In times of economic crisis, it makes sense to fall back on time-proven investing strategies. Gold is a standard form of investment that has proved its worth time and time again, even in unstable markets. Historically, the price of gold has remained stable compared to other investment vehicles that tend to fluctuate more drastically. And its value has held up even as worldwide currencies have fluctuated, due to more consistent prices and returns. For centuries, this precious metal’s overall beauty has been based on its varied usage, durability, and beauty.
We often hear how important it is to properly diversify our investment portfolios. Diversification can strengthen your investments — maximizing returns while reducing risk. Since gold is not affected by the same factors that might drive the price of GE stock down, for example, investing in this commodity can help stabilize your portfolio.
The value of this precious metal is rated high in most, if not all, markets around the world. Gold’s demand for use in personal electronics, dental devices, various other industries, and its potential in areas of scientific research help determine its value.
Investing in gold can be relatively easy. However, the type of investment vehicle you choose is dependent on your tolerance for risk. As you get into riskier types of investments, the dynamics of the venture can become more complex. The simplest way to invest in gold is by purchasing jewelry, gold coins, gold bars, or certificates, in its physical form. Exchange-traded funds, mutual funds, and buying stock in gold mining companies can also be ways to own gold without having to store it. However, gold oriented funds and derivatives can be riskier due to the different factors affecting their value.
If you’re wondering how to invest in gold, you’re in the right place. Below, we’ll cover different types of gold investments and ways to invest in gold to help diversify your portfolio. Read through for a full scope on investing in gold, or use the links below to jump to a section of your choosing.
Types of Gold You Can Invest In
There are numerous types of gold investments you can purchase to diversify your portfolio. In fact, according to USGS.gov, because gold is used for a variety of purposes, such as jewelry and technology, it has a unique status among commodities for having a long-term store of value.
However, as with any investment, it’s important you do your due diligence to ensure you’re buying from a trustworthy company. Take a look at some of the common types of gold investments you can make.
Like James Bond’s arch-nemesis Goldfinger, you might find there’s no substitute for actually purchasing and owning gold. While this can be the safest way to invest in gold, it is not without risk. Gold bullion, also known as gold bars or gold ingots, is assessed by weight and sold by major banks and dealers. You can also purchase bullion coins, which are minted from gold and bought by banks, brokerage firms, and coin dealers for investment purposes.
Gold bars can be purchased through a number of accredited manufacturers. Most consumers buy gold bars that weigh between 1 gram and 10 ounces. The typical gold bar you see in movies and TV shows, known as the Good Delivery Gold Bar, weighs 400 ounces, or 27.428 pounds, which costs around $500,000. These gold bars are typically traded by central banks and bullion dealers, not the public. For more information, go to Gold Bars Worldwide.
Actually owning gold, either in the form of gold bars or jewelry, can be a security risk and costly, depending on the insurance and storage options you choose. When buying pure gold, such as coins or bullion, you often have to pay a fee for your bank, broker, or firm to store it securely. You may be better off with a gold certificate, which provides a more secure way of owning gold. Gold certificates are sold by banks. The certificate confirms the quantity and ownership of the gold, but the actual gold stays in the banks’ vault.
Gold coins have been issued by governments across the globe for decades. In the United States, the U.S. Mint issues gold, silver, and platinum bullion coins, with their value based on gold, silver, or platinum bullion content. While the price of gold coins can fluctuate based on the world market, these coins can serve as profitable investments.
Gold bullion coins can be bought directly from government authorized dealers. The U.S. Mint provides a list of authorized bullion coin dealers through its website. The World Gold Council states that the market value of these coins is determined by the value of their fine gold content plus a markup that varies between coins and dealers.
The U.S. Mint issues two types of bullion coins:
- Proof bullion coins, which are coins that are minted and sold in a protective display case designed for collectors
- Uncirculated bullion coins are minted coins made for investment purposes and sold to a select number of authorized buyers. The price of uncirculated bullion coins is dependent on the current market price and a small premium charged by the U.S. Mint.
