How to Invest in Gold and Silver

For thousands of years, precious metals like gold and silver have been used as currency, an investment, and a symbol of wealth. The key points that draw investors to these metals are their long history as a store of value, their low correlation to often volatile financial markets, and their utility as a hedge against inflation. On the downside, investors in precious metals may have to deal with liquidity issues and a lack of yield generation.

With inflation rising from historically low levels, financial conditions becoming increasingly uncertain, and the price of gold reaching all-time highs in September 2024, it is no surprise that the interest in gold and silver is again on an upswing. We’ve compiled the best practices for investing in gold and silver, along with answers to common questions to help you get started.

Investing in Gold and Silver ETFs and Mutual Funds

Buying silver and gold through financial instruments shifts some of the risks–storage and insurance is someone else’s problem–but it also means you no longer have an investment you can physically touch. There are numerous gold and silver funds that investors have access to today, many of which can be purchased using traditional brokerage accounts. 

Some funds are proxies for direct ownership of silver or gold, holding only bullion of those specific metals, while others cover the sector more broadly with some percentage held in other precious metals. The goal of these funds is to mimic the price movements of a specific precious metals index or a specific metal’s price. Some funds are mainly holding physical gold and the price moves up and down in sync with the benchmark price. Other funds may try to mimic the benchmark price of silver or gold using a mix of physical gold, options, and futures. The performance of these funds will, of course, be reduced by the expense ratio of the fund and the more active a fund’s strategy is, the more it will cost. 

Gold and silver funds can be thought of as an investment in precious metals without the actual hassle of storing, buying, or selling them. The fund structure allows for greater liquidity, meaning you can easily add or subtract from your gold or silver holdings without having to get items verified and physically shipped around the dealer network. Gold and silver funds aren’t direct investments, however, and they sometimes will not track the exact price of physical gold. That said, they do still provide investors with the diversification of physical gold or silver without the carrying costs.

When we talk about gold and silver funds, we are speaking specifically about funds that provide exposure to physical gold and silver bars but are much more liquid because of the ability to trade shares across global markets. There are also funds that invest in the stocks of companies mining deposits of these precious metals. We will take a closer look at these investments next. 

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Investing in Gold and Silver Mining Stocks

Gold and silver mining stocks are heavily influenced by the market price of the deposits they are mining, but the connection isn’t always exact. Miners are judged by the quality of the deposits they’ve assayed and the feasibility of getting the metal out of the ground. This complex judgment is being recalculated every time the market value of those deposits changes.

There is also a significant segmentation within the mining industry, with junior mining companies that are in the development and exploration phase. These companies prospect for land with a higher chance of uncovering large mineral deposits. Junior mining stocks tend to be more volatile than those of major mining companies, which tend to track more closely to metals prices based on their proven deposits. Major mining companies are also more likely to be in a position to pay dividends and see share price appreciation when metal prices are on an uptrend.

Although there are pure gold and silver plays in both the junior and major categories, investors looking to invest in gold and silver mining stocks may be better served by a sector Exchange-Traded Fund (ETF) like the VanEck Gold Miners ETF (DGX) or iShares MSCI Global Silver Miners ETF (SLVP). Like the stocks themselves, the ETFs can offer a mix of dividend yield and appreciation. If you are set on investing directly in particular stocks, it is important to understand the industry and get familiar with the preliminary feasibility studies, reserve estimates, and valuation methods so you can apply this information. 

Investing in Gold and Silver Futures and Options

Gold and silver can also be traded via financial derivatives like futures and options. With futures, an investor is able to use leverage to gain either long or short exposure to metals prices on centralized exchanges. A unique risk of futures contracts for precious metals is that you could end up with delivery of the underlying precious metals if contracts expire and you haven’t rolled your position into a longer-dated contract.

Unlike owning gold as a hedge against inflation or equity market downturns, traders use gold futures to make leveraged bets on the price of gold without ever intending to take delivery of the underlying metal. As with any form of leverage, however, the upside and downside risks of trading precious metals through futures are amplified.  

