6 Smart Ways to Invest in Gold (Even as a Beginner)
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Are you 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.
In this guide, I will explain how to start investing in gold, even for beginners.
Why Invest in Gold?
There are many reasons to invest in gold. For one, gold has a history behind it. Modern currencies like the dollar, pound, euro, and yen have all experienced inflation and changing values.
Gold has retained value throughout history, so many people see it as a stable asset when paper money’s worth can be volatile.
Many use gold as a hedge against inflation or a fall in the dollar’s value compared to other currencies. Similarly, gold can also be used to protect against deflation.
Gold also has some intrinsic value. It’s used in the production of computers and electronics, jewelry, and some dental and medical devices, which means 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.
How 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 it safely. A popular method is to buy a safe and place it somewhere in your home.
You can also work with a bank or a gold storage company specializing in keeping precious metals safe, but most will charge a regular fee for their service.
Check out Vaulted, where you can buy physical gold without having to store it.
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 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, much like management fees. You’ll pay a percentage of your investment each year in exchange for the management services of the ETF company.
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 it, which adds some additional risk to gold ETFs.
Check out M1 Finance, where you can invest in Gold ETFs for free.
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 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.
4. Buy shares of gold mining companies
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, and exposure to the other commodities 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.
Check out Robinhood, where you can trade gold mining company stocks for free.
5. Buy a gold certificate
Gold certificates are certificates 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 hold 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. For this reason, it can also be difficult to sell gold certificates.
6. Buy shares of gold streaming companies
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 buying land to mine or equipment for 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 fall 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.
This can be a pro for people who want exposure to multiple metals. However, it means that gold streaming companies won’t always accurately 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 it 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 decide to use your gold as a doorstop, it takes up space in your home.
Another thing to consider 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, which can be expensive.
Fees
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 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, it 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 if you hold a bond, whether it gains or loses value.
With an investment in gold, selling is the only way to get value from it. 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 whole 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.
Volatility
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. Investing in stocks and bonds makes it 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.
Summary
There are many ways to invest in gold, such as diversifying your portfolio or as a hedge against a volatile currency.
So choosing the right one for your portfolio’s needs will help you get the most out of your investment.
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