Investing in Gold Explained: Ways to Hold Gold and the Real Risks

Gold has been used as money and as a store of value for thousands of years, and many beginners ask whether they should own some. The honest answer is that gold is only one way to hold wealth, and it comes with real costs and real risks. This guide explains the main ways people hold gold, what each one costs, and where the dangers are.

The short answer

You can hold gold as physical coins or bars, through exchange traded products backed by gold, or through shares of gold mining companies. Physical gold pays no interest or dividends, and its price swings up and down. Dealer markups, storage, and fees eat into any gain. Gold is usually a small part of a wider mix, not a complete plan.

What gold is, and what it is not

Gold is a metal that people have valued for a long time because it is rare, it does not rust, and it is easy to divide and carry. People buy it as a store of value, which means they hope it will keep its worth over time. Gold is not a business. It does not earn money, it does not pay interest, and it does not pay dividends. Its price depends on what other people are willing to pay for it later, and that price goes up and down.

That is the first thing to understand. When you buy gold, you are not buying an income stream. You are buying a piece of metal and hoping its price rises, or at least holds its value. If the price falls, you lose money, and there is no interest payment to soften the loss.

Physical coins and bars

The most direct way to hold gold is to buy coins or bars and keep them yourself. You buy them from a dealer, and you pay more than the market price of the gold. That extra amount is the dealer’s markup, and it covers the cost of making the coin or bar and the dealer’s profit. When you sell the gold back, the dealer usually pays you less than the market price. So you lose money on both the buying and the selling, and the price of gold has to rise just to cover those costs.

Then there is storage. Gold needs to be kept safe, in a home safe, a bank safety deposit box, or a vault. A home safe can be stolen. A bank box or vault charges a yearly fee. Insurance adds more cost. You also need to check that what you buy is real. Fake gold coins and bars exist, and a beginner may not be able to tell the difference.

Exchange traded products backed by gold

Another way to hold gold is through an exchange traded product that is backed by gold. You buy shares of the product through a brokerage account, and the price of those shares follows the price of gold. You do not own the metal itself, and you do not have to store it or insure it. The product charges an annual fee, which is taken from its value over time.

This way is simpler and cheaper than holding coins, but it is not free. The fee reduces your return a little each year. And you still face the main risk: if the price of gold falls, the value of your shares falls with it.

Shares of gold mining companies

A third way is to buy shares in companies that mine gold. When you do that, you do not own gold at all. You own a small part of a mining company. The share price can rise or fall with the price of gold, but it also depends on the company’s costs, its debts, its managers, and the places where it mines. A company can do badly even when the gold price rises, and it can do well even when the gold price is flat.

Some mining companies pay dividends, but those payments are not guaranteed. A company can cut or stop its dividend at any time. Mining shares are shares in a business, with all the risks that come with that, so they are not the same as holding gold.

A worked example

Here is a simple example, with made up round numbers, to show how costs eat into a gain. Imagine you buy $2,000 worth of gold coins. The dealer charges a markup of 5 percent, which is $100, so you pay $2,100 in total. You also pay $60 a year to keep the coins in a bank safety deposit box.

After one year, the price of gold rises by 10 percent. Your gold is now worth $2,200 (10 percent of $2,000 is $200, and $2,000 plus $200 is $2,200). Your gain is $2,200 minus $2,100, which is $100, minus the $60 storage fee, which leaves $40. So a 10 percent rise in the gold price left you with a $40 gain on $2,100 paid, which is less than 2 percent. If the gold price had stayed flat, you would have lost $160 ($100 markup plus $60 storage). That is the honest math, and it shows why costs matter.

The real costs

Every way of holding gold has costs. With physical gold, you pay a dealer markup when you buy and you usually sell back below the market price. You also pay for storage and insurance. With an exchange traded product, you pay an annual fee. With mining shares, you pay the normal cost of buying and selling shares, and the company itself has mining costs that affect its profits.

There may also be tax to pay when you sell gold at a profit. The rules depend on where you live and how you hold it, so check the tax rules that apply to you. The point is simple: costs and tax come out of any gain, so the gold price has to rise by more than your costs before you are ahead.

The real risks

The biggest risk is the price. Gold can fall sharply and stay low for years. There is no income from physical gold to make up for a fall, and no promise that the price will recover. A second risk is that you can be cheated. The CFTC, the US regulator for commodity markets, warns about “tricky promises of easy profits from rising prices in precious metals such as gold, silver, palladium, and platinum.”

The CFTC says fraudsters often sell metals at inflated prices and charge high commissions. A common trick is a “financing agreement” where you pay only a small part of the price, between 15 percent and 25 percent, and the company arranges a loan for the rest and promises to store the metal for you. The CFTC warns that these firms often do not use your money to buy metal, do not arrange a real loan, and do not store metal with an independent bank, but still charge storage fees. They often lose all or a large part of your money.

Watch for warning signs. The CFTC says to be careful if the agreement does not name the bank that is lending you the money, does not say where the physical metal is kept, claims to deliver it to an overseas storage facility, or if it is hard to check the company’s license. Before you buy, check the company with the CFTC at 866-366-2382 or with the National Futures Association, and ask how the seller is paid and how the product fits your needs.

How people usually think about gold

Gold is usually discussed as a small part of a wider mix, not a complete plan. Some people hold a little gold alongside shares, bonds, and cash, so that no single thing decides how their money does. That does not make gold safe, and it does not promise that gold will rise when other things fall. It only means gold is one piece among many.

If you are thinking about gold, start by learning the costs and the risks, and be honest about how much you can afford to lose. Gold is not a shortcut to wealth, and anyone who promises you easy profits from it should be treated with care.

Quick answers

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• Stocks vs Bonds: What Is the Difference?
• Automatic Investing Explained: How Set and Forget Investing Works

Further reading

For the official warning about precious metals fraud, see the CFTC page Fraud Advisory: Precious Metals Fraud. It warns about tricky promises of easy profits from precious metals and explains the warning signs of fraud.

This article is educational only and is not financial advice. It explains the main ways people hold gold, the costs, and the risks. It does not recommend buying gold or any product.