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Throughout history, few investments have matched gold's popularity as a hedge against almost every kind of trouble, from inflation to economic upheaval and currency fluctuations to war.
When considering investing in gold, don't limit yourself to purchasing physical gold such as coins or bars. Alternatives to investing in gold include buying shares in gold mining companies or gold exchange-traded funds (ETFs). You can also invest in gold by trading options and futures contracts.
How to invest in physical gold
Investing in physical gold can be difficult for investors who are used to trading stocks and bonds online. When it comes to physical gold, you will typically be dealing with a dealer other than a traditional intermediary, and you may need to pay storage fees and obtain insurance for your investment. There are three main options for investing in physical gold: bullion, coins, and jewelry.
gold nugget
When most people think of investing in gold, they think of bullion, or large, shiny gold bars stored in a safe.
Gold bullion is sold in bars ranging from a few grams to 400 ounces, but is most commonly available in 1 ounce and 10 ounce bars. Considering the current gold price is around $1,900 per ounce (as of September 2020), investing in gold bullion can be an expensive proposition. And unlike stocks, there's really no way to acquire fractional shares of gold bars.
Due to the high price of gold bullion, it is especially important to use a reputable dealer, insure it and pay for shipping, or pay a large sum of money to store it in a large safe or safe deposit box.
If you're investing in gold using bullion, it's a good idea to keep up to date with the price of gold so you can choose the right time to buy. Most dealers will update their prices based on current spot prices.
gold coin
The most common gold coins weigh 1 ounce or 2 ounces, but 0.5 ounce and 1/4 ounce gold coins are also available. Collectible coins such as the South African Krugerrand, Canadian Maple Leaf, and American Gold Eagle are the most widely available types of gold coins. Some dealers sell blank, damaged, or worn coins.
However, the price of a gold coin may not perfectly match its gold content. Collectible coins that are in high demand often trade at a premium. For example, a 1-ounce American Gold Eagle coin sells for just over $2,000 as of mid-September 2020. This is almost a 5% increase over the equivalent amount of gold bullion.
Although you may be able to find better deals on gold coins from local collectors and pawnshops, it is usually safer to purchase using a trusted and licensed dealer.
gold jewelry
You can also buy wearable gold, or gold that someone once wore but got damaged, in the form of gold jewelry. However, investing in gold jewelry involves many risks that investing in solid gold does not.
Firstly, you should be careful when buying jewelry as not all used jewelry is sold by reliable dealers. Authenticity is not only important to you, but also to anyone looking to resell your work. This is why it's important to purchase your investment jewelry from a reputable dealer and obtain as much documentation as possible.
You will then pay some markup based on the company that designed and manufactured the jewelry. This can range from 20% to more than three times the raw value of the precious metal.
You should also pay attention to the purity of the jewelry, i.e. the proportion of gold. Gold purity is calculated based on carats, and 24 carats is 100% gold. Lower purity reduces the melt value of the jewelry and reduces the raw value of the jewelry components when the jewelry is melted down to pure gold.
Invest in gold by buying shares in gold miners
Investing in the stocks of companies that mine, refine, and trade gold is a much simpler proposition than buying physical gold. This means buying shares in a gold mining company, so you can invest using your brokerage account.
Some of the most popular stocks in this sector include:
- Newmont Corporation (NEM). Newmont, headquartered in Colorado, is the world's largest gold mining company. It operates mines not only in Africa but also in North and South America.
- Barrick Gold Co., Ltd. (GOLD). The gold mining giant is headquartered in Toronto and operates in 13 countries around the world.
- Franco-Nevada, Inc. (FNV). Franco-Nevada owns no gold mines. Instead, it buys royalty rights from other gold miners.
However, keep in mind that gold company stock prices are not only correlated with the gold price, but are also based on fundamentals related to each company's current profitability and expenses. This means that investing in individual gold companies carries the same risks as investing in other stocks. Individual stocks can be subject to a certain level of volatility and do not offer the security of a diversified fund.
Invest in gold ETFs and gold mutual funds
Investing in gold ETFs and mutual funds gives you the long-term stability of gold while being more liquid than physical gold and more diversified than individual gold stocks. There are different types of gold funds. There are also passively managed index funds that track industry trends and bullion prices using futures and options.
For example, the SPDR Gold Shares ETF (GLD) holds physical gold and deposit receipts, and its price tracks the price of physical bullion. VanEck Vectors Gold Miners ETF (GDX), on the other hand, is a passively managed fund that tracks an underlying basket of stocks of gold mining and refining companies.
Gold mutual funds, such as Franklin Templeton's Gold and Precious Metals Fund, are actively managed by professional investors. These funds aim to outperform the returns of passively managed index funds. In return, you will be charged a relatively high expense ratio.
Remember, like gold stocks, you are not buying gold, but just paper that is theoretically backed by mining company debt or equity, or physical bullion futures and option contracts. Please keep it. This means that the value of gold mutual funds or ETFs may not exactly match the market price of gold, and these investments may not perform as well as physical gold.
Invest in gold using futures and options
Of all the ways to invest in gold, the riskiest is through futures or options trading, which is a form of speculative investment. Futures and options are derivatives whose value is based entirely on the price of the underlying asset.
A futures contract is a contract to buy or sell a security at a set price on a specific date, regardless of current market conditions. An option contract, on the other hand, is a contract that gives you the option to buy or sell a security if the security reaches a certain price on or before a certain date.
To invest in futures and options, you need an account with an online broker that offers these trades. Many online brokerages allow trading in these securities, but may require account holders to sign additional forms acknowledging the risks of investing in these derivatives.
Once you have established a brokerage account to trade options and futures, you will be able to buy and sell them directly through the platform. Most platforms charge fees for all options and futures trades. Fees vary depending on the number of contracts you buy or sell.
Those who choose to invest in gold via options or futures contracts should actively monitor their holdings so that they can sell, roll over, or exercise options before they become worthless. Additionally, these options include some degree of leverage, or debt, by default, so investors who overextend their options and experience market losses can quickly add up to their losses.
Should you invest in gold?
If you're worried about inflation or other disasters, gold may be a safe investment. While it can be as volatile as stocks in the short term, over the very long term gold retains its value remarkably well.
Depending on your own preferences and suitability for risk, you can choose to invest in physical gold, gold stocks, gold ETFs, mutual funds, or speculative futures and options contracts. Regardless of the form of gold you choose, most advisors recommend allocating no more than 10% of your portfolio to gold.
Any form of investment involves risk. Gold is no exception. But the idiosyncratic gold market is unforgiving and takes a long time to learn. This makes gold ETFs and mutual funds the safest option for most investors looking to add the stability and shine of gold to their portfolio.
