Looking to invest in gold?
Gold is one of the best-known precious metals and is a popular choice for people looking to diversify their portfolios.
There are many ways to invest in gold, each with its benefits and drawbacks.
Table of Contents
- Why Invest in Gold?
- The Best Ways to Invest in Gold
- What Are the Risks?
Why Invest in Gold?
There are many reasons you may want to invest in gold. For one, gold has a history behind it. Modern currencies like the dollar, pound, euro or yen have all experienced inflation and changing values.
Gold has retained value throughout history, so many people see it as a stable asset in times when paper money’s worth can be volatile.
Many use gold as a hedge against inflation. Or if there is a fall in the value of the dollar as compared to other currencies. Similarly, gold can also be used as protection against deflation.
Gold also has some intrinsic value. For example, it’s used in the production of computers and electronics, jewelry, and some dental and medical devices. These uses mean that there will be a continual demand for gold.
Notably, you could invest in gold based on these demands. Besides, gold is a limited resource, so companies that need it will always need to buy it from someone.
Gold can also be an effective way to diversify your portfolio. Gold is a commodity, which makes it very different from other investments like stocks, bonds or mutual funds.
As a result, it will perform very differently than most other types of investments. So holding a small amount of gold will diversify your portfolio and reduce the impact any single asset type has on it.
Investing in gold can also be purely speculative. If you have a hunch that gold will increase in value, you can buy gold in hopes of selling it for a quick profit.
The Best Ways to Invest in Gold
There are a lot of different ways for people to invest in gold.
1. Buy and store physical gold
The most obvious way to invest in gold is to buy physical gold. This can range from buying gold bars to smaller gold coins or even gold jewelry.
If you choose to invest in physical gold, you’ll also need a way to store your gold safely. Buying a safe and placing it somewhere in your home is a popular way to do this.
You can also work with a bank or a gold storage company that specializes in keeping precious metals safe, but most will charge a regular fee for their service.
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2. Invest in an ETF that tracks gold’s value
If you want to invest in gold without physically holding the metal, you can use any one of the Exchange Traded Funds that aim to track gold’s value. These ETFs don’t directly hold gold. Instead, they contain derivatives that are backed by gold.
By buying and selling the right mix of derivatives, these ETFs can track the price of gold.
ETFs are like mutual funds in that they charge expense ratios, which are much like management fees. You’ll pay a percentage of your investment each year in exchange for the management services of the company that runs the ETF.
The way that they differ from mutual funds is that they’re traded on the open market. You don’t buy shares directly from the company managing the fund. That means that you might have to worry about liquidity.
You can’t sell an ETF if no one is looking to buy. That adds some additional risk to gold ETFs.
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3. Invest in gold futures or options
If you’re an experienced investor, you can use options or futures to make investments based on the value of gold.
If you’re using options, you can buy or sell the right to buy or sell gold at a specific price. Put simply, you can guess as to whether gold will increase or decrease in value and make a profit or loss based on which direction gold’s price moves.
Futures trading can be even more complicated; it is not for the beginner investor. Only sophisticated investors who know what they’re doing should attempt it.
Investing in gold mining companies gives you some exposure to the price of gold. Mining companies make more money when gold prices are high, so their stock values rise with gold prices.
Similarly, they produce lower profits when gold prices fall, so their stock values fall when gold prices fall.
The relationship between gold prices and gold mining stocks is imperfect. There are further risks, such as planned mining sites not producing as much gold as expected as well as exposure to the other commodities that the company mines for.
On the other hand, the companies can outperform gold if their mines do better than expected, giving you the potential to earn more than you would from an investment in pure gold.
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5. Buy a gold certificate
Gold certificates are certificates that are issued by companies that hold gold on behalf of investors.
You can purchase a gold certificate to, in effect, buy a portion of the gold that the company holds in its vault.
This gives you direct exposure to the price of gold without forcing you to deal with holding the metal yourself. The downside is that these certificates are reliant on the company issuing them.
If the company is untrustworthy or somehow goes out of business, your certificate could quickly lose value or become worthless. It can also be difficult to sell gold certificates for this reason.
