Gold is an important part of many investors’ diversified portfolios, providing a hedge against inflation and economic uncertainty. But how you invest in gold depends on your financial goals, risk tolerance and market conditions.
Besides the cost of buying and maintaining physical gold, there are storage costs and capital gains taxes. Learn how to incorporate gold into your portfolio by speaking with a Morgan Stanley Financial Advisor.
Buying Physical Gold
Buying physical gold involves purchasing coins and bars of the precious metal. This method gives investors the ability to hold a tangible asset they can hold in their hands, and it is recognized globally as a store of value. It also offers a sense of security for those worried about economic collapse or other calamities that may destabilise the financial system. However, investing in physical gold comes with the risk of theft or damage. As a result, it is important to weigh the pros and cons of this option when making your investment decision.
If you decide to purchase physical gold, it is best to work with a reputable company with a strong track record and excellent customer service. Look for resources like the Better Business Bureau and the Business Consumer Alliance to make sure that you are dealing with a legitimate seller. It is also a good idea to purchase only bullion that has been verified to be pure and unaltered. You should also consider storage costs for your investment. Some people choose to store their physical gold in their homes, while others opt for professional vaults or safety deposit boxes that offer added security.
Another way to invest in gold is through ETFs, or exchange-traded funds. These are similar to stocks and can be bought and sold through an online broker. Gold ETFs are a popular choice for investors because they provide exposure to the price of gold without having to own the actual metal. However, ETFs can be volatile and are not a safe haven in the event of a financial crisis.
When considering how much gold to buy, it is important to take into account your overall investment portfolio and financial goals. Many investment advisors recommend diversifying your assets by owning a variety of investments that can grow and offset losses in the event of a market decline. While gold has traditionally performed well as a store of value, it doesn’t provide the income opportunities that are available when investing in stocks and bonds. As such, it is recommended that you limit your gold investments to a small percentage of your total portfolio.
Buying Gold Stocks
Buying gold stocks gives you exposure to the price of gold without the physical risk or storage challenges. But it also carries more operational risks than physical gold, since you’re investing in the company that mines it. Gold-mining companies need to be able to find new deposits, build and operate mining facilities, and deal with all the other operational risks of any business. The smartest gold stock managers, which are few and far between, have found a way to mitigate these risks through counter-cyclical capital allocation practices, but even they have to contend with volatile commodity prices and other outside forces.
If you want to buy a smaller portion of gold than what is available through physical bullion, then you can do so through exchange-traded funds and mutual funds that focus on the precious metal or through gold-leveraged ETFs. These are typically easier to buy and sell, but they also carry a fee that can eat into your overall returns.
Historically, gold has performed well as a hedge against inflation, and it tends to perform well during economic uncertainty and crisis periods. However, it’s important to remember that gold is still a volatile investment, and a small portion of your portfolio may be better off in other investments during these times.
The best way to diversify your gold investments is by including them in a broader diversified portfolio. This will ensure that your portfolio can be more resilient to market fluctuations and give you a higher chance of reaching your financial goals.
You can also invest in gold through a self-directed individual retirement account (IRA) that is custodied by a trusted custodian. This method is most popular for retirement investors, as it allows you to avoid the tax complications associated with IRAs that are managed by brokerage firms. You can research the gold options available through your chosen IRA custodian and choose the one that best meets your needs.
Buying Gold ETFs
Buying gold ETFs provides an easy, convenient way to invest in the precious metal without having to store or transport physical gold. In addition, there are no storage or insurance fees involved with buying ETFs. Unlike stocks and bonds, ETFs are not directly tied to any real-world asset, but are backed by the performance of an underlying commodity. In the case of a gold ETF, this means the price of the underlying metal will rise or fall depending on market sentiments and geopolitical events.
Investors can choose between ETFs that focus on physical gold or those that invest in public companies that mine and produce the metal. Both types of investments have different risk profiles, and investors should always consider their financial goals and current portfolio before choosing which type of investment is best for them.
Once an investor has decided to buy gold ETFs, they can open an investing account with a brokerage firm. The process is similar to opening a stock trading account and can be done online. Once the account has been opened, investors can research and select the gold ETFs that meet their needs. When researching gold funds, investors should pay close attention to the expense ratios, top holdings and assets under management.
The primary reason to add a gold ETF to an investment portfolio is diversification. Gold has historically had a low correlation to the stock market, and can act as a hedge against inflation. Additionally, many investors find that gold can provide stability in their portfolio during economic turmoil.
TD Direct Investing lists several gold ETFs that can be purchased, including the SPDR Gold Trust, which holds physical gold and tracks the spot price of the metal. The VanEck Vectors Junior Gold Miners ETF is another option that focuses on small-cap mining companies. These firms have more growth potential but also face higher levels of risk, as they may experience cost overruns on new projects or fail to meet their production targets.
Investors can also purchase ETFs in tax-advantaged accounts, like IRAs and 401(k) plans. These accounts allow investors to save on transaction costs by deducting the purchases and sales from their taxes. When investors withdraw money from their accounts, they will be required to pay taxes at their regular income tax rate.
Buying Gold Futures
Gold is a popular investment due to its perceived safety and ability to hold value in times of financial stress. However, gold doesn’t provide cash flow, so it is important for investors to understand the nuances of the investment and how they can profit from owning precious metals. There are multiple ways to invest in gold, including stocks, ETFs and physical assets. Adding gold and other investments that are not correlated with the stock market to your portfolio diversifies your holdings and can potentially increase returns and reduce risk over the long term.
The most common way to invest in gold is through shares of gold-mining, exploration and development companies. However, these stocks may be volatile and do not necessarily pay dividends. Additionally, these stocks may be impacted by economic concerns or geopolitical events. If you choose to invest in these stocks, be sure to conduct your research and understand the company’s business model and future growth plans.
Another option for investing in gold is through futures contracts, which can be traded on exchanges. However, you should be aware that futures are leveraged instruments and can be very risky. If you’re considering investing in gold futures, it’s important to consult with a financial advisor and understand the risks associated with these contracts.
Lastly, you can also purchase gold through mutual funds and ETFs that track the price of gold. These investments eliminate the hassle of purchasing and storing physical gold and track prices more efficiently than direct investment in gold bullion. However, fund fees can reduce your overall returns.
Before investing in any gold-related assets, you should first decide on an overall investment strategy and consider your time horizon and risk tolerance. It’s also important to have a clear understanding of the factors that can impact the price of gold, such as economic volatility, geopolitical tensions and central bank policy. With a little research, you can be confident that you’ve made an informed decision and have the best chance of making a profitable investment in gold or other precious metals. Remember, though, that gold is not a replacement for diversified holdings and should only make up a portion of your overall portfolio.