Customers pursue different investment goals, but gold can be a valuable addition to a portfolio. It can help protect against inflation and volatility. However, it is not income-generating and requires specialized storage.
If you want to invest in physical gold, you need to find a dealer and store the coins or bars somewhere safe. You can also add physical gold to a self-directed Individual Retirement Account (SDIRA).
Investing in Gold Mining Companies
Gold has long been seen as a safe-haven asset that protects against many kinds of risk, including inflation, economic upheaval and currency fluctuations. While owning physical gold can provide attractive returns, there are other ways to invest in the precious metal, including buying shares of gold mining companies and gold exchange-traded funds (ETFs).
Investing in a gold mining company gives you direct exposure to the underlying asset without having to store or insure it yourself. However, this is also a high-risk approach because the profitability of individual miners will be tied directly to the performance of the gold price. Moreover, it is important to select a miner with a solid track record and proven assets.
ETFs provide a diversified and cost-efficient way to invest in the gold sector. They typically charge an ongoing management fee and platform fees, but they do not require as much research as backing individual miners. Some of the largest ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Physical Gold Shares ETF (SGOL).
Investors can also choose to invest in individual gold-mining companies, though this requires more research because profits will depend on the company’s performance and financial health. For example, a more efficient and cost-effective miner may be able to extract and sell gold at lower prices than its competitors. In addition, investors should carefully examine a company’s operating and capital expenditures to understand its level of risk.
Another option is to invest in gold streaming or royalty companies, which give businesses the right to purchase a percentage of future production from a miner for a lump sum up front. These companies can offer higher returns than traditional mining stocks, but the amount of work involved can be a deterrent for some investors.
Lastly, investors can buy gold through the trading of futures and options contracts, which are highly speculative investments. As with any investment, you should consult with a qualified financial advisor before making a decision.
Investing in Gold ETFs or Mutual Funds
Gold ETFs and mutual funds give you exposure to the commodity without having to store physical gold or buy individual stocks. These investments come with greater liquidity than owning gold bullion and offer the opportunity to diversify your portfolio. To decide if these types of investment vehicles are right for you, consider your risk tolerance and financial goals. A reputable financial advisor can help you determine the proper weighting of gold in your portfolio.
The value of a gold fund or ETF rises and falls with the price of gold. Some gold ETFs hold physical bullion, while others have a more complex structure that tracks the prices of gold miner shares and other related assets. Many of these ETFs are leveraged, meaning they use derivatives and debt to magnify market movements. However, this also increases the risk associated with these instruments.
Like gold ETFs, most mutual funds that invest in the commodity earn returns based on the performance of their underlying assets. Some funds also shoulder the cost of holding physical supplies, passing that expense to investors in their expense ratios. Gold funds are an alternative to purchasing individual gold shares and may be more tax efficient for you than buying physical bullion.
Investors should take the time to compare gold funds’ underlying assets, fees and performance histories before making a decision. You can do this by reading the prospectus for each fund, which can be found on the fund’s website or through the SEC’s EDGAR database. The minimum investment requirement is another important consideration for some investors.
While gold is an important part of a diversified portfolio, it does not produce cash flow and should be added to your investment mix only in limited quantities and with caution. In fact, legendary investor Warren Buffett has recommended avoiding gold altogether and sticking with cash-flowing businesses. Despite this, some investors find comfort in adding the precious metal to their portfolios during periods of economic uncertainty. In addition to helping offset market volatility, gold can also serve as a hedge against inflation. This makes it an attractive investment option for retirees, who typically see lower incomes and higher rates of inflation than younger people.
Investing in Gold Futures or Options Contracts
If you have some capital to risk and want to speculate on the price of gold without owning physical bullion, you can buy futures or options contracts. These obligate the contract holder to buy or sell a specific amount of an asset (in this case gold) at a certain time in the future. The buyer of a futures contract pays an upfront premium and, as with all commodity investments, is exposed to the possibility of losing more than they initially invested.
Futures trading takes place on financial futures exchanges, or over the counter. The exchanges provide strict regulations and a central clearing house that help match buyers and sellers of the contracts. Trading takes place 24 hours a day, six days a week.
In order to trade futures you must put up a margin deposit with the exchange. This margin is used to cover potential losses if you are wrong about the direction of the market and need to close out your position. This is why it is so important to have a solid understanding of the market and your own risk tolerance before trading.
When trading gold futures it is important to remember that you must ‘roll over’ the contract before the expiry date – usually every quarter. This means that if you are long on the contract and prices start to fall, you will be obliged under the contract to top up your margin and may end up owing more than you originally invested. This is why futures are only a viable investment for large institutions, hedge funds or trading firms.
For those who are not comfortable with the risk of losing more money than they originally invested, it is possible to invest in a fund that deals specifically with gold or other commodities. However, these funds tend to be more expensive than a futures or options contract. They also often invest in other assets, which can lead to diversification issues and make it difficult for the investor to determine their true exposure to the market. In addition, these investments can come with the added expense of storing or insuring physical bullion.
Investing in Gold Mining or Refining Companies
Gold can be a volatile investment, especially during periods of economic or financial turmoil. However, it has long held value as a form of money and has a history of increasing in value over time. It is considered a safe-haven asset, attracting investors seeking a counterbalance to traditional stock and bond market investments.
One option for investing in gold is to buy shares in a company that mines or processes the precious metal. This is typically a less expensive route than purchasing physical gold, but it still requires a significant amount of research to find a good company. Some investors use this as part of a value-based investing strategy, selecting companies with low prices relative to fundamental business metrics.
Investors can also gain exposure to the gold price through exchange-traded funds (ETFs). These funds track the performance of various commodities, including gold. They can offer lower fees and more diversified portfolios than physically holding the metal itself. For example, a gold ETF such as BlackRock’s Gold and General fund can back 50 to 80 different mining firms. However, this is a higher-risk route as the profit of a mining firm can be highly dependent on gold prices.
If you are looking for a more speculative way to invest in gold, consider buying futures or options contracts. These are traded on commodity exchanges and provide the right or obligation to purchase a standardized amount of gold at a future date for a set price. Buyers can take physical delivery of the gold or settle in cash, depending on the contract.
Another option is to buy a precious metals mutual fund, which holds both the physical metal and shares in gold mining companies. These funds typically offer lower fees than ETFs and are more liquid, making it easier to sell your investment at any time. Some of these funds are leveraged, meaning they aim to produce two to three times the return of gold spot prices, which increases your upside potential but also increases your risk. When choosing a fund, make sure to check its management team and background to avoid getting burned by scams or fraud.