Gold is considered a safe investment in times of economic and geopolitical uncertainty. There are multiple ways to invest in gold, from buying physical bullion and coins to investing in shares of companies that mine the precious metal.
But each method carries its own risks, especially for beginning investors. This article will help you understand how to diversify your portfolio by investing in gold. Find out more at how to invest in gold.
Buying Physical Gold
When most people think of gold investments, they picture physical gold bullion—gold bars, coins and hunks of pure gold jewelry. This is the most hands-on way to invest in gold, but it also involves storage and insurance costs.
Another popular way to invest in gold is through financial investments—like ETFs, mutual funds and stocks that track the price of gold. These types of investments usually involve more risk and complexity than physical assets.
Buying shares of gold mining companies offers diversification benefits, but it’s important to understand the risks and rewards involved with this type of investment. Investing in a company that produces gold can be volatile, and its share price may fluctuate significantly over short periods of time. Also, because of the nature of these securities, you’re likely to pay a premium over the spot price of gold when purchasing them. This premium can be as high as 30 percent. Traders in commodities like gold also often trade futures contracts and options, which require a large brokerage account and intimate knowledge of the market.
Investing in Gold Mining Stocks
Gold has historically been a stable and safe investment and helps to diversify portfolios. It is also a good hedge against inflation. However, it is not immune to other economic factors and price volatility can still occur.
One way to invest in gold is through stocks in gold mining companies like Barrick Gold Corp and Franco-Nevada Corp. This approach can be less volatile than investing in physical gold and offers the potential to earn dividends which is not an option with owning physical metal. However, individual stock prices can be influenced by issues unrelated to gold prices such as management decisions and market trends.
Another option is to invest in a gold ETF or mutual fund. These funds can hold physical gold, gold-related stocks or a combination of both and can be purchased via an online broker or investment app. ETFs tend to have lower fees than buying gold directly and provide diversification versus individual stock picking. They also have higher liquidity than physical metal holdings as their assets are held in a vault.
Investing in Gold ETFs
An investor can gain exposure to gold by investing in a gold ETF (exchange-traded fund). These funds hold various assets, including physical gold and derivatives, to track or mimic price movements of the precious metal.
These investments can be more cost-efficient than investing in physical gold, which requires paying for storage, insurance and other fees. However, investors should carefully research a fund’s underlying assets, expense ratio and liquidity restrictions to ensure it is a good fit for their financial goals and investment strategy.
Physical gold has a proven track record of returns, liquidity and low correlations with stocks and bonds, making it an effective diversifier for an investor’s portfolio. The investor’s specific financial goals and risk tolerance should be the driving factors in determining which investment method is best for them. To further understand the benefits and risks of each investment, consult a fiduciary wealth manager who is required by law to prioritize your financial well-being.
Investing in Gold Futures or Options
Investors seeking to leverage their exposure to gold can do so via futures contracts. These standardized and legally binding transactions trade on exchanges. They can provide greater flexibility and reduce counterparty risk as they exclude the physical metal from the equation.
Before investing in futures it is advisable to carefully evaluate your portfolio and risk profile. This will include assessing how much exposure to the gold market makes sense and what your level of comfort with volatility is.
Investing in gold futures will also require you to top-up your margin on a regular basis as prices move. Failure to do this means that you will be closed out of the position and your original investment lost on a minor intra-day price blip. This is a consequence of the fact that futures trading has the potential to generate vicious cycles – a rapidly falling price encourages selling which further depresses the price while a rapidly rising price will attract buyers which pushes the price higher.