Investing in gold coins can be beneficial because they are often sold in smaller sizes, making them easier to purchase for a larger population of investors. There are also many trustworthy dealers to buy from across the country. As with any investment, it’s important to do your research to ensure you’re buying from a reputable dealer and not falling prey to a scam.
Gold ETFs and Mutual Funds
If you are willing to take more of a risk, you’ll want to consider gold-oriented funds, such as exchange-traded funds (ETFs) and mutual funds.
- Gold ETFs are commodity ETFs in that they track a commodity: gold. They can track the price of gold, funds covering the global mining industry, and more, making them a popular investment option. Gold ETFs can also serve as a great alternative to gold bullions and coins.
A benefit of gold ETFs is that you don’t have to hold onto physical gold and pay for insurance and storage fees. However, purchasing a Gold ETF often comes with a commission and management fee, but these fees can be lower than managing bullion and coins.
- Gold mutual funds are different from gold ETFs in that they invest in a variety of mining stocks rather than gold itself. While mutual funds can own gold bullion and gold companies, they often include other commodities, which means it might be hard to find a mutual fund that only focuses on investing in physical gold. A benefit of gold mutual funds is that they can be relatively cheap and diversify among multiple companies and sectors.
Investing in these types of funds is different from investing in gold bullion coins because the increase in their value depends on how well the companies perform, market expectations on the future price of gold, and the cost of mining the gold, among other factors. Information on these types of funds can be acquired through your investment professional.
Gold Futures and Options
Futures are a type of contract where you agree to buy or sell a specified amount of an item, which, in this case, is gold, on a future date. Also called derivatives, since the value of futures is derived from the underlying asset, which is gold, gold futures contracts can be a risky investment. This is because investors typically only have to put down a fraction of the gold cost, such as 20 percent, which creates leverage.
These can become risky if the price of gold drops because you have a specified end date in your contract, which means you can’t hold onto the contract with hopes of it rebounding.
Futures contracts can come in the form of structured products such as forward contracts, gold-linked bonds, and structured notes.
- Gold forward contracts are agreements to exchange gold at an agreed price at some future date.
- Gold-linked bonds can be purchased through bullion dealers and investment banks. This type of bond has a yield, principal protection, and exposure to gold price fluctuation.
- Structured notes involve the purchase of put/call options, which are products designed to generate value based on the investor’s expectation of market performance.
Gold Mining Companies
There are a variety of large gold mining companies that extract gold that can be used for technology, jewelry, trading, and more. Purchasing stocks in gold mining companies can be a lucrative investment, depending on the company you invest in, current market conditions, and other factors.
However, it’s important to remember that when you invest in stocks in a gold mining company, you’re investing in the company itself, not the actual gold. This means their stock prices can fluctuate depending on the company’s performance, not the actual price of gold. But, as a company, they could have the ability to expand and increase production, which could benefit your portfolio. Taking time to research a variety of gold mining companies,or mutual funds that invest in the act of mining, can help you make an informed decision and choose a company that’s profitable.
Gold jewelry is the largest source of annual demand for gold, accounting for about 52 percent of total demand. With demand for gold jewelry so high across the world, it can make for a good investment, especially if the jewelry is close to 24 karats.
However, jewelry might not always be a good investment. This is because the initial markup can be extremely high compared to the underlying value of the gold. So, if you’re buying jewelry with fewer karats, let’s say around 10 karats, selling your gold later in life might be less than your initial purpose. However, investing in gold jewelry can be an attractive option, both literally and figuratively. This is because you’re able to wear the gold in the form of a necklace, ring, bracelet, or earrings.
Wrapping Up on Investing in Gold
Whether or not you decide to invest in gold and make it part of your investment portfolio should be based on your careful consideration and ability to tolerate risk. It’s important to keep in mind that whatever money you decide to invest, this is money that if you lose it, you will be able to live without while managing your household expenses. Remember that investing can be a gamble.
Written by Ana Gonzalez Ribeiro.
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