A Beginner's Guide To Investing In Gold
/Historically, gold has performed remarkably well during times of economic crisis or political uncertainty. Throughout history, gold has acted as a hedge against inflation, economic crisis, political crisis, currency fluctuations, or other uncertainties. That is why investors invest in physical gold or gold securities mainly as a hedge against inflation and political crisis.
Top financial and investment advisors recommend you allocate a portion of your portfolio to commodities, including gold, in order to reduce overall portfolio risk. If you have decided to buy some gold for your investment portfolio and wondered how to invest in gold, there are many different ways to invest in gold.
In this article, you will learn how to invest in gold, including opportunities for investing in physical gold (e.g. gold coins or gold bars), or investing in gold through gold stock companies, mutual funds, ETFs, options, and other ways. The most direct way or easiest way to invest in gold is by purchasing physical gold bars or coins.
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Ways to invest in gold
If you have ever wondered how to invest in gold, here are all the ways you can invest in gold, own the physical gold, or invest in companies that are involved in the gold market.
Buy gold bullion
The best way to invest in physical gold and take direct gold ownership is by buying gold bullion. Gold bullion is any form of pure, or nearly pure, gold that includes coins, bars, etc. of any size and that has been certified for its weight and purity.
Gold coins provide much more liquidity than gold bars. Coins are usually often minted in smaller sizes (one ounce or less) so investing in gold coins is more convenient than the gold bars that are larger.
If you want to invest in physical gold, you will want to buy it from a merchant who charges the most competitive gold premiums. Depending on the private dealer or merchant, you can buy gold coins typically at a premium of about 1% to 5% above their underlying value.
If you are interested in investing in gold coins, then purchase widely circulated coins such as the U.S. eagle, the Canadian maple leaf, and the South African Krugerrand.
When you buy gold bullion, you pay for its entire value. So when the price of gold changes, the value of your holding also changes accordingly. Investing in physical gold involves storage costs (if you keep it at a storage facility) and insurance costs (if you want to keep at home).
If you are looking to own physical gold, then the best option is to buy gold bullion directly from the U.S. Mint.
Buy gold certificates
One of the best ways to invest in gold without physically owning it is to buy gold certificates which are notes issued by a company that owns gold. If you buy allocated gold certificates from a company that owns gold, the costs are higher than unallocated gold certificates.
Unallocated gold certificates are really only as good as the company that backs them. One of the most reputable companies that sell gold certificates is the Perth Mint.
The Perth Mint Certificate Programme which is the only government backed precious metal certificate program in the world allows you to own investment grade gold which is stored in vaults in the Perth Mint of Western Australia.
Buy gold jewelry
One of the straightforward ways to invest in physical gold and own physical gold is by buying gold jewelry. About 49% of the global gold production is used to make gold jewelry. And as the global population and global wealth are growing annually, demand for gold jewelry is also increasing.
Buying gold jewelry is the most enjoyable way to invest in gold and own gold, but is not the most profitable way to invest in gold. Unless you buy and hold extremely expensive jewelry, the resale value of gold jewelry is likely to fall immediately.
Invest in gold by purchasing gold stock shares
One of the easiest ways to invest in gold is by buying the stocks of individual companies involved in the gold business. These companies include miners, refiners, and distributors. However, it is important to remember that investing in individual companies involved in the gold business carries similar risks as investing in any other stock, as the price of gold stocks are based on fundamentals related to each company's current profitability and expenses.
So if the market falls due to an economic chaos or some other crisis, a single company that invests in gold shares may experience a certain level of risk due to volatility of the stock market than a gold-backed diversified mutual fund.
Some of the most popular gold stock companies include Newmont Corp. (NEM), Barrick Gold Corp. (GOLD), and Franco-Nevada Corp. (FNV).
Invest in gold through gold ETFs
The cheapest way to invest in gold is through an Exchange-Traded Fund (ETF). If you are wondering how to invest in gold via ETFs, you can invest in ETFs that own mining stocks. Gold-backed ETFs tend to invest in physical gold.
Be careful when you are selecting a gold-backed ETF to invest in gold, as not all funds that own mining stocks are created equal. Some ETFs have established miners, while others have junior miners. The price you pay to buy gold in an ETF will depend on the ETF you choose.
Investing in gold ETFs can provide you with exposure to gold's long-term stability. When you invest in a gold-backed ETF, your investment offers more liquidity than physical gold and more diversification than individual gold stocks.
Invest in gold through mutual funds
You can buy gold shares to invest in gold via gold-oriented mutual funds. Typically, gold-backed mutual funds invest in gold mining stocks, but some funds invest in both physical gold and gold mining stocks.
