Investing in gold is an excellent diversifier for your portfolio. There are many avenues to pursue, but finding the right one for you depends on your resources and risk-reward calculations.
Physical gold requires storage fees, and it can be difficult to receive full market value if you need to sell. But investors can also invest in gold mining companies to gain exposure to the metal without the hassles of buying or selling physical bullion.
Buying Physical Gold
Buying physical gold is an option, but it comes with the added expense of storage costs and insurance. Additionally, this form of investment is often prone to scams, such as gold mines that don’t exist or bars that aren’t all gold. That’s why it is important to buy from reputable dealers and have your purchase appraised before you commit to a deal.
For small investors, exchange-traded funds (ETFs) or mutual funds that track the price of gold offer low-cost exposure to this commodity. These investments are also more liquid than physical gold and require a smaller capital commitment.
Investors can also buy gold futures contracts on the New York Mercantile Exchange. These standardized contracts represent a specific amount of gold, such as 100 troy ounces, quoted in dollars per ounce. Investors can trade these futures contracts through their brokerage account, just as they would trade stocks.
Gold is often seen as a safe haven asset and is attractive during times of economic uncertainty or high inflation. In addition, it is a valuable portfolio diversifier, and some experts recommend keeping 5% to 10% of your assets in the precious metal.
Many investors choose to invest in the companies that mine for gold, rather than directly purchasing the metal itself. The idea is that if the prices of gold rise, the mining company will profit, as will its shareholders. This is a riskier type of investment, however, and investors should carefully research the company before making a decision.
Many financial professionals recommend limiting one’s exposure to speculative trading instruments like options and futures contracts. Instead, investing in gold ETFs and mutual funds is generally considered a safer option for those looking to add the precious metal to their portfolios. While these investments won’t generate huge returns, they can help to smooth out portfolio returns during market volatility. This is particularly true for those seeking protection against inflation, as the gold price tends to increase when prices of other goods and services are rising. Investors can even invest in a traditional or Roth gold IRA or Simplified Employee Pension (SEP) plan to enjoy tax-advantaged benefits.
Buying Gold Futures
Gold and other precious metals add diversification to a portfolio, but they are not without risk. Whether it’s physical gold, or gold-related securities such as stocks and ETFs, you should make sure that they are part of a well-thought-out investment strategy. This includes determining your investment goal, time horizon and risk tolerance, and working with an advisor to determine which type of gold is the best fit.
Buying gold physical or direct is typically considered the safest way to invest in this commodity, but it has some risks as well. If you buy physical gold, it’s important to find a reputable dealer that has a good track record and will give you the full market value for your purchase. Some dealers may inflate the price or employ aggressive sales tactics, so it’s a good idea to check their background with the National Futures Association’s Background Affiliation Status Information Center. Likewise, you’ll want to consider fees and charges when you’re buying or selling, as these can quickly detract from your profit.
A less popular but still viable option is to buy gold through a futures contract. These are agreements to buy or sell a certain amount of an asset at a specific date in the future, and they’re traded on a commodity exchange. The biggest advantage of buying gold futures is that they provide substantial leverage, which means you can make a large amount of money relatively quickly if the prices move in your favor. However, the opposite is also true, and a rapid rise or fall in gold can cause you to lose your entire investment very quickly.
Purchasing a gold futures contract is a speculative investment, and it’s not recommended for beginning investors. You’ll need to put up a significant amount of money as margin, and if you lose your investment balance, you’ll be forced to close your position, which can be very costly. Moreover, these contracts are very volatile and you’re likely to see a lot of ups and downs. The most successful traders understand the nature of these markets and use sound risk management practices.
Buying Gold Stocks
While a significant allocation to gold can boost an overall investment portfolio, the decision to invest in this commodity ultimately comes down to individual investing objectives. Some investors may choose to include gold in a portfolio as a hedge against declining asset classes or broader economic uncertainties, while others might simply be looking for ways to diversify their portfolio. Whatever your goals, understanding the various ways to buy gold will help you make the best choice for your situation and risk tolerance.
Buying gold stocks is one way to get exposure to the price of the precious metal without buying physical gold yourself. A stock represents a stake in a company, and the price of a particular stock rises or falls based on the market’s view of that company’s future performance and prospects. Investopedia explains that you can purchase shares of individual gold-mining companies or buy a basket of these stocks through exchange-traded funds like GLD or IAU. These ETFs have the added benefit of eliminating the need for storage or insurance.
Investors should research each gold-mining company carefully before purchasing its shares, as their price can fluctuate wildly. However, this type of investment also offers the advantage of being able to diversify by investing in several different companies. In addition to analyzing the price of gold, investors should consider factors such as a company’s operating margin and debt levels.
Another advantage of gold stocks is that they typically have lower price correlations with gold bullion returns than other stocks. This makes them a good option for those who want to diversify their investments but still need exposure to the general market.
Investors can buy gold shares online through a variety of brokerage platforms. It’s important to look at the fees charged by each broker to find the best one for your needs. Some platforms offer a certain number of free trades each month, which can be very helpful for those who plan to make a lot of trades. If you’re thinking of a long-term investment, consider opening an account with an online broker that allows you to do dollar-cost averaging.
Buying Gold Exchange-Traded Funds
Like any investment, it’s important for beginner investors to consider their initial capital, desired returns and risk tolerance. While gold does not require a significant time commitment to be profitable, it is still important to do your research and remember that gold performs best in a diversified portfolio.
A good way to diversify your gold investment portfolio is by buying gold exchange-traded funds (ETFs). These funds allow you to buy and sell units in the fund on the stock market, just as you would with any other type of mutual or equity fund. These funds invest in either physical gold or stocks of companies involved in the mining and production of gold. They offer easy entry into the gold market and provide exposure to the industry without the higher risks of owning physical gold or individual gold mining stocks.
Investors should carefully compare the performance of ETFs to find the best one for their needs. When comparing, look at the fund’s underlying assets, expense ratio and past performance. You can also read the prospectus, which is available on the fund’s website or through the Securities and Exchange Commission’s EDGAR database.
If you are looking for a simple, beginner-friendly option to invest in gold, you can consider the SPDR Gold Shares fund, which has approximately $5.6 billion under management and has a low annual expense ratio of just 0.1%. The fund also allows you to easily track price movements on a daily basis, which is an important feature for new investors who want to stay up to date on the latest prices.
However, keep in mind that gold ETFs are not as liquid as physical bullion and may be harder to sell when needed. The limited volumes of trade on the stock market could also lower the prices you receive, which may reduce your profits.
Another consideration when choosing an ETF is the fund’s storage fees. Unlike other types of investments, gold requires safe storage spaces that may cost money, such as renting a storage space or adding a vault to your home. The costs of storage can add up over the years, and the value of your gold investment could be reduced if you are forced to sell it quickly due to an emergency.