In addition to offering a potential inflation hedge, gold also tends to outperform other asset classes in recessions. But the metal doesn’t generate dividends or interest, and storing physical gold requires paying a fee to a private firm for storage.
Investors have been using gold as a safe haven since ancient times. Its price doesn’t depreciate over time and is easily liquidated by banks and other financial institutions.
Buying Physical Gold
Purchasing physical gold is the most traditional way to invest in the precious metal. Investment-quality gold comes in many forms, from bullion (investment-grade pure gold) to coins and jewelry. Gold is an especially attractive commodity for long-term investments, since it is highly liquid and can easily be converted to cash. However, investing in physical gold is not without risk. The gold market is volatile, and the numismatic value of some coins may make them more expensive than their actual gold content.
Buying gold bars or bullion is typically the most cost-effective and safest option. Investors can also buy physical gold through a futures contract, but this is typically only available to sophisticated investors and requires the use of a futures broker, which not all major brokers offer. While a futures contract can provide leverage and the potential for higher returns, it can also be risky.
Another benefit of owning physical gold is that it can be passed down to the next generation. This is common practice in some cultures, and it can be a great way to save money for retirement or other financial needs. Unlike stock or real estate, which can decrease in value over time, gold is a hard asset that maintains its value and has a history of rising prices during difficult times.
If you want to invest in gold but do not wish to hold physical assets, you can purchase shares in gold-mining companies. There are a number of exchange-traded funds and mutual funds that own stocks in gold-mining companies, such as SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU). These assets can help diversify your portfolio and often come with some legal protections.
You can also trade gold in the spot market, though this is a more complicated process and requires access to a reputable broker. The spot market can be more volatile than the futures market and is only open to accredited investors. The pitfalls of this investment include high margin requirements and the fact that the spot price is not necessarily linked to a currency like the dollar or euro.
Buying Gold-Mining Stocks
Gold-mining stocks, ETFs and mutual funds provide a variety of ways to diversify your portfolio with this precious metal. However, it’s important to do your research before investing in any company. That includes reviewing a mining company’s financial statements and filings, researching its leadership and history and assessing any potential risks.
Gold stock prices tend to rise in times of economic uncertainty or geopolitical instability, but they can also drop when other markets recover. Therefore, these investments are best suited to longer-term holdings, or for those who are comfortable riding out short-term market volatility.
When choosing a gold-mining stock, you can go with a global fund that invests across multiple miner’s or opt for a single mining company like Canada’s Barrick Gold, which is well established and has shown impressive revenue growth in recent years. Investing in a single miner can increase your risk exposure and can limit your upside.
In general, the stock price of a gold-mining company should have a fairly loose correlation to the price of physical gold, as the mining company itself has its own unique opportunities and challenges. Many gold-mining companies also pay dividends, which can add to your income and make them a good choice for those seeking yield in their portfolios.
Another popular way to invest in gold is by buying gold-mining futures contracts, which are not tied to any actual physical gold. Instead, they’re highly leveraged instruments that magnify small movements in the price of gold. This can be profitable and risky for investors who are bullish or bearish about the metal’s long-term price trends.
Investing in gold is a great way to build your portfolio and take advantage of the potential protection against inflation or other market risks. But remember that it’s always wise to keep your portfolio well-diversified and to stick to your overall investment plan, even in the face of market fluctuations. And if you’re looking for a low-cost, convenient way to buy stocks and ETFs, check out Robinhood, the intuitive trading and investing app that offers zero commission trades on thousands of assets, including gold-mining shares.
Buying Gold ETFs or Mutual Funds
If you want to include gold in your portfolio but don’t have the capital or interest to invest directly in physical bullion, an exchange-traded fund or mutual fund is an alternative. These investments trade on a stock exchange and are liquid, meaning they can be sold anytime during market hours. They also offer diversification because they typically track the performance of a particular index or commodity rather than individual companies or the price of physical gold.
The most popular gold ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Physical Gold Shares ETF (SGOL). The goal of these funds is to match the price performance of physical gold bullion held in vaults located around the world. They generally have low expense ratios, ranging from 0.4 percent to 0.25 percent.
You can find other gold-related ETFs, such as leveraged ETFs that borrow money or use derivative instruments to magnify their returns. However, these carry higher risk because they are exposed to the entire market and can experience steep losses in a short period of time.
Many investors also choose to buy a gold mutual fund because it allows them to spread their investment over multiple securities, including stocks and bonds. This can lower their overall investment risk and reduce volatility. Gold mutual funds, however, often invest in other commodities as well and can lose value if prices for other assets go down.
It’s important to determine your financial goals before you decide which type of gold investing is right for you. An experienced financial advisor can help you determine your asset allocation, select gold-related investments and develop a long-term plan to reach your goals. SmartAsset’s free tool matches you with financial advisors in your area who can help with your unique needs. Get started now.
Buying Gold Futures
Gold has been a popular investment for centuries. There are several ways to invest in gold, from buying physical coins and bars to investing in gold-mining stocks. Another option is to buy gold futures, which are a type of financial contract that gives you leveraged exposure to the metal’s price movements. This type of investment can be a good choice for investors who want to diversify their portfolio or hedge against inflation, but the risks are higher than with other forms of gold investing.
To trade gold futures, you must first open a commodity trading account with a broker. This requires submitting basic identity documents and bank information. Once your account is opened, you can start placing your orders on the platform. Most brokers offer online and mobile applications to facilitate the process. Some even have in-house traders to help you manage your account. However, you must be aware of the fact that you are trading on margin, which means that your broker may call for additional funds during times of declining prices. This is called a margin call and could cost you a significant amount of money.
In addition to trading gold futures, you can also invest in options contracts that give you leveraged exposure to the metal’s pricing. However, these investments can be more risky and are not appropriate for most retail investors.
Before you invest in any gold-related assets, determine your investment strategy and consider your time horizon, risk tolerance and how much of your portfolio you want to allocate to these assets. Also, be sure to research the factors that influence gold prices, including economic and geopolitical volatility, central bank policy, demand from industrial and investment markets and supply fluctuations.
Investing in gold can provide a safe haven from inflation, but be sure to research each asset thoroughly before making a decision. You should also consult a licensed financial advisor to assist you. Request your free gold IRA kit to learn more about how this type of retirement investment can protect your hard-earned savings. Click here to begin.