Gold is a popular way to diversify a portfolio. It can offer stability during market volatility and protect against inflation over the long term.
However, it may have high storage costs and requires insurance. Plus, it doesn’t generate dividends or interest income.
There are several ways to invest in gold, including buying physical coins and bars or shares of companies that mine it. Each involves unique risks, so speak to a financial professional before making any decisions.
Buying Physical Gold
There are two ways to invest in gold: buying physical gold or investing in a gold-leveraged security like a gold mutual fund or exchange-traded fund (ETF). Depending on your investment strategy, expertise and the level of risk you’re willing to take, one option may be more suitable than the other.
Buying physical gold is an excellent way to diversify your portfolio, particularly during times of economic or geopolitical uncertainty. However, it can also be costly due to the cost of storage and insurance. Plus, physical gold doesn’t pay dividends or interest. In many cases, physical gold is better used as a hedge against inflation rather than as a primary source of income.
When purchasing physical gold, it’s important to purchase from a reputable dealer to ensure you’re getting the highest quality and purity possible. You can find reputable dealers online or in-person, but it’s important to do your research before making any purchases. Checking a dealer’s background using FINRA’s BrokerCheck or conducting a general Internet search can help you avoid being scammed.
Another popular way to buy gold is through futures or options contracts. Both of these options give you the right to buy or sell a specific amount of gold at a specified date in the future, but they come with additional risks and fees that physical gold investments do not.
Finally, you can also buy shares of gold-related companies, such as mining or manufacturing firms, through a gold mutual fund or ETF. This can be a more stable way to invest in gold because you’re buying stocks in multiple companies that produce, mine or process the metal. But it’s important to consider these funds’ management fees before deciding whether or not they are the right fit for your portfolio.
Buying Gold Stocks
Gold stocks are another way to invest in gold without having physical metal. These investments represent ownership of a company that mines or sells gold, and they typically track the price of gold. But if the company itself isn’t stable, or if it goes bankrupt and doesn’t pay you back, your investment could suffer.
Some gold stock companies are high-quality, with strong financials and a good long-term production outlook. They also tend to have low valuations, which helps reduce the risk of significant downside in a recession or other market volatility.
Investors are often drawn to gold stocks as an inflation hedge because they tend to rise in value when the prices of other assets fall. However, history shows that over the long term, gold stocks haven’t outperformed other assets. So if you’re looking for a hedge against inflation, you might want to consider alternatives like stocks or bonds.
Buying individual gold stocks or funds can be a hassle because you’ll need to find a broker with no markups, and then you’ll need to pay for storage or insurance. A simpler option is to buy gold-related funds or ETFs through an online trading app such as Robinhood, which charges zero commission on most trades.
When evaluating gold mutual funds and ETFs, check their expense ratio, which represents the annual fee that the fund’s creators charge investors. An ideal ETF or mutual fund will have an expense ratio of less than 1%.
Many precious metals investment funds hold both gold bullion and mining company stocks. These funds offer a lower cost alternative to owning physical metal, and they are liquid (meaning you can sell them at a moment’s notice). However, these types of investment vehicles typically have less diversification than a stock or ETF portfolio.
If you’re an adventurous and confident investor, you might be interested in owning physical gold. It can be a fun and rewarding hobby to collect rare coins or near-perfect bars, and it can be a useful store of wealth in a financial crisis when paper currencies collapse. But remember that the same volatility that makes you fearful of losing your hard-earned savings can also drive the price of gold up in a panic.
Buying Gold Funds
Before investing in gold, you should know your investment goals. Determine your time horizon and risk tolerance, as well as how much of a role you want your gold investments to play in your portfolio. You can buy physical gold like bars and coins, invest in gold mining company stocks or a gold exchange-traded fund (or ETF), or go the unallocated route with gold certificates that you hold yourself instead of in a custodial account at a reputable business that keeps your metal in a safe location.
Buying gold ETFs is the most straightforward way to diversify your portfolio with this commodity, but you’ll need a brokerage account to do so. You can open one for free with a site like SmartAsset’s. Then, choose a brokerage firm that offers ETFs in your desired asset classes. Unlike individual stock and bond shares, which are purchased for their share price, you buy ETFs for the total value of their holdings, or “net asset value.”
Many investors like to buy gold mining company stocks because the profits from these investments can grow with the spot price of gold, or at least keep pace with it. However, profits can also grow or decline based on other business factors, such as management’s execution and the ability to find and mine resources. In addition to traditional ETFs, there are also leveraged gold ETFs and inverse leveraged ETFs that use derivatives and debt to amplify market movements of the underlying assets.
Investors who want the hands-off convenience of an ETF should consider a gold exchange-traded fund that holds physical precious metal stored at a secure vault in London. These funds typically track the price of gold fairly closely, but you’ll need to pay a small fee to own them.
You can also buy gold ETFs through your IRA, though the process is a little more complicated. If you want to include them in your retirement account, you’ll need a qualified gold IRA provider who can make the necessary purchases for you and store them safely. Typically, this involves working with an RIA or Fidelity that offers these types of accounts.
Buying Gold ETFs
Gold ETFs (exchange-traded funds) provide a convenient and cost-effective way to gain exposure to the precious metal. They track the price of gold, meaning they will rise and fall with it. They are typically more liquid than physical gold, allowing you to buy and sell in small increments. Gold ETFs may have lower fees than individual stocks or mutual funds and can be a good option for novice investors, who don’t want to manage the hassle of buying and storing physical gold.
Some gold ETFs buy physical bullion directly, reducing the need to purchase and store physical metal. Others invest in the shares of gold mining companies. However, these stocks don’t necessarily move in concert with gold prices; they’re more likely to increase or decrease depending on the performance of their operating businesses. In addition, they don’t give you the security of owning physical metal if the companies fail.
While investing in ETFs provides a more hands-off approach to the commodity, you should still take the time to research them before making a purchase. Look at the fund’s historical returns, expense ratios, top holdings, and assets under management to ensure that they align with your investment goals. You can find this information in the fund’s prospectus, which is available on most broker websites.
Buying gold-related investments through an online brokerage account or robo-advisor is relatively easy. After opening your account, you can choose the stocks or ETFs you’d like to own and place your order on the website. Be aware that ETFs are subject to trading commissions and exchange fees, and you should factor these costs into your overall portfolio expenses.
Another important consideration with ETFs is counterparty risk. Since a large number of financial institutions are involved in the process, there’s always a chance that one party will default on their obligations. In the case of gold-related ETFs, this could have a significant impact on the fund’s value.
Investing in gold is a way to diversify your portfolio and hedge against inflation. The metal has also been used as a store of value during times of political and social unrest. But remember that it’s not a substitute for a well-diversified portfolio, and it can be very volatile in the short term.