Understanding Commodities

In times of crisis, go for the gold

When the economy is in crisis and stock prices fall, people often turn to commodities such as gold and silver. Historically, the price of the gold has remained fairly stable compared to other investments.

Investing in commodities can be relatively easy, but as you get into riskier types of investments, the dynamics can change. The simplest way to invest in gold or silver is by purchasing jewelry, coins, bars or certificates -- but, of course, you can’t track the number of coins under your bed with Mint.com the way you can track the rest of your investments! And even though funds and derivatives can be tracked with Mint, they’re also riskier than owning gold directly, due to the different factors affecting their value.

Owning gold and silver

Jewelry and coins can be bought in many stores, but be careful where you shop for it. Gold coins can be bought directly from government authorized dealers.

Remember that actually owning gold and silver can be a security risk. You may be better off with a certificate, sold by banks. The certificate confirms the quantity and ownership, but the actual commodity stays in the banks’ vault.

Funds and derivatives

Funds are more complex. You’re essentially investing a collection of mutual funds and investment companies, so the value of your investment depends on how well the companies do. Be sure to learn what you’re getting into by talking to an investment professional.

Derivatives are even riskier. Derivatives come in the form of structured products such as forward contracts, gold-linked bonds and structured notes. Forward contracts are agreements to exchange a commodity at an agreed price at some future date. Gold-linked bonds are purchased through bullion dealers and investment banks. And structured notes involve the purchase of put/call options. All of these are risky and demand specialized knowledge. Keep in mind that like any investment, commodities can be a gamble.

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