Similarly, gold and silver options are derivative contracts that can have gold and silver futures as their underlying asset. But they can also be written off of physical metals prices. Like futures, gold and silver options are less capital intensive, allowing for more leverage. The downside risk is limited to losing the cost of the option if it expires worthless, while the potential for profit with some options strategies is theoretically unlimited.

Although gold and silver options and futures are not limited to just the Chicago Mercantile Exchange (CME), it is one of the long-established exchanges and is a good place to observe the market and understand how the derivatives approach to silver and gold works. It is important to remember that this is a higher risk, higher potential return way to get exposure to silver and gold and is not for beginners just looking for an inflation hedge. If you want to learn more about this, check out How to Buy Gold Options and Trading Gold and Silver Futures Contracts.

To make the most of this style of trading, you will need a brokerage account that is margin enabled and has strong charting capabilities.  

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Investing in Physical Forms of Gold and Silver

Physical gold and silver are, of course, the original ways people invested in these precious metals. Wearable wealth like jewelry was followed by coins and more standardized forms of physical gold and silver. Today, investors have two categories of precious metals to choose from: bullion and jewelry.

Buying physical gold and silver in either of these forms generally involves going through a dealer. This can either be done online or in person, with reputation being the key factor in choosing, followed by markup and fees. The structure of the physical gold and silver market means dealers play an important role in verifying the purity of the metal being purchased and usually offer complementary services like storage and insurance.  

Investing in Gold and Silver Bullion 

Gold and silver are both mined from deposits in the earth’s crust. This raw form is then extracted and refined before being alloyed. The amount of alloyed metals depends on the application. Gold, for example, is alloyed with silver or copper to give it more strength when being formed into jewelry, while gold bullion should contain the bare minimum of alloys needed to keep it firm.  

Bullion is a term that encompasses physical bars and coins, but we’ll deal with the bars first. Bars are formed rectangles of gold or silver that are 99.5% or higher in terms of purity. Bars vary in size from under an ounce all the way up to 400 ounces. Bars have a stamp that is the equivalent of the manufacturer’s label indicating the weight and purity. One of the reasons a reputable dealer is essential is because there are many ways to create counterfeit forms of physical goods like a gold bar.

Gold bullion was once considered to be strategically important to national governments because some currencies followed a gold standard, where the currency was backed by a physical equivalent of gold and could, in theory, be traded in for gold. Since the 1970s, however, we have been operating in a fiat currency system. Therefore, when people are turning to gold as the last store of value in fear of a financial crisis, they are usually looking at gold bars as a way to protect against fiat currencies.

Regardless of individual reasons for wanting to invest in gold and silver bullion, bullion bars come with some of the highest barriers. For instance, they have to be stored securely, should have insurance, and must be physically sold to realize gains. A major risk with gold bars is that they can be stolen. They can also be hard to liquidate in larger sizes. This means investors have to think about the size of the bar—10 one-ounce bars are easier to parcel and sell than one 10-ounce bar—and where it is kept.

Outsourcing this to a service provider is a natural solution, but it becomes an ongoing cost and a drag on eventual returns. Moreover, although bars are the purest form of physical gold or silver, they are still value-added, formed products with a markup over melt value and dealer-specific fees or charges (shipping, storage, insurance, etc).

Investing in Gold and Silver Coins

Gold and silver coins, also called bullion coins, straddle the line between an investment asset and a collectible. Unlike utilitarian bullion bars, gold and silver coins have an aesthetic value that often causes them to be priced above their simple melt value. The more beautiful a coin is, the more rare it is, or the more demand there is for a coin for whatever reason, the higher that coin's numismatic value will be.

Gold coins come in ounces and fractions of ounces (half ounce, quarter ounce, one-tenth ounce, etc.) and are priced at a premium to their melt value on original sale from the mint. After that, the value of the coin can uncouple entirely from the melt price if it is deemed collectible and sees high demand. Generally, however, the melt price is the floor for a gold or silver bullion and will fluctuate along with the gold or silver spot price.

