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How to Invest in Gold Without Actually Buying It

By Edited Apr 9, 2016 2 3

Buying Gold for Cheap

Are you wondering how to buy gold and invest in gold without actually having to buy physical gold? Gold has had a huge run in price since the year 2000, exploding from around $300 an ounce to around current prices of $1,700 an ounce. While many people including myself believe that gold still has plenty of upside and will eventually reach $5,000 an ounce or more, it can be hard for the average Joe to get invested in physical gold, known as gold bullion. This complicates things but there are ways to get around this. You don't have to miss out on the greatest bull market of our time - there are easier ways to get invested in the gold market!

Why Has the Price of Gold Risen So Much?

Gold 10 year chart

This is a common question I get from people not too familiar with the fundamentals of the gold market. Basically, gold is a barometer that measures the strength of fiat currencies such as the dollar. Confused? Don't worry! Let me explain further. This is crucial to understand.

What is a Fiat Currency? A "fiat" or paper currency is money that isn't backed by anything, other than the full faith and credit of the government that issues it. Every currency in the world today is Fiat -
the US Dollar, the Canadian Dollar, the Yuan, the Euro, the Japanese Yen, etc.

Why Have Currencies Been Losing Their Value? - A big reason to own gold is because when curriences such as the dollar lose their value, due to excessive money printing by the central banks, gold tends to rise in price.

It does this because people fear inflation and losing the purchasing power of their money - which happens when central banks print money.

So, Why Are Central Banks Printing Money if They Know it Will Devalue the Currencies and Cause Inflation? Because they must do it and they have no other option.


Why Central Banks Such as the Federal Reserve Are Printing Money

What is Quatitative Easing? To put it simply, it is printing money. Ben Bernanke said with QE3 that the Fed will engage in monthly rounds of QE, supplying a minimum of $40 billion a month in purchases of mortgage-back securities. This money does not come from a bank or savings that the federal reserve has accrued - it comes out of thin air! That's why people say they are printing money. While they are not physically printing it, it is being electronically created.

If the Federal Reserve is printing so much money, why haven't prices risen? Why is Ben Bernanke printing money?

These actions haven't caused big inflation - yet. But many people, myself included, think it will. And some argue that it already has. Gas prices are over $4 a gallon in some places, and food prices are risen quick. The government tends to underreport inflation in the Consumer Price Index for a number of reasons. They say inflation is currently only around 2 percent, but independent analysts such as Shadow Stats have said that the real rate of inflation is more like 6-7 percent, currently.

How Much Upside Does the Price of Gold Have?

Another way to ask this question is, "how much money will central banks print?" The answer is, a lot, to both questions. The western world is faced with a tremendous amount of debt - the United States national debt is currently over 16 trillion and growing every day. By 2016, at current paces, this number will increase to over $20 trillion! And I am very pessimistic that the US government will get things done to fix the debt problem.Many believe we could even see a hyperfinaltion in the United States if the Federal Reserve continues to print money.

Gold 10 year chart

Can gold reach $10,000 an ounce? I really do think so. Remember, the gold price is a function of how much currency has been created. So when you see a chart of the money supply in the United States, as it increases, the price of gold tends to increase. The federal reserve needs to keep increasing the money supply and keep interest rates low to prevent another 2008 financial collapse.

*Price targets for gold this decade*

*Gold price target for 2013 - $2,250 - $2,500.

*Gold price target for 2013 - $3,000

*Gold price target for 2014 - $4,000 - $5,000+

*Gold price target for 2015, 2016  - $5,000 - $10,000


How Can I Invest in Gold Without Having to Buy it?

So, like I said above, there are many ways for the average Joe to get exposure to gold without actually having to buy it. Here are a couple of ideas.

1) Buy a Gold Exchange Traded Fund  - The most popular choice I know of is the GLD - SPDR Gold Trust. Actions that will debase the dollar such as QE3 will give this ETF more upside. It is designed to track the price of gold. Instead of buying a physical gold coin for $1,700, you can buy a share of this fund for $170.

You can also buy the GDX, which is the Gold Miners ETF, or the GDJX, which is the junior gold miners ETF. These ETFs hold shares of dozens of companies around the world that mine gold. Both of these have a ton of upside but carry a little more risk since they are miners. Gold mining company risks include rising costs and the potential nationalization of mines. Nevertheless, I am very bullish on the gold mining stocks. Which leads me to my next way to invest in gold without having to actually buy it:

2) Buy Gold Mining Stocks - Check out large cap gold stocks such as Goldcorp (Quote: GG), Newmont Mining (NEM) which pay a pretty decent dividend and could outperform gold as it moves to $5,000 an ounce.

3) Buy Gold Royalty Company Stocks - Another way to buy gold is to buy the royalty companies. These are NOT mining companies, rather they are financers for the mining companies. They give miners some money upfront to build a mine and then get a portion of the gold produced for a fixed price for the life of the mine.

These companies are cash-flow machines - they are very profitable because of the fixed-price business model. Companies such as Franco Nevada (FNV) or Sandstorm Gold (SAND) pay $500 an ounce and less for the gold the miners produce. With inflation comes rising costs to build and produce gold, which affects the mining stocks but does not affect on these royalty companies. So they offer all of the upside of gold but none of the risk associated with the mining companies.

I hope you enjoyed this article on how to invest in gold without actually buying it - there are many ways to invest in gold and its important to know the differences!



Jan 1, 2013 2:01pm
It is nice to know that they are so many options rather than having the physical gold.
Jan 4, 2013 3:15am
That was a great read.
Feb 15, 2013 7:35pm
NYWriter,this is a great,informative article. Well done!
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