Right now the commodity market is going through a short term boom. In the spirit of boom in the commodity market the price of gold is also skyrocketing and it would be hard for any investor to ignore gold as an investment.

There are three main questions whenever we think of investing in gold -
1. Should I invest in gold now or it's too late?
2. How should I invest in gold?
3. How much should I invest in gold?

I will talk about all these three questions to give you a better understanding of the gold investment and leave you educated so that you can make your own choice based on your circumstances and interests.

Should I invest in gold now? The gold prices have gone from $288.8 an ounce on 31st Dec, 1997 to $833.2 on 31st Dec, 2007 *. Current price of gold is hovering around $974 an ounce **. Within last 10 years the gold price has increased 188.5% which is an awesome investment return. So have we missed the long bull run of gold or there is still some steam remaining in the gold?

Considering the rise in inflation and falling dollars I can safely say that the gold price is going to rise and it will go beyond $1000 an ounce. The more people lose faith in US dollars the more people will hoard on precious metals and for centuries gold has been the best in that category. Apart from the quality of being precious metals gold is used in many other areas like scientific research, Gold plating hi fi cables, cosmetic (gold tooth) and jewelry. The demand of gold is going to be there and hence it's price is not going to come down in a while. Even though the price might swing a little bit but in a long run I am sure the gold would turn out to be a great investment even now when it is trading at around $970 an ounce.

How should I invest in gold? Until recently one can invest in gold either by buying shares of gold mining companies or by buying the real gold and keeping that at a safe place (like bank locker). Recently gold based ETF present a nice way of investing in gold.

When you buy a share of a mining company you are NOT really investing in gold because there are many things that can affect the share price of a gold mining company apart from the gold price, e.g., bad management or lack of profitability in a gold mining company can bring the stock down despite gold prices being high.

When you buy the real gold the cost associated with the insurance, shipping & handling and cost of keeping it at a safe place really eats away from your profit. Also once you buy a gold coin it's not in a liquid form even though some people might give you dollars for a coin. So buying real gold also becomes a turn-off.

With gold exchange traded fund (gold ETF) like Street Track Gold Shares (ticker: GLD )you can buy a share whose price directly reflect the price of gold. There is no catch and no hidden fees. The expense ratio is 0.4%, which is very insignificant. So how does it work? The company has bought a bucket of gold and created shares out of those buckets. Each share of GLD reflect 1/10th ounce of a gold. The expenses are paid by selling these buckets. Net asset of GLD is around 27.1B and these expenses will have very insignificant effect on the buckets of gold the company has. You can learn more about it through prospectus available at Street Track Gold Shares

I recommend gold ETF as it tracks the price of the gold and you are invested in gold and you can sell those ETFs and get your cash back anytime you want. You can't get such liquidity when you own the real gold.

How much should I invest in gold? You can have around 5-10% of your total investment in gold. Adding gold to your portfolio will diversify it. Gold is a safe bet in economic downturn and in an uncertain environment. Gold also provides hedge against inflation.

I hope by now you are clear about investing in gold. Feel free to leave comments or ask questions.

Happy investing in gold!

* Data from http://www.finfacts.com/Private/curency/goldmarketprice.htm
** Data from http://www.monex.com