American Gold Eagles, Canadian Maple Leafs, and South African Krugerrands are well known types of gold bullion from their countries’ respective mints. Mints are the national bureaus that act as the sole manufacturers of legal tender in a nation; they are permitted to produce commemorative bullion coins. The U.S. Mint provides a product schedule where collectors can watch for new releases.

As gold and silver coins are rarely traded solely on their melt value, they are more of a collectible than an investment. Investors can access bullion coins through the same dealers that trade in bars, and can also order directly from mints. While this introduces markups and fees to the equation, coins are smaller in size, which helps to keep shipping fees lower than what is typical with bars. These coins do offer some of the same features as bullion bars in terms of diversification and low correlation with the financial markets. They also come with similar risks, however, requiring secure storage and insurance for any large collections.

Investing in Gold and Silver Jewelry

As the last category for investing in physical silver and gold, jewelry sits the furthest from traditional investing. While the markup from the melt price for a gold coin can be 50% or more, the markup for jewelry can be many times the actual market value of the metals making up a particular piece. Jewelry has more in common with art than bullion bars, and an authenticated piece with a famous former owner can trade at whatever value the market will bear.

Jewelry containing some amount of precious metals is more widely traded than bullion, but this can actually make it more challenging to find reputable dealers in the secondhand market. Authenticity and confirmed purity is critical in pricing jewelry, but the aesthetics or history of a piece can completely change the market value. This doesn’t completely erase the inflation hedge and store of value aspects, but it does weaken these benefits.

When it comes to market valuation, the subjective nature of jewelry, the similar needs for secure storage and insurance, the higher risk of fraud, and the lack of any recurring yield make jewelry more of a collectible than an investment.

What You Need to Open a Brokerage Account 

The type of brokerage account you need depends on the type of precious metals investment you are looking to make. For investments into silver and gold funds and mining stocks, a simple brokerage account will do. If you intend to trade futures and options, you’ll have to confirm the brokerage provides these options. 

Personal Information

Opening a brokerage account requires the same basic pieces of personal information as most financial accounts. This includes:

• Your name, address, and telephone number
• Tax identification number (usually your Social Security number)
• Date of birth and government ID 

With most brokerages operating online now, you’ll likely need to provide an email address to create an account. Prior to investing, you will need to answer some questions to establish your income level, investment experience, net worth, and so on. These personal questions are part of the know your client rules. 

Minimum Deposits

Many brokerage accounts no longer require a minimum deposit. If you are looking to access gold and silver investments through ETFs, you can get started with very little as some brokers even offer fractional shares of these ETFs. 

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What You Need to Open a Gold IRA

Gold individual retirement accounts (IRAs) are a bit more complex than a regular IRA, as a custodian must hold the physical assets. You cannot store your IRA bullion in your house, for example. To set up a gold IRA, you first establish a self-directed IRA, select a custodian to administer the account, select an approved depository to hold the assets, and then choose a broker/dealer to buy the gold through. Custodians specializing in gold IRAs will help refer clients to an approved depository as well as gold dealers.

Personal Information

The documents required are the standard ones for investment accounts:

• Your name, address, and telephone number
• Tax identification number (usually your Social Security number)
• Date of birth and government ID 
• Additional KYC questions 

Minimum Deposits

Minimum deposits in a gold IRA can be quite high. This is somewhat expected - as of September 2024, the price of a one-ounce bar of gold is over $2,700, and you can only hold approved bullion or coins in your gold IRA, as per IRS rules. Some gold IRAs do not advertise a minimum, but there are others that start at $10,000, $25,000, and even $60,000.

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Factors to Consider When Opening an Investment Account

The main factor to consider when opening an investment account is whether it provides access to the assets you are after. As long as that is true, choosing between accounts mainly becomes an exercise in comparing fees and capabilities. When it comes to investing in silver and gold as a financial derivative, many brokers can fill that need without much in the way of costs. If you are specifically looking at a gold IRA, however, the fees can be quite steep between companies and you also need to consider the mark-ups and fees that the dealer will be expecting. It is worth combing through the disclosures and fee schedules once you have your search narrowed down to a few promising candidates.

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