While there are many reasons to own gold, they typically all come down to protecting yourself against a risk. Whether you want a little protection in case the dollar loses some value through inflation or you think society is about to break down, turning life into a "Mad Max" movie, holding some gold might be appropriate. Whether you choose to hold gold stocks or the physical metal depends largely on what risks you think the economy and society face.
Metal vs. Stock
When you own physical gold, you literally have pieces of shiny metal. Gold can be minted into coins or smelted into bars. Smaller pieces generally have higher relative costs because it costs more to make them. Making 40 one-ounce bars is more work than making one 40-ounce one. Gold stocks come in a few different forms, but in all of them, you own a piece of paper rather than a chunk of metal. You can buy into funds that hold gold, or you can buy a company that produces it. In either case, your stock ownership represents a piece of someone else's gold holdings.
When you buy or sell gold stock, you pay fees to your broker and the exchange where you buy or sell the stock. While fees vary, they're usually not much more than a couple of percent of the transaction, unless you're buying very small quantities or stock. When you buy physical gold, you pay the dealer a premium above the metal's value, or "spot price." You may also have to pay for shipping to and from the dealer when you buy and sell.
You can usually sell your gold stock like any other stock. If it's a regularly traded item, it can typically be sold in a matter of minutes and you can have your money within a couple of days. Selling physical gold requires you to take or ship it to a broker, receive a quote and get the money. Where physical gold has an advantage is if the financial markets break down. At that point, you can use gold coins or bars for bartering.
When you buy physical gold to guard against risk, you're usually just interested in the value of the metal -- as opposed to collectible coins, which can fetch hundreds of dollars above the spot price. Buying a gold stock exposes you to other risks, including changing currency values. If you buy stock in a company, as opposed to a fund, the management and prospects of the company could also influence its price. If gold goes up but the company is poorly managed or runs out of land to mine, its stock could go down. Gold stocks and other nonphysical forms of gold also tend to change in value because they're easier to trade.
Gold can be a part of your individual retirement account. You can buy stock in gold mining companies or shares in exchange-traded funds that hold precious metals. To own physical gold, you need to set up a self-directed IRA. This type of account lets you choose from a range of investments, including physical precious metals, but carries additional paperwork and fees.
To hold gold in a self-directed IRA, you must buy bars or coins that are at least 99.5 percent pure, according to the Internal Revenue Service. Bullion coins made by the U.S. Mint, like gold American Eagles, fit the bill. Your gold must be held by a third-party repository, so you won't be able to keep it with you.
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