Gold is often seen as a safe haven in times of economic uncertainty. Its price often rises when other assets fall.
Purchasing physical gold—gold coins, bars and hunks of pure metal—is the most common way to invest in gold. But this investment method comes with costs, including shipping and storage.
Investing in Gold Mining Companies
Gold-mining companies are one way to invest in gold without owning physical bullion. This method provides diversification to a portfolio, and gives investors the opportunity to select the specific mining company in which they want to invest. For example, an investor might prefer to invest in a gold-mining company that practices strong environmental responsibility over another that does not. However, investing directly in gold-mining companies comes with additional risk and does not provide the same instant liquidity that a person who owns physical bullion has.
Gold exchange-traded funds (ETFs) and mutual funds are another way to gain exposure to the gold market. These investment vehicles allow people to purchase a fixed amount of gold, which is often cheaper than purchasing individual shares in a gold-mining company. ETFs and mutual funds are also generally more liquid than buying physical bullion. However, these investments do not provide the instant liquidity that owning physical gold does, and they may charge higher fees to manage and maintain them than an individual would pay for the same bullion.
Adding gold to a portfolio is sometimes done as a hedge against inflation. It is believed that the price of gold will rise as inflation erodes the value of other assets. This is a popular argument for those who advocate the use of gold as an investment.
There are also claims that gold can be a safe haven in times of economic or geopolitical turmoil. This is based on the idea that the dollar, like many other world currencies, is only backed by the collective belief of citizens and investors that it has value. In the event that that belief is shaken, as in a time of hyperinflation or a global financial crisis, it may become less valuable than other commodities.
Gold futures are contracts that represent the right to buy or sell a set amount of gold at a predetermined date in the future. These instruments react very strongly to movements in the price of gold and are therefore volatile. The amount of research needed to successfully trade gold futures can be daunting for new investors, and the potential for leverage makes this form of investment very risky.
Investing in Physical Gold
Gold has long been a popular investment, providing a hedge against inflation and other risks. Investors can buy physical coins and bars, or invest in gold-backed securities, including mutual funds, exchange traded funds (ETFs) and shares in gold mining companies. There are many different ways to invest in gold, and each has its own advantages and disadvantages.
Buying physical gold is one of the most straightforward ways to make an investment. It can be stored in a bank safety deposit box, at home or with a reputable precious metals dealer. The main drawback is that the purchase price can be quite high, as gold is often sold at a premium over its spot price. This is because the product is expensive to produce, package and distribute. Moreover, it requires special storage, which can involve costs such as renting a safe or buying an extra safe for your home.
Another option for investors is to buy shares in gold mining companies that mine and process the metal. This strategy can offer more diversification, but it can also be riskier than simply investing in gold itself, as profits can depend more on the company’s performance than the price of gold. Additionally, companies can take on debt and reduce their cash-on-hand balance as they grow, which can impact their ability to pay dividends.
Finally, investors can purchase gold ETFs, which track or mimic the price movements of physical gold. These can be a good choice for new investors who want to gain exposure to the asset without having to physically hold or store it. However, it’s important to note that not all gold ETFs are created equal – some focus on owning physical gold and others use derivatives to boost returns, which can add to the expense of owning them.
Lastly, investors can also choose to buy gold mutual funds or exchange-traded commodities (ETCs), which are similar to ETFs but are usually professionally managed. These can be an excellent way to get exposure to the commodity, but they may carry higher fees than ETFs.
Investing in Gold Funds
The best way to invest in gold depends on your preferences and the level of risk you’re comfortable taking. Bullion—physical coins and bars—is often the first thing people think of when they consider investing in gold. However, it’s one of the most expensive ways to get exposure to the metal, and it can be difficult to sell or store. Gold mining stocks are an alternative, but they can be a volatile investment that may not perform as well as other stocks.
Another option is a gold fund, an exchange-traded fund that tracks the price of physical gold. Some funds hold a physical stash of the precious metal, while others are backed by gold futures contracts. These investments can be a good way to speculate on the price of gold rising or falling, but they’re also more complicated and require a higher level of knowledge of the market.
Investors can also buy a commodity-linked currency investment with a gold (XAU) base, allowing them to earn interest on their money while retaining the asset’s value in a particular currency. This method can be easier and less costly for new investors, although you’ll need to agree on a duration with your bank or broker, and may require more research to make an informed decision.
Many investors use gold as a hedge and safe-haven asset, adding it to their portfolios during times of volatility. It has historically had a low correlation to stock markets, meaning that it can help offset losses in other investments.
Some experts suggest that anywhere from 5-10%, or even 20%, of your portfolio should be invested in gold. The amount of risk you take should be determined by your comfort level with the metal, and you can always add more later to diversify your portfolio. You should also review your holdings regularly, making sure you’re happy with the percentage of your assets that are in gold or other precious metals.
Investing in Gold Futures
Gold’s unique ability to provide a tangible store of value makes it a valuable asset for investors. It’s also highly liquid, meaning it can easily be converted into cash, making it a useful investment for anyone seeking to diversify their portfolio. But it’s not without risk, and many new investors steer clear of this alternative investment in favor of more reliable options such as stocks and real estate.
One way for investors to diversify their portfolio is by investing in gold through futures contracts. Unlike physical bullion, which requires the purchase and storage of a large quantity of gold to be worth anything, futures contracts are standardized agreements that can be traded on exchanges. They allow investors to bet on the price of a commodity rising or falling, though they are not for everyone as they can be extremely complicated.
To invest in a gold futures contract, you must open a commodities trading account with a broker. Typically, this will require basic KYC documents such as ID, proof of address and a passport-sized photo. It will also require you to deposit margin funds, a down payment that is held with the broker until the trade closes. Typically, margin funds are the equivalent of 2% of the value of the transaction.
Once you have your account opened, you can then buy and sell gold futures, though this can be risky for beginners due to the complexity of the contracts and the high level of borrowing that is often involved. The key is to keep an eye on the underlying spot price of gold, which is used as the basis for all futures prices. A futures contract will almost always be priced at a premium to this – it’s the cost of financing the deal that carries the most risk for new investors.
Alternatively, you can also invest in gold through ETFs and mutual funds. However, these investments can be more volatile than direct physical investment, and may be affected by market crashes. They can also be difficult to sell if you need the money, since you will need to find someone willing to pay what you think it’s worth.