How does gold work?

You usually buy gold at a percentage higher than the spot price and sell it at the spot price. Spot pricing is based on gold supply and demand from investors, banks, etc. The most common way to invest in physical gold is through SPDR's Gold Shares (GLD) exchange-traded fund (ETF), which simply holds gold. When investing in ETFs, pay attention to the net asset value (NAV), as buying can sometimes exceed the NAV by a large margin, especially when markets are optimistic.

Gold can be a solid investment because its supply is relatively constant, unlike that of securities and currencies. This is because gold mining does not increase the supply of gold much annually. Gold stock ETFs and mutual funds typically own shares of several gold miners. Diversification gives investors ample exposure to the gold mining segment, helping to reduce risk.

Gold stock ETFs and mutual funds offer investors advantages beyond the price of gold. However, the downside of gold mining ETFs and mutual funds is that they typically underperform the price of gold. Investing in stocks of companies that extract, refine and trade gold is a much simpler proposition than buying physical gold. Since this means buying shares of gold mining companies, you can invest using your brokerage account.

When investor confidence breaks, gold prices tend to rise, as nervous investors look for a safe place to get cash out of the market. Gold is also a paradise in times of inflation because it retains its value much better than currency-backed assets, which can rise in price, but fall in value.