There is a range of different types of gold-backed mutual funds. Some of these gold funds are passively managed index funds that track industry trends or the price of physical gold bullion using futures or options contracts.
It is important to remember that when you invest in gold through a mutual fund, you are not buying physical gold. Instead, you are buying just paper that is backed by debt or equity of gold mining companies. So the value of gold mutual funds may not match up with the market price of physical gold, as gold mutual funds may not perform the same as physical gold.
A gold-backed mutual fund is more diversified, so it has a lower-risk. It also offers a liquid, low-cost entry into the gold market.
Invest in gold through gold options
If you are interested in investing in gold, one way to do so is through gold options. A gold option is a gold futures contract that gives you the right but not the obligation to buy or sell gold at a specific price within a specific period of time. Each gold option contract includes 100 ounces of gold. You will need to open a margin brokerage account to trade gold options.
With a gold option contract, you can buy an option to invest in a predetermined amount of gold at its strike price. If it hits the strike price, you have the right, not the obligation to buy it, sell it for a profit, or hold it for the long term. If the price of gold moves the opposite way, you only lose the small amount you have paid for the option.
There are two ways to buy gold through gold options. If you think the gold price will go up, you can buy a gold call option contract. But if you think that the gold price will fall, then you can buy a gold put call to buy gold.
You can invest in gold through gold options via COMEX which is a division of the Chicago Mercantile Exchange (CME).
You can also invest in gold through an IRA account, and there are several IRA account options to choose from. You can do some research online for augusta vs goldco to see which option suits your needs more, and which is going to benefit your future financial goals.
Pros of investing in physical gold
Inflation hedge
Physical gold acts as an inflation hedge. Since gold maintains an intrinsic value, its value always reflects the cost of living. Paper currency, on the other hand, loses its value over time due to inflation.
Gold minimizes risks
Like other commodities, gold acts as a counterfoil to equities, as it usually moves in the opposite direction of the stock market.
For example, gold prices went up in 2020 to record an all-time high due to the impact of the Covid-19 pandemic on global markets.
Gold is a safe haven for investors
Investing in physical gold is seen as a safe haven in uncertain times, due to the collapse of global markets or other threats such as a socioeconomic or political crisis, or a government's ability to back its currency.
Gold is virtually indestructible
Physical gold cannot be destroyed by a natural disaster. And it cannot be hacked or erased.
Cons of investing in physical gold
Physical gold is expensive to hold
Storing gold at home is highly risky, as there are potential risks of theft or loss. Keeping gold in a commercial storage facility incurs storage costs which can vary anywhere from .5% to 2%, depending on the size and value of the holdings. If you are not storing your gold in a commercial storage facility, you will want to attain insurance for your gold which means there will be an ongoing charge to insure your gold.
Physical gold is illiquid
Physical gold cannot be sold at any time. It can take days or even weeks to sell physical gold. Even if you sell gold, you have to arrange for shipping.
Physical gold does not produce income or profit
Investing in physical gold does not provide an income or profit unless you sell it when there is a jump in price, as physical gold does not generate interest or dividends. Even if you sell gold at a profit, there are various costs associated with selling it in addition to the time and effort that accompany selling.
Should you invest in gold?
The price of gold surged to an all-time high in 2020 due to the Covid-19 pandemic. If you are concerned about inflation and other calamities such as rough economic times and a recession, gold may provide you with an investing safe haven.
Historically, gold has held its value remarkably well. However, in the shorter term it can be just as volatile as stocks and other traditional assets.
You may choose to invest in physical gold, or invest in stocks, ETFs, and mutual funds or options contracts that represent gold depending on your preference and how much risk you want to take on. However, regardless of your preference and risk tolerance level, most financial advisors recommend you allocate no more than 10% of your portfolio to gold.
If you want to invest in gold, gold ETFs and mutual funds are the safest choice for most investors looking to add gold to their portfolios.
How much should you invest in gold?
Gold can be a volatile investment, especially in the shorter term, so you should not put a large amount of your assets into it. Financial advisors recommend you keep gold to less than 10% of your overall stock portfolio.
The real benefit of investing in gold comes from the diversification that gold offers.
When should you buy gold?
The best way to invest in gold is to buy small amounts of gold over time. You can buy a little at a time. However, when the price of gold and gold-related stocks is high, you can buy and sell gold in the short term to gain returns. But you can also buy gold when it appreciates in value for the long term to diversify your portfolio.
In conclusion
If you have ever wondered how to invest in gold to make money, there are many ways to go about doing this. Gold has long been considered by investors a reliable store for their money. And the reputation of gold as a safe haven for investors is not likely to change any time soon. Historically, gold has appreciated in value for its perceived safety and its potential as a hedge against inflation and declining value of paper assets such as stocks, bonds, currencies, etc.
Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
