Things to know about investing in gold

"So tell me," the customer began, after listening to a consultant's expose on the future of the stock and bond market. "What do you think about gold? Shouldn't I buy some?"

Good question. After months of prices breaking records by the day, investors are wondering whether they should get into gold, and mainly, how. Here for their convenience is a short guide to investment in the gleaming metal.

Gold isn't a good long-term investment.

Although gold has more than doubled in price in recent years and generated double-digit gains in 2009, a look at returns over time shows that as an investment, it's inferior to stocks or bonds.

An investor who put $1 into gold in 1801 was left in 2001 with $1 in adjusted terms. In other words, the investor was protected from the ravages of inflation, and that's about it. Had that same dollar been invested in government bonds, the owner would have $952. If put into stocks, he'd have nearly $600.

Not convinced? Gold has been an investment target for eons. We can look at values going back 700 years. We find that it has more or less remained stable. Yes: the owner of 100 ounces of gold one hundred years ago could have exchanged it for a quality suit, and that's exactly what it will buy today.

The cost of gold

While bonds or even deposits offer income from interest, and stocks yield dividend income and increasing value, gold generates no cash flow for its owner at all. Just the opposite: owning gold comes with the burden of a steady cost for protecting it. That is a negative yield. The only way to profit from gold is through speculative demand, causing its price gold to rise.

Gold is non-consumable

Gold is considered a commodity, like oil or soybeans. But while other commodities are consumable, gold isn't going anywhere. Though applied to various industrial uses, it is recycled. If its price continue to rise, manufacturers will have little trouble replacing it with other metals. Despite claims of a future gold shortage, gold isn't going anywhere. While global oil stockpiles turn over once every 48 days, the global stockpile of gold is sufficient for the next 345 years, and continues to grow.

Safe harbor

Gold is considered a safe harbor in times of market uncertainty, and its price increases in the face of inflation concerns, war, financial collapse and other sad scenarios. As a real and rare asset, many choose to hoard it as a sort of financial insurance or as a speculative investment. Among the many experts who recommend investment in gold, even after its price has hit a record $1,100 per ounce, some think it could reach $2,000 or even $6,000.

Bank Societe Generale, for instance, says that central banks are in danger of becoming entrapped in a vicious circle of being forced to print more and more money. "Everyone knows that gold has no inherent value and generates no yield," the French bank says, "but is paper that could be replaced one day with other paper, preferable?"

Other studies show the price of gold is now lower than it was 30 years ago when the U.S. dropped the gold standard.

In short, gold will not make a person rich, but it can certainly prevent a person of means from falling into poverty.

And so, there are six customary ways to invest in gold.

1. Jewelry

Buy jewelry! Why not? A bank consultant that sends his customers to a jewelry store is not likely to be awarded the bank branch's monthly outstanding achievement award, but it's a simple and easy way to invest in gold. It's also very useful: The investment can be worn. But there are drawbacks. The price is higher than pure gold, sometimes three times higher; gemstones and diamonds set in gold complicate calculation of the investment, and no less important, jewelry beckons thieves.

2. Coins

Gold coins are a popular and direct way of investing in the metal. Rare ones carry a premium above the cost of gold, and a few are even legal currency in their country of origin and can be acquired in small quantities. Coins are also a good way to give a valuable gift to friends and family, but they have to be carefully kept, generally in a safe.

3. Exchange traded funds on gold prices

There are two relevant kinds of ETFs: ones linked to the price of gold through acquisition of futures, and ones backed by actual gold ingots kept in special safes. If you don't trust the ETF issued by investment houses in Israel, you can for instance buy certificates warranting that the physical gold is kept in Swiss vaults.

4. Shares in gold mining companies

Tread carefully: your investment is leveraged. The revenues of a gold mining company are based on the price of gold minus the cost of production, so that while an increase in gold prices sends the company's profits soaring, falling gold prices weigh down its results and can even lead to losses. Factor in the possibility of defective operations or management error, and the bottom line is, shares in a gold mining company are related but not linked to gold prices.

5. Futures

Instead of ETFs, you can buy futures on gold. This may be the most direct and sophisticated way to invest in gold. Investment through futures can be highly leveraged (risky) or very conservative, and provide a way to create endless strategies to fit your forecasts for gold prices over the next few months. But if you aren't an expert, don't touch futures. The contracts must be rolled forward every few weeks. Nor are the calculations involved a simple matter. Another disadvantage is that there can be no assurance that the markets will be open or liquid in the event of a financial disaster: you could get stuck.

6. Gold ingots, gold in third world countries and solid or plated gold objects

Numbered gold ingots are sure and liquid, and the craze for gold has brought ingots into city centers. Harrods of London is offering its customers 99.99% pure gold, including storage and safekeeping services. You can also buy gold ingots over the Internet.

Of course, the ingots must be safeguarded. There are two main strategies for this: known locations that are heavily guarded, such as bank safes, or secret places. According to the Financial Times, hedge fund manager David Einhort, who won fame for short selling Lehman Brother shares before its collapse, recently decided to deposit his investor's money in gold by acquiring a large number of ingots. Einhorn has deposited them at a location 'nearby' his offices in New York, but declines to elaborate further.