How to Invest in Gold: The Basic Guide
Gold has been used as the world’s money from early civilizations until today. It serves as protection against inflation and political change to investors. Most investment advisors suggest a portfolio allocation in commodities, such as Gold, to reduce risk.
The key points in Gold Investment
- Is Gold a good investment?
- Collecting gold bars and coins is an excellent choice, but these need to be protected and stored securely.
- Mutual funds and ETFs having gold in the portfolio are an excellent way to invest in Gold
- You can also use gold Futures and Options if you have access to markets in your brokerage account
- You can also invest in Gold through Gold-Mining stocks.
The Basics of Investing in Gold Coins
Probably the best way of collecting Gold is by Bullions. The term Bullion means Gold, silver, or other precious metals in the form of bricks, bars, ingots, or coins that maintain its worth better than any conventional currencies. It is therefore kept as a form of emergency currency by Banks, Governments, and People. For security purposes, there is always a serial number attached to it. Heavy gold bars are large size up to 400 troy ounces. Retail investors can buy Bullion in smaller-sized bars and coins, which gives much more liquidity and is very popular among gold investors.
For many years, sovereign governments have issued large numbers of gold coins around the world. Retail investors bought Gold from private sellers at about 1-5% above their value in early 2020, have got a return of up to 30% by August 2020, with price crossing $2074 per troy ounce in August 2020.
Advantages of investing in Bullions and Coins:
- Their prices are the same all over the world and available in global financial publications.
- Gold coins are a more convenient way to invest than the larger bars due to their smaller sizes.
- You can easily find legitimate sellers in different cities.
- Numismatic gold coins are older and rare. Remember to leave them to collectors.
- The PAMP Suisse, South African krugerrand, and the Canadian maple leaf are some of the widely circulated gold coins and bars.
Buying gold bullion is a personal investment. However, the issue with collecting it is the storage, insurance costs, and high mark-up that prevent potential profit. Some gold investments, like mutual funds, ETFs are cheaper than bullion and don’t have storage cost or mark up fees.
Gold Mutual Funds and ETFs
One alternative to buying gold bullion is to invest in exchange-traded funds (Gold ETFs). These represent a fixed amount of Gold. In any brokerage account, the investors can buy or sell Gold ETFs just like stocks. Therefore, this method is more cost-effective and much convenient than owning bars or coins, especially for small investors. The annual average expense ratios of these funds are usually about 0.65%, much lesser than owning gold bullions. Many mutual funds have gold bullion and gold companies but, investors should be conscious that only a few mutual funds concentrate only on Gold investing; most own few other commodities. Some advantages of the gold-only oriented mutual funds:
- low and minimum cost investment requirements
- Diversification amongst several companies
- No individual company research is required
- Security of ownership in a regulated brokerage account
Mutual funds and ETFs are the safest and easiest way to invest in Gold. Traditional mutual funds serve to be well-managed, while ETFs adhere to the index-tracking strategy, so they have lower expense ratios.
Gold Futures and Options
Gold Futures are the contracts to buy or sell a given amount of Gold on a particular date in the future. The Gold Futures are traded in contracts and represent a fixed amount of gold. (1 lot = 100 Troy Ounces). The Futures are much better for experienced investors. People often trade Golf Futures due to low commissions, and margin requirements are much lesser than traditional equity investments. Some contracts settle in dollars, while others chose Gold, so investors must be mindful of the contract terms to avoid having issues.
Gold Options are another way to invest in Gold Futures contract. These give the owner the freedom to buy the futures contract within a specific time-frame. One of the Options advantages is both leverages your original investment and limits losses to the price, unlike with futures investment that is base on the current gold value.
However, the option disadvantage is that the investor needs to pay to the underlying value of the Gold to own the option. Due to the volatile nature of futures and options, they may be bad for many investors.
Trade Gold with realtime pricing – Gold Spot (XAU/USD)
Trading Spot Gold with the Forex Brokers in another exciting way to invest in Gold with low trading costs. There are a number of regulated brokers offering Gold trading on MT4, MT5, cTrader, or any other trading platform. The traders can BUY or SELL gold priced in USD or Euro while using the leverage of up to 1:500 or more. The leveraged trading of Gold increases profitability and also increases the potential loss. Hence trade responsibly while trading Spot Gold on leverage.
Trading on Spot Gold comes in Lots, 1 Lot equals to 100 Troy Ounces. The small investors can trade fractional Lot, starting from 0.01 lot.
Investing in Gold Mining Companies
Companies that specialize in the extraction of Golf by mining and refining will also take advantage of a rising gold price. If you invest in these types of companies, it can be an effective way to earn, and it also provides a lower risk than other methods of investment. The well-known gold mining companies boast extensive global operations. Because of this, these companies can still earn a profit even during the times of declining gold prices. Falling of gold prices is a normal part of their business. Gold mining companies provide a safer way to invest in Gold than owning bullion. The research and selection of individual companies require due diligence on the investors’ part.
Because of the global population and wealth growth, demand for Gold in jewelry production increase over time of about 49%. Gold jewelry buyers somehow price-sensitive and buy less if the price increase. Purchasing of jewelry at retail prices involves mark-up – up to 400% over the underlying value of the Gold. Better jewelry bargains are at auctions and estate sales. Buying of jewelry there is advantageous because there is no retail mark-up; however, the disadvantage is the time spent searching for valuable and better pieces. Owning a piece of jewelry gives the most exciting way to own Gold. Gold jewelry is a beautiful form of art. It is a good investment, especially if you love gold jewelry.
The Final Words – Investing in Gold
Big investors chose to invest in Gold through bullion because of its price and higher valuation. There is always an advantage of owning gold as an asset.
The disadvantage of owning physical gold is the price paid on the initial purchase and the subsequent storage costs. For aggressive investors, futures and options will do the trick. Buyers need to be aware that investing in the derivatives of Gold can see sharp price movements, up or down. And especially when the trading os on the margin, the profit or loss can be higher. Gold Futures, on the other hand, is one of the best ways to invest in Gold without actually owning it. Contracts must rollover periodically as they expire. The idea of jewelry and gold collection is considered an excellent investment, but it involves additional expenditures of owning it over and above the value of Gold.
Knowing the basics of Gold investment are important to become successful. Hence the Gold investors must educate themselves and find the appropriate way to invest in Gold. Choose from Bullions, Gold Coin, Gold ETF, Gold Mutual Funds, or Spot Gold trading depending on your investment goal and risk capacity.