How to invest in gold: an investor’s guide

From ancient civilizations to modern times, gold has always been the world’s preferred currency. Today, investors buy gold mainly to hedge against political turmoil and inflation. In addition, many top investment advisers recommend portfolio allocation for commodities including gold to reduce overall portfolio risk.

We will introduce many opportunities to invest in gold, including gold bars (ie gold bars), mutual funds, futures, mining companies and jewelry. With few exceptions, only gold, futures and a few professional funds provide direct investment opportunities in gold. Part of the value of other investments comes from other sources.

Key points

  • So, you have decided to buy some gold for your investment portfolio, but what should you do?
  • The most direct way to own gold is to buy physical gold bars or coins, but these may lack liquidity and must be stored safely.
  • ETFs and mutual funds that track the price of gold are also very popular. If your brokerage account has access to the derivatives market, you can also use gold futures and options.
  • In order to obtain gold indirectly, you may also need to consider investing in gold mining stocks, although in the long run, the stock prices of these companies do not track the value of gold well.

bullion

This is probably the most famous form of direct gold ownership. Many people regard gold bars as large gold bars held in Fort Knox. In fact, gold bars are any form of pure gold or nearly pure gold that has been certified for weight and purity. This includes coins, gold bars, etc. of any size. For security purposes, the serial number is usually also attached to the gold bar.of

Although heavy gold bars are impressive, their large size (up to 400 troy ounces) makes them illiquid and therefore expensive to buy and sell.After all, if you own a large gold bar worth $100,000 as your total gold holdings and then decide to sell 10%, you cannot completely saw off the end of the gold bar and sell it. On the other hand, gold bars stored in smaller sized gold bars and gold coins provide more liquidity and are common among gold owners.

gold

For decades, sovereign governments around the world have issued a large number of gold coins. Investors usually buy coins from private dealers at a premium of about 1% to 5% higher than their potential gold value, but this jumped to 10% in March 2020.

The advantages of gold and silver coins are:

  • Their prices can be easily found in global financial publications.
  • Gold coins are usually minted in smaller sizes (one ounce or less), so they are a more convenient way to invest in gold than larger bars.
  • Only a few searches are required to find reputable dealers located in many large cities.

Beware: Older rare gold coins have a so-called numismatic value or “collector” value, which is higher and exceeds the potential value of gold. Strictly invest in gold, focus on widely circulating coins, and leave rare coins to collectors.

Some widely circulated gold coins include South African Kruger, American Eagle and Canadian Maple Leaf.

The main problem with gold bullion is that storage and insurance costs and relatively large markups by dealers hinder profit potential. In addition, buying gold bars is a direct investment in the value of gold, and every dollar change in the price of gold will proportionally change the value a person holds.Other gold investments, such as mutual funds, may be made in dollars less than gold bullion, or they may not have as much direct price exposure as gold bullion.

Gold ETFs and mutual funds

Another option for buying gold bars directly is to invest in a gold-based exchange-traded fund (ETF). Each share of these special tools represents a fixed amount of gold, such as a tenth of an ounce. These funds can be bought and sold in any brokerage company or IRA account like stocks. Therefore, this method is easier and more cost-effective than directly owning gold bars or coins, especially for small investors, because the minimum investment is only the single share price of the ETF. The average annual expense ratio of these funds is usually about 0.65%, which is much lower than the fees and expenses of many other investments, including most mutual funds.of

Many mutual funds use gold bullion and gold companies as part of their normal portfolio, but investors should note that only a few mutual funds focus solely on gold investment; most people own some other commodities. The main advantages of pure gold mutual funds are:

  • Low cost and low minimum investment requirements
  • Diversification between different companies
  • Easy to have ownership in a brokerage account or IRA
  • No need for individual company research

Some funds invest in mining company indexes; others are directly related to gold prices; and some are actively managed. Read their prospectus for more information. Traditional mutual funds tend to be actively managed, while ETFs adhere to a passive index tracking strategy, so the expense ratio is low. However, for ordinary gold investors, mutual funds and ETFs are now usually the easiest and safest way to invest in gold.

Gold futures and options

Futures are contracts to buy or sell a given quantity of goods (in this case, gold) on a specific date in the future. Futures are traded in the form of contracts rather than stocks and represent a predetermined amount of gold. Since this amount may be large (for example, 100 troy ounces x 1,000 USD/ounce = 100,000 USD), futures are more suitable for experienced investors. People often use futures because the commission is very low and the margin requirements are much lower than traditional equity investments. Some contracts are settled in U.S. dollars, while others are settled in gold, so investors must pay attention to the contract specifications to avoid delivery of 100 ounces of gold on the settlement date.

Futures options are another option for buying futures contracts directly. These give option owners the right to purchase futures contracts at a preset price within a specific time frame. One of the benefits of options is that they can both use your original investment and limit the loss to the price paid. If losses increase rapidly, futures contracts purchased on margin may require more capital than the initial investment. Unlike futures investments based on the current value of gold, the disadvantage of options is that investors must pay a premium to the underlying value of gold to own options. Due to the volatility of futures and options, they may not be suitable for many investors. Even so, futures are still the cheapest (commission + interest fee) way to buy and sell gold when investing in large sums.

Gold mining company

Companies that specialize in mining and refining will also benefit from rising gold prices. Investing in these types of companies can be an effective way to profit from gold, and the risk is lower than other investment methods.

The largest gold mining companies have extensive global operations; therefore, commercial factors common to many other large companies affect the success of this type of investment. Therefore, these companies can still achieve profitability when gold prices remain flat or fall. One way they do this is to hedge against falling gold prices as part of their normal business. Some people do this, some people don’t. Even so, compared with directly owning gold bars, gold mining companies may provide a safer way to invest in gold. At the same time, the research and selection of individual companies requires investors to conduct due diligence. Since this is a time-consuming task, it may not be feasible for many investors.

Gold jewelry

Approximately 49% of global gold production is used to make jewelry.As the global population and wealth increase year by year, the demand for gold used in jewelry production should increase over time. On the other hand, gold jewellery buyers are more price sensitive, and if the price rises rapidly, the purchase volume will decrease.

Buying jewellery at retail prices requires a substantial price increase-400% higher than the potential value of gold. Better jewelry deals can be found in real estate sales and auctions. The advantage of buying jewelry in this way is that there is no retail markup; the disadvantage is that it takes time to find valuable works. Nevertheless, owning jewelry is the most enjoyable way to own gold, even if it is not the most profitable from an investment point of view. As an art form, gold jewelry is beautiful. As an investment, it is mediocre—unless you are a jeweler.

Bottom line

Larger investors who wish to have direct access to the price of gold may be more willing to invest in gold directly through gold bullion. Owning physical assets rather than a simple piece of paper can also bring a certain degree of comfort. The disadvantage is that the value of gold paid for the first purchase is slightly premium, as well as storage costs.

For more aggressive investors, futures and options will definitely work. However, buyers should pay attention: these investments are derivatives of the price of gold and may fluctuate sharply, especially when they are made on margin. On the other hand, futures may be the most effective way to invest in gold, except that the contract must be regularly extended when it expires.

The idea that jewelry is an investment is legendary but naive. The price difference between the price of most jewellery and its gold value is too great to be considered a real investment. Instead, ordinary gold investors should consider gold-oriented mutual funds and ETFs, because these securities usually provide the simplest and safest way to invest in gold.

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