During times of crisis and higher-than-average inflation, gold’s price rises, making it attractive to investors looking for assets that can survive economically challenging times. Contrary to this, cash and several other asset classes lose value over time because of inflation. Moreover, gold is also more liquid than real estate and retirement accounts. Despite this, the reality of investing in gold is more complex than it may appear at first glance.
Is Gold A Good Investment?
Gold has the benefit of preserving wealth. Gold has been a valuable resource used by multiple civilizations and empires for thousands of years. Many of those civilizations devised currencies that today only have historical significance. On the other hand, gold still has monetary value and can easily be bought and sold.
When considering if gold is a good investment, we can compare the performance of gold with that of the S&P 500 to determine gold’s investment merits. The S&P 500 has performed significantly better than gold in the past five years. Despite this, gold has outperformed the S&P 500 during the ten years from 2002 to 2012. Therefore, finding the right time to invest is crucial.
There may be times when gold isn’t a good investment. The most profitable time to invest in almost any asset is when the market is in a negative mood, and the purchase is inexpensive. The investment becomes very beneficial once the market turns around.
How to Invest in Gold?
Throughout history, gold has been the world’s currency of choice. Investors purchase gold primarily to hedge against political unrest and inflation. Additionally, many investment advisors recommend allocating a portion of a portfolio to commodities, including gold, to reduce overall portfolio risk.
When you consider investing in gold, do not limit yourself to purchasing physical gold, such as coins or bullion. You can buy shares from gold mining companies or exchange-traded funds (ETFs). Option and futures contracts are other ways to invest in gold.
✅ Gold Bullion
Gold bullion is perhaps the most widely recognized form of direct ownership of gold. People think of gold bullion as the large gold bars held at Fort Knox. The term “gold bullion” describes any form of pure gold or gold that is nearly pure and has been certified as to its weight and purity. It includes coins, bars, etc., of all sizes. Gold bars are generally marked with a serial number for security.
Although heavy gold bars are an attractive sight, their large size makes them illiquid and costly to buy and sell. For instance, selling 15% of your gold bar worth $120,000 would be difficult. However, bullion held in smaller bars and coins provides much greater liquidity and is quite common among gold owners.
Due to its high price, gold bullion should only be purchased from a reputable dealer and delivered with full insurance. It should be deposited in a large vault or stored in a safe deposit box.
✅ Gold Coins
Many sovereign governments worldwide have issued large quantities of gold coins for decades. Investors typically purchase coins from private dealers at a premium of one to five percent above their underlying gold value, but the premium jumped to ten percent in 2020.
Bullion coins offer the following advantages:
✔ Bullion coin prices are easily accessible through global financial publications.
✔ The coins are usually minted in a smaller size (one ounce or less), making them more convenient to invest in gold than the larger bars.
✔ There are reputable dealers in many large cities, and you can find them easily.
✅ Gold ETFs and Mutual Funds
Investors may invest in gold-based exchange-traded funds (ETFs) instead of purchasing gold directly. The shares of these instruments are made up of a fixed amount of gold, for example, one-tenth of an ounce. These funds may be purchased or sold through a brokerage account or IRA. Therefore, investing in an exchange-traded fund is more convenient and cost-effective than buying bars or coins. This is particularly true for small investors, as the minimum investment is merely the cost of a single ETF share. By investing in gold ETFs and mutual funds, you get to benefit from gold’s long-term stability and liquidity while also diversifying your portfolio.
Some mutual funds invest in gold bullion and gold companies as a standard element of their portfolios. However, investors should know that only a small number of mutual funds invest solely in gold; most own a variety of commodities.
✅ Gold Futures and Options
Trading futures and options contracts, a form of speculative investing, is the riskiest method of investing in gold. Futures and options are derivative instruments that depend on the underlying asset price.
In futures contracts, investors agree to buy or sell a specific asset at a predetermined price on a specified future date regardless of current market conditions. In contrast, an option contract gives one the right, but not the obligation, to buy or sell an asset at a specific price on a specified date.
If you wish to invest in futures or options, you must open an account with an online broker that provides these instruments. Online brokerages often offer the possibility of trading these securities, but they may require account holders to sign additional forms acknowledging the risks associated with investing in these derivatives.
After establishing your brokerage account, you can trade options and futures directly on the platform. Generally, platforms charge a commission for all options and futures trades, which varies according to the number of contracts purchased or sold.
To avoid losing money on the investments in gold through options or futures contracts, investors must monitor their holdings regularly — they can sell, roll over, or exercise their options before they expire worthlessly.
✅ Purchasing Stock in Gold Miners
As opposed to buying physical gold, investing in the stocks of gold mining, refining, and trading companies is much simpler. If you are interested in purchasing gold mining companies’ stocks, you may invest through your brokerage account.
The following stocks are among the most popular in this sector:
✔ Newmont Corp. (NEM). Newmont is the world’s largest gold mining company, with its headquarters in Colorado. In addition to North and South America operations, Newmont operates in Africa.
✔ Barrick Gold Corp. (GOLD). This gold mining company is headquartered in Toronto, Canada, and operates in 13 countries worldwide.
✔ Franco-Nevada Corp. (FNV). Franco-Nevada does not own a gold mine. Instead, it purchases the rights to royalties from other gold miners.
The share prices of gold companies are correlated with gold prices based on fundamentals such as the profitability and expenses of each company. Investments in individual gold companies are subject to the same risks as those associated with other stocks. Investing in single stocks can be volatile and may not provide the same level of security as investing in diversified funds.
✅ Gold Jewelry
Jewelry accounts for approximately 50 percent of global gold production. The rapid global wealth growth should increase the demand for gold used in jewelry production over time. The gold jewelry buyers, on the other hand, are price-sensitive and tend to purchase less when prices increase rapidly.
There is a substantial markup over the gold’s underlying value when jewelry is purchased at retail prices. Therefore, you should consider buying gold jewelry through auctions and estate sales because they offer better jewelry bargains. It is advantageous to purchase jewelry this way since there is no markup at retail, but the disadvantage is the need to take time to search for valuable pieces.
A risk is associated with purchasing secondhand jewelry, as not all dealers are reputable. The piece’s authenticity is vital to you and will also matter to anyone to whom you intend to resell it. Make sure you purchase jewelry for investment from a reputable dealer and obtain as much documentation as possible.
Also, it is essential to know the purity of the jewelry or the percentage of gold it contains. If melted into pure gold, a piece of jewelry with a lower purity will lose its melt or raw value. The purity of gold is measured in karats, with 24 karats being 100% pure gold.
Every investment has its advantages and disadvantages. You may opt to buy shares in a gold mining company if you are opposed to holding physical gold. If you believe that gold may be a good hedge against inflation, you can invest in gold coins, bullion, or jewelry, which will lead you to financial stability. Finally, suppose your primary concern is to utilize leverage to profit from an increase in gold prices. It would be beneficial in that case to consider the futures market, but be aware that leveraged investments can be hazardous.
Michael Choi is a senior lawyer based in Hong Kong whose background includes international trade and trade financing. Over his career, he has assisted numerous international corporate clients in raising capital and increasing their funding levels. Michael has also provided free legal advice to the public in Hong Kong since 2011 to assist those who cannot afford to pay the legal fee.
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