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# Investing in Gold

Gold investors who would prefer not to pay the high costs of storage and insurance or to deliberate the strengths and weaknesses of different mining companies can invest in gold through gold mutual funds and gold exchange-traded funds (ETFs). Gold mutual funds offer a diversified portfolio of gold mining stocks. Savvy investors should seek funds that have low expense ratios, which is one of the major factors to look for when choosing any mutual fund. Gold ETFs offer a convenient way to own gold bullion without having to be concerned with the added costs of storage and insurance. Shares of ETFs are traded on the major stock exchanges.

Gold options can be used either to insure existing investments in gold or to speculate on future changes in gold prices. If an investor expects the market price of gold to rise, he or she would purchase call (buy) options on gold; conversely, put (sell) options would be purchased if the price were speculated to fall.

Gold futures contracts also allow investors to speculate or hedge their positions on gold. These contracts can offer the investor a substantial amount of leverage. For example, if the market price of gold is $500 per ounce and the investor purchases a gold futures contract (which consists of 100 troy ounces), the full value of the contract would be $50,000. If the margin requirement for such a contract is $5,000, the investor actually controls the $50,000 contract value with a fairly small investment. If the price of gold were to increase by $1 per ounce, the contract value would increase by $1,000 for a total worth of $51,000. Of course, when using leverage the opposite is also just as true. If gold prices drop by $1 per ounce, the contract value would decrease by $1,000 to $49,000. The volatility of the price of gold lends itself to the possibility of sizeable profits as well as substantial losses by investing in gold futures contracts.

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