Question about gold
I'm pretty sure this is a dumb question. In fact, I'm certain of it.
When people talk about investing in gold, what exactly are they talking about? There are a couple different prices I see when I look it up and I'm not sure which one to consider.
Price of a troy ounce of gold (same as a bullion?) ~1200
Price of GLD (on the exchange) ~120
Are these just two different ways of investing? One, you can physically have the gold. The other, you're just investing in the stock? Are the prices dependent on one another (One goes up, the other goes up by the same margin)? Is one way better than the other? How exactly do you buy a bullion? Are there other ways?
Sorry if I sound like an idiot...I have no excuse.
It's actually a good question. When you hear commentators talk about the price of gold though they are referring to the price of the physical gold (bullion). GLD is an ETF that I believe invests in gold via future's contracts and whose price per share is valued at approximately 0.10 oz/gold. Easiest way of thinking about this is that gold has been around forever whereas GLD has only been around for a few years and the security itself is simply comprised of gold futures contracts. So the commodity itself is what people are talking about.
There are pro's and con's to both owning the physical gold or investing in GLD. With GLD you obviously have more liquidity and don't have to worry about theft risk. Certain people though believe that there is not enough gold in existence to back all the contracts that GLD invests in (this argument is over my head though and may be more of a conspiracy theory if anything-you can check out GATA if you are really interested in it). Another thing to consider is the lack of liquidity in bullion causes spreads to obviously be quite large. If you go to buy a gold coin right now you are likely going to pay 3%-4% over spot. This could be advantageous if you were a dealer, though I would want to flip the inventory quickly due to the risk involved. That being said I think most people just stick with GLD.
Thank you very much. These are great answers. I have a couple of follow up questions if you don't mind.
Is this how most commodities work? Oil - The price of a barrel is what most people worry about, but nobody's going around buying up barrels of oil.
Also, what drives the price of gold/silver/other precious metals? I know if everyone knew what drove the price up and down, we would all be rich. But on a basic level, what determines the price?
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