Many investors choose gold investments as a way to diversify their portfolio. But how you invest in gold depends on your resources and investment goals.
Larger investors looking for direct exposure may prefer to buy physical gold. But this can come with extra costs like premiums and storage expenses.
Buying Physical Gold
One of the most common ways to invest in gold is to buy physical metals like coins, bars, and bullion. Physical gold is a tangible asset that can be stored in your home or safely deposited at a bank. When you invest in physical gold, you also get the benefit of liquidity—meaning that you can easily sell it to a dealer at any time for a fair market price.
This is important because it can help to hedge against currency depreciation and other economic volatility. However, the best time to buy physical gold is a personal decision that should be based on your investment goals and current financial situation. It is recommended that you consult with a reputable financial advisor or wealth manager to learn more about how gold can fit into your investing strategy.
Another way to invest in gold is through exchange-traded funds (ETFs) and mutual funds. This option may be easier for investors who already have retirement or brokerage accounts because they can purchase shares in these instruments for a small amount of money. However, it is important to note that ETFs and mutual funds are not as liquid as physical gold or other forms of alternative investments.
Investors also need to think about how much they are willing to lose in the short term by taking on this type of risk. In addition, investors should carefully consider whether they are seeking an income stream from their investment or simply want to diversify their portfolio with a safe haven asset.
If you are looking to generate an income from your gold investment, you can purchase a Gold IRA. This is an individual retirement account that is set up to hold precious metals like gold and silver. These types of accounts can be set up with a broker or self-directed online platform. The fees associated with a Gold IRA vary but typically include an annual fee and a transaction fee.
It is also possible to invest in gold as a currency through Commodity-Linked Structured Investments (GLSCIs). These investments allow you to agree with a bank or broker on an investment duration and a base currency, which is the currency that will be used to calculate the value of your gold investment.
Investing in Gold Funds
Gold-backed funds offer a low-cost way to diversify a portfolio. These exchange-traded funds (ETFs) either hold physical gold or invest in stocks of companies that mine and process the precious metal. Some also include companies that provide services to gold mining firms. There are even leveraged and inverse gold ETFs, which use derivatives to amplify market movements in the underlying assets. Leveraged funds have additional risk and should be used only by sophisticated investors.
Whether you are looking to hedge against inflation, diversify your investment portfolio or fear a financial system meltdown, gold can be an appealing option. But before you make the leap, consider your overall investment goals and how much cash flow you require from your investments. For example, if you want to use your investments to generate income, real estate and bonds are likely more suitable options than gold.
Aside from determining your investing goals, you should be aware of the risks involved in each type of gold investment. For example, purchasing physical gold requires safe storage and may have high shipping costs. And because gold does not yield a consistent stream of cash flow, you should carefully evaluate any associated fees and taxes before making your decision.
The most common way to invest in gold is through mutual funds and ETFs. ETFs and mutual funds are easier to manage than buying and selling individual pieces of gold, but they can still have significant differences in performance and expense ratios. When selecting a gold fund, be sure to check its expenses, top holdings and performance history.
Another option is to buy shares of gold-mining companies or the financing companies that support them. These stock investments have the added benefit of providing exposure to other commodities, which can help you diversify your portfolio and limit your risk. But be wary of investing in a company that uses scare tactics to lure unsophisticated investors. Also, consider the liquidity of the stock and its price volatility when making your decision. Finally, be prepared for the possibility of substantial losses in the short term as companies that fail can fall into bankruptcy.
Investing in Gold Stocks
There are several ways to invest in gold, including physical metal, mutual funds or exchange-traded funds (ETFs). Which one you choose depends on your financial goals and risk tolerance. Consider factors such as your timeline until retirement, your expected income needs and your overall portfolio diversification.
The easiest way for an average investor to get exposure to the gold market is through stocks of companies that mine the precious metal or finance its production. These investments are often more affordable than purchasing physical gold and require less expertise, since they are traded in transparent, liquid markets. They also may offer more diversified exposure than investing in gold-backed securities like futures and options, which are contracts that give you the right but not the obligation to buy or sell gold at specific prices for certain periods of time.
ETFs are popular options for investors seeking to add gold to their portfolios. The price of an ETF is partially influenced by the spot price of gold, but also depends on how well the companies in the fund’s portfolio perform. Many ETFs include both gold and other commodities, providing further diversification and the potential for higher returns. Some, such as GLD and IAU, are pure-play gold funds that hold only physical metal, while others, like GDX and SGX, combine both physical gold and a basket of gold-related stocks.
If you prefer to hold your assets in a more tangible form, you can buy gold certificates, which are notes issued by a company that prove ownership of a certain amount of the precious metal. These are not insured and only as valuable as the company that issues them.
More sophisticated investors can use futures and options, which are contracts that provide you with the right but not the obligation to buy or to sell an asset (gold in this case) at a particular price for a specific period of time. These are speculative investments and carry a significant degree of risk. Blueprint recommends limiting your exposure to these types of investments and only using them as part of a well-diversified investment portfolio.
Investing in Gold Futures and Options
Adding gold to your portfolio diversifies it and can smooth out the volatility of your other assets. Consider working with a financial advisor as you explore adding the precious metal to your investments.
Physical gold offers aesthetic value but can be expensive and difficult to maintain, secure and sell. It is also not as liquid as stocks and bonds. The simplest way to own physical gold is through an exchange-traded fund, or ETF. This allows you to invest in many companies that mine or process gold and provides easy access to the price of gold. However, the fees charged by funds reduce your return.
Another option is to buy futures contracts for gold, which are traded on commodity exchanges. A futures contract obligates the buyer to purchase a set amount of gold at a specific date in the future and at a specified price. Futures contracts offer significant leverage and can make you rich relatively quickly if gold prices move in the direction you want them to, but they can also lose you money quickly if gold prices move against you.
To trade gold futures you must open a commodities account with a broker that offers this trading. A new account typically requires documentation including proof of identity, address, a passport-sized photo and bank information. Once you’ve opened the account you can then buy gold futures through the account, similar to how you would buy stock in a brokerage account. Buying gold futures requires depositing a margin amount, which is money that your broker keeps if you lose more than you make in a trade.
You can also trade options on gold, which allow you to speculate on whether the price of gold will rise or fall in the future. Options give you the ability to trade both calls (speculating that the price will rise) and puts (speculating that the price will fall). Futures and options are regulated by the federal government and can be purchased through most brokers. Unlike stocks, these contracts do not carry a storage or insurance cost. However, if you are unable to fulfill the terms of the contract, you will be charged a termination fee.