any risk of third-party misconduct that other methods of investing in gold entail. Some investors enjoy the coin-collecting aspect of gold bullion coins.

Cons: You'll pay a markup to the current spot price to buy physical gold and might have to accept a discount when you sell it back. Also, you have to find and pay for a safe place to store your gold.

What's involved: Some coin dealers offer pool accounts, which allow you to buy gold but arrange to have it stored with the dealer rather than taking delivery. At any time, you then have the option either to sell the gold back or arrange to have the dealer send you a physical coin or bar corresponding to your pool-account position.

Pros: You have all the benefits of owning gold, but the dealer remains responsible for its care. You avoid dealing with shipping and insurance costs and have the assurance that it's held in a secure facility. The premiums for buying and discounts for selling also tend to be smaller than with physical gold.

Cons: To take possession of the gold, you'll have to pay shipping costs and other fees. You also have to trust that the dealer running the pool account will take all necessary steps to protect it from theft or other dangers.

What's involved: Gold futures contracts allow you to buy the right to take delivery of gold at a specified future date. Futures contracts tend to track the changing spot price of gold, paying you profits when prices rise and losing money when they fall. Most futures investors sell back the contract before it expires, never taking delivery of the physical gold underlying the contract.

Pros: You get the potential financial benefits of owning gold without worrying about storing it. You also don't have to come up with the full value of the underlying gold, as futures contracts require only a small margin balance covering a fraction of the gold's total value.

Cons: Futures contracts are only available through specialized brokerage accounts, and there are commissions involved. Most futures contracts may provide too much exposure, as a standard contract corresponds to 100 ounces, worth about $140,000 at current prices. You may have that much in your portfolio to invest, but putting it all into gold futures could give you too much exposure to one commodity.
What's involved: Exchange-traded funds like SPDR Gold (GLD) own vast holdings of gold bullion. Each share of SPDR Gold has a value of just under a tenth of an ounce of gold, and those shares rise and fall with the price of gold bullion.

Pros: Gold ETFs take responsibility for storage and protection of the gold in their possession, saving you the hassle and cost of owning physical gold.

Cons: Although many gold ETFs own physical gold, some gold ETFs use derivatives rather than bullion to track changing gold prices. For those ETFs, you run the risk that the derivatives involved won't move in lockstep with gold prices, potentially causing you to miss out on a gold-price increase.
 

What's involved: Hundreds of public companies mine gold. When gold prices rise, they earn more for the gold they produce, tying their value to that of the yellow metal itself.

Pros: Unlike other investments, mining stocks can actually produce income. Some miners even pay dividends to shareholders.

Cons: Mining stocks don't always track the price of gold, as other factors such as labor disputes and production costs can cause miners to suffer financial difficulties even when gold prices are high. Lately, gold-mining stocks have had far worse returns than bullion due to rising costs and falling profit margins.

 

Each of these five ways to add gold to your portfolio has pros and cons. But if you see the value of having gold among your investments, they're all worth considering to give you the gold exposure you want.

 

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