Gold streaming companies are another way for investors to get indirect exposure to the value of gold.
Gold miners need cash to finance their operations, whether it be buying land to mine or equipment to use in the process of mining.
Gold streaming companies give mining companies the capital they need to finance their operations. In exchange, the streaming companies receive the right to buy gold and other precious metals at a reduced rate. It’s like lending money to someone and having them pay you back in gold.
Because gold streaming companies get their gold at a predetermined cost, their stock values will rise as the value of gold rises and falls as the price of gold falls. This lets investors track the price of gold without direct investment in the metal.
Another perk of gold streaming companies is diversification. These companies offer financing to many gold miners and many mining sites. If you invest in a single mining company, you’ll expose yourself to the possibility that the company or its mines would fail.
With a gold-streaming company, the success or failure of your investment is spread among multiple miners.
Gold streaming companies usually don’t work only in gold. Most are involved in streaming silver or other precious metals or mining output.
For people who want exposure to multiple metals, this can be a pro. But it means that gold streaming companies won’t perfectly track the value of gold.
What Are the Risks?
As with all investments, there are risks to investing in gold. Because gold is a physical commodity, there are additional risks that are not present with investments like stocks or bonds.
Storage is hard and expensive
If you’re purchasing physical gold, you need a way to store that gold and keep it safe. Depending on your risk tolerance, this can be cheap or expensive. You might rent a safety deposit box or buy a safe to put in your home.
Even if you simply decide to use your gold as a doorstop, it takes up space in your home.
Another thing to think about if you’re storing gold in your home is insurance. Even if you keep your gold in a safe, a thief may be able to break into it or walk off with the safe. Natural disasters like fire, floods, earthquakes or hurricanes could also damage your investment.
You’ll want to add your gold to your home or renter’s insurance plans, but that can cause your premiums to increase, adding to the cost of investing.
If you don’t hold the gold yourself, you have to pay a third party to keep and protect your gold for you, which can be expensive.
Buying gold might seem like a great way to avoid the costs that are common with investing. After all, how can you be charged a management fee if you’re just keeping some gold coins in a safe?
Unfortunately, gold investing brings its own fees to the table. If you’re investing in physical gold, most gold dealers will charge a premium when selling you gold bars or coins.
Similarly, few gold buyers will pay the spot price for gold, so you’ll pay fees on both ends of the transaction. In many cases, these fees can be a few percent of your investment, which is far higher than most mutual funds charge.
If you opt to invest in gold another way, such as using derivatives or an ETF that tracks gold’s price, you’ll be paying standard investing fees anyway.
Gold Does Not Produce Value Until You Sell
When you purchase shares in a company, you’re investing based on that company’s performance. Even if the company does not perform well, the company generates some value.
In many cases, companies will pay dividends to their stockholders, so you’ll receive some cash from your investment, even as its value falls.
Bonds are similar; you’ll earn interest as long as you hold a bond whether it is gaining or losing value.
With an investment in gold, the only way to get value from it is to sell. You won’t receive interest or dividends like you would from a stock or bond.
Additionally, it can be hard to sell fractions of your investment. If you buy a gold bar, you’ll likely have to sell the full bar to recoup your investment.
You can’t divide it into multiple pieces. In contrast, if you purchase 100 shares in a company instead, you can sell just a fraction of your investment if you need some extra liquidity.
Historically, gold has been seen as a good store of value when currency values are volatile, but gold prices can be equally unpredictable.
Given the volatility of precious metals, there’s no guarantee that you’ll be able to sell your gold for as much or more than you paid for it.
Gold can be challenging to liquidate
If you buy physical gold, you have to find a way to sell it when you want to turn your investment into cash. If you invest in stocks and bonds, it’s easy to make a sale through your brokerage account.
But with gold, you need to find a buyer and a way to deliver that gold.
Many stores or pawn shops that advertise that they pay cash for gold will pay far below the spot price (market value), which makes it even harder to liquidate your investment at a fair price.
You can invest in gold for several reasons, such as diversifying your portfolio or as a hedge against a volatile currency. There are many ways to invest in gold.
So choosing the right one for your portfolio’s needs will help you get the most out of your investment.