Gold offers several benefits as an investment, including serving as a hedge against inflation and helping to diversify your portfolio. Talk with your Morgan Stanley Financial Advisor to find out how gold can fit into your overall investment strategy.
Investors can buy physical gold in the form of coins, bars and bullion. However, these investments can be illiquid and expensive to sell.
Buying Physical Gold
Purchasing physical gold, which includes bullion coins, bars or jewelry is one of the most direct ways to invest in the precious metal. Investors can find online dealers specializing in physical gold, or they can purchase the metal from their local currency bank.
When making a purchase, investors should take into account the storage costs associated with physical gold. Often, this means that buyers will need to purchase a safe or other secure storage unit. In addition, investors should carefully research the dealer they are purchasing from to ensure they are getting a fair price. There are several websites that offer reviews and comparisons of dealers to help make this process easier.
For investors looking to avoid storing and transporting physical gold, a popular alternative is investing in a Gold ETF or mutual fund. These funds track the price of gold and can be purchased through a traditional brokerage firm or an online platform. However, investors should note that these investments will not yield as high of returns as investing in physical gold.
Another option is to buy shares in a gold mining company. These companies will profit from the rise in the price of gold and can be a great way to diversify an investment portfolio. Investors will need to research the companies in which they are interested and may want to consider factors such as environmental responsibility and corporate governance.
Finally, investors can also participate in the futures market by buying or selling a set amount of gold at a specific time in the future. These investments are typically the most risky and should only be made by experienced investors. However, they can provide a low-cost (commissions + interest expense) method for purchasing or selling large amounts of gold.
Regardless of the type of gold investment chosen, all investors should understand that any form of investment comes with risks and that it is important to diversify their portfolios. In addition, any investment in gold should be a relatively small percentage of a person’s total investments. For example, Ray Dalio, founder of Bridgewater Associates, recommends that investors allocate no more than 10% of their portfolio to gold.
Investing in Gold Mining Companies
Investing in gold mining companies allows you to gain exposure to the precious metal without having to deal with the cost of storing physical bullion. In addition, investing in a company can offer other benefits like dividends, which are not available with ETFs or physical bullion. However, you should carefully consider your initial capital and desired returns before investing in gold mining companies. You may also want to consider a financial advisor who can help you build a long-term plan and determine which type of investment is right for you.
Unlike physical bullion, which can only be stored in secure locations, most investments in gold can be traded on the stock market. Many online trading platforms provide a variety of tools to make buying and selling shares simple. When choosing a platform, make sure to research the fees charged for each transaction. Some will charge a flat fee while others will give you a certain number of trades for free.
Another option for investors is to buy a precious metals exchange-traded fund, or ETF. These funds are similar to mutual funds in that you purchase shares of the fund and your money is used to buy assets like stocks and bonds. Some ETFs focus on specific sectors while others are broader in their investment strategy. For example, the SPDR GLD is an ETF that owns a diverse collection of mining and related assets.
Many gold investors choose to purchase physical bullion as a hedge against inflation and other market volatility. It’s also a popular choice for investors looking to diversify their portfolio with alternative asset classes. However, it’s important to note that gold is not a reliable source of income and should only be a small part of your overall portfolio.
Investing in gold mining companies is another way to gain exposure to the precious metal, and it can be a more profitable option than investing directly in physical gold. Unlike bullion, mining companies can profit from rising gold prices in two ways: by increasing production and through a higher share price. This form of investment is a bit riskier than buying physical gold, but it offers the potential to generate high-dividend income and appreciation in value.
Investing in Gold ETFs
Investing in Gold ETFs is a cost-efficient way to diversify your portfolio. Unlike physical gold, which requires storage, dealers’ premiums and other fees, exchange-traded funds (ETFs) track the price of gold in real time, making them easier for average investors to buy and sell. ETFs also carry lower expenses than traditional mutual funds. You can learn more about each gold fund’s expense ratio and top holdings by reading the prospectus.
In addition, ETFs are generally less volatile than the physical metal, helping to protect your portfolio against market turbulence. Many investors are embracing this alternative to traditional gold investing, which is typically done by owning physical gold bullion.
Before you choose a gold ETF, determine what percentage of your investment portfolio you are comfortable allocating to the precious metal. This should be based on your financial goals and risk tolerance. Keep in mind that gold is a non-yielding asset, meaning that it does not produce income or cash flow.
ETFs are traded on a stock exchange, much like stocks, and their prices fluctuate throughout the day as demand and supply changes. It is important to understand the fees associated with an ETF before you invest, including its management, administrative and marketing fees. In addition, you should be aware of the potential tax implications of owning an ETF. Generally, you will be liable for capital gains taxes if you sell your ETF shares within 36 months.
If you plan to hold your Gold ETFs for more than 36 months, you can benefit from a lower tax rate. However, you may still be liable for short-term capital gains taxes, depending on your tax slab.
When choosing a Gold ETF, consider whether you want exposure to physical gold or the public companies involved in the mining process. Both have different risks and may require a different approach to investment. When researching Gold ETFs, pay attention to their performance metrics, expense ratios and assets under management. You can find this information by reading the prospectus for each fund. You should also make sure to understand the liquidity and market risk associated with each ETF, as this will affect how easily you can buy or sell it.
Investing in Gold Futures
Gold has historically been considered a safe haven from economic uncertainty. Its price stability offers investors and collectors a secure alternative to the risky stock market. Adding precious metals and other investments that are non-correlated to stocks, bonds and funds in your portfolio helps diversify the asset mix and may potentially increase returns over the long term. However, it is critical to understand the risks associated with using leverage or derivatives as part of your investment strategy. Investors should consult a qualified financial advisor as they explore these options.
Buying physical gold provides security and liquidity but can be expensive to store and insulate from the threat of theft. Investing in gold miners or gold-related ETFs can be more cost effective and offer greater flexibility to move in and out of the market. However, the price of these investments can still rise or fall significantly during market volatility.
Many investors choose to speculate on the price of gold by investing in futures contracts. This type of investment can be highly profitable if the gold price rises or falls, but you should consider carefully whether you are comfortable with this level of risk. Gold futures are generally traded for a much lower price than the spot gold price and offer significant leverage. Investors must also put up substantial sums of money as collateral to maintain their positions, which can be quickly eroded by price moves against them.
While some speculators prefer to take physical delivery of their gold, this is rarely what motivates them. For most, the primary motivation is to diversify their portfolio and protect against declines in other traditional assets such as stocks and real estate.
In this case, a gold-backed ETF or the shares of a well-managed mining company offer higher liquidity and the potential to earn dividends in addition to any gains in the gold price. These are good choices for beginning gold investors who want to add a stable and predictable component to their investment portfolios. Investors should always evaluate their personal risk tolerance when considering any investment option, and they should keep in mind that gold typically performs best as a long-term investment in a well-diversified portfolio.