Through the ages, few things have remained as universally alluring as gold. The shiny metal has been a metric of wealth for nations and individuals throughout history. And even though the introduction and worldwide adoption of the fiat currency changed the status of gold as a primary marker of wealth, it has not lost its value as an asset. Nowadays, gold is most favored by investors as a safe-haven asset and its ability to grow in value when the stock market crashes.
Before we get to the "how" of it, it's essential to understand the thought process behind investing in gold so you can make an informed decision.
One reason investors seek gold is that it has a negative correlation with the stock market.
If you lay the price of gold over the S&P 500 index for the same period, you will see that gold grew when the market was down during the Great Recession, as well as in the 2020 market crash. But there is a flip side to that as well, which is that in a strong market, stocks (even broad-spectrum indexes) offer better returns.
There are other reasons to buy (or not to buy) gold as well. You should buy it if you are:
You may not want to buy gold if you:
There are multiple ways of investing in this coveted metal.
You can buy physical gold in the following forms:
Each physical form of the asset has different additional costs and liquidity repercussions attached to it. The purest form of investing in gold is buying gold bullions (also called gold bars) because you can sell them at the spot price of the metal. The minimal additional cost is for shaping and branding the bullion. Make sure that the gold is 99.5% pure or purer.
Also, try going for smaller denominations because the larger ones might be difficult to sell. If you have enough funds to buy 10 ounces of gold bullions, buy ten bullions of one ounce each, not one ten-ounce bullion. You can buy it directly from the US gold bureau, US mint, from precious metal dealers, from websites like APMEX, and even from a gold ATM. The last one is tricky to find, and the price might usually be above the spot price.
Gold coins can be divided into two broad categories. They can be bullion coins (like American Gold Eagle), which are slightly more expensive and might not be as pure as the gold bars. But they are still relatively predictable investments (especially if you know the purity level). The other types of gold coins include vintage coins that might fetch a higher price because of their historical value. But they are unpredictable, difficult to sell, and are more akin to collectibles than a commodity investment.
Gold has been used as jewelry for millennia, and gold jewelry pieces are usually passed down from generation to generation. But it's not an ideal investment because, in most cases, it's significantly less pure than gold bars. Also, jewelry is more expensive than the value of gold it can be melted down to, because it comes with the cost of craftsmanship.
Physical gold assets should be insured (jewelry is typically covered in the home insurance) and kept safely, either in a deposit box or in a safe.
Though it's not as common yet, some online banks (with their own investment platforms) now allow you to invest in gold as well. You can get the metal delivered, or the bank can keep it secure for you.
Fractional gold is very similar to fractional investing. Rather than buying a full share of a stock that may be very expensive e.g. Amazon shares are over $3,000 each you buy just $1 of Amazon shares i.e. a fraction of a share. This makes it much more accessible for everyday investors. You can also buy gold in the same way in that you would own a fraction of a gold bar held by an institution. When you own enough you can convert into a bar or coin and take physical ownership of it if you wish.
If you want to invest in gold without dealing with the physical asset, there are gold ETFs and gold mutual funds. Gold mutual funds are typically funds made up of gold-related equities and, in some cases, the asset itself. You can buy these funds from a bank or a financial institution that's managing them.
Gold ETFs, on the other hand, are relatively easier to buy and sell, as they are available on the stock market. These ETFs are backed by the actual metal, but you can buy them at a significantly lower price range. This allows investors to hedge their portfolio with gold without making significant investments.
Gold futures are a bit different. It’s a contract between you and the seller to buy a specific amount of gold at a specific price on a set date. You only need to put up a small fraction of the total cost upfront to buy the option, which can be both a good and a bad thing. If you are not experienced or predict the gold price the wrong way, you can end up losing more than your original investment. This makes it different from funds and stocks because with those asset classes (and almost all other asset classes), you can't lose more than what you've invested. Options are traded at New York Mercantile Exchange.
Though more people lean towards gold ETFs when they try to buy gold-backed securities on the exchange, gold stocks are worth looking into as well, especially if you consider the two main types. There are gold companies like Newmont Corporation, which is the world's largest mining company.
Then, there are companies like Franco Nevada Corp, which owns royalties and streams in other mining companies and does not operate mines itself. The difference between the returns of the two different types of gold stocks can be quite stark.
Newmont’s price fell by over 24% between Jan 2011 and Jan 2020 (before gold prices started to rise), whereas Franco Nevada returned its investors over 200% over the same period.
Gold stocks, especially if you consider the performance and business model of the different companies, might not mimic the spot price pattern.
Gold can provide a decent hedge against market turbulence and offer a good way to realize sizable short-term gains if you buy and sell at the right time. If you’ve made up your mind about the asset, you should look into different methods of investing and choose the one that suits you best. How much capital you want to invest, whether you will hold it for long or short-term, how much liquidity are you looking for, and your investment goals – all these factors come into play when you are making the decision about investing in gold.
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