Investing in gold
admin - October 28, 2024Investing in gold offers numerous options, catering to different preferences, investment goals, and levels of involvement. Gold has been regarded as a valuable asset since time immemorial and used as a safe haven during times of economic uncertainty, inflation, or market volatility. There are two main ways to gain exposure to the gold price: investing in physical gold (such as coins, jewellery, and bars) and investing in paper gold (including gold ETFs, mining stocks, and futures).
Physical gold provides the comfort of direct ownership, but comes with storage and liquidity challenges. Paper gold, on the other hand, offers easy access to the gold market without the hassle of holding the asset, though you give up the tangible aspect of ownership. Whether you choose to invest in gold coins, bars, ETFs, mining stocks, or something else, it’s important to consider your investment goals, investment horizon, risk tolerance, and overall financial strategy before diving into the gold market.
Below, we explore a few different types of gold investments.
Physical Gold
Investing in physical gold means owning the tangible asset itself. It offers direct ownership of gold in the form of coins, bars, or even jewellery. This traditional method of investing in gold has been used for thousands of years as a store of value, and today, it is still popular among investors who prefer to have a physical asset in their possession. However, physical gold comes with considerations for storage, security, and liquidity, all of which differ depending on the form of gold you choose to invest in.
A compromise that some investors go for is to own physical gold, but keep it in third-party storage, e.g. a bank box. This comes with both pros and cons, and one of the downsides is that you are now no longer in actually hands-on possession of your gold and the third-party company can prevent access, be unable to give you access, or be ordered by the authorities to hand over your gold. Also make sure you understand exactly who is responsible if anything happens to your gold in the vault, e.g. if it is somehow lost, stolen or damaged. Many people assume that the bank or other third-party is legally required to reimburse them, or that gold in bank vaults is always insured by the bank, but that is not always the case, and you need to investigate these things before making any decision about how to store your gold.
Gold Coins
Gold coins are one of the most traditional and widely recognized ways to invest in gold. Their history and collectible aspect sometimes makes them more valuable than their gold content alone.
Today, you can elect to purchase golden coins issued by governments, and minted with a specific weight and purity. For instance, coins like the American Gold Eagle (United States), Canadian Maple Leaf (Canada), and Krugerrand (South Africa) are well-known and trusted by investors around the world.
Some gold coins are not 24K gold. This is especially likely for coins that were created to be a bit sturdy and not just stay in a protective casing for eternity. If you want 24K gold coins or not depends on your preferences. Some investors want 24K because it is the most efficient way; they do not want to waste space on other metals. Others prefer a 22K or even 20K gold coin as it is less suseptible to damage and wear, if they are ever in a situation where they need to actually use the gold coin for barthering.
Pros:
- Tangible Asset: You physically own the gold, which can be reassuring during times of economic instability.
- Globally Recognized: Gold coins are widely recognized and can be liquidated relatively easily.
- Potential Numismatic Value: Rare coins can have added value beyond their gold content.
- Can be sold for scrap gold value if the condition is poor.
Cons:
- Premiums: You’ll typically pay a premium over the spot price of gold when buying coins, which can eat into your potential profits.
- Storage and Security: Storing physical gold requires safety arrangements and you may incur extra costs. People knowing or suspecting you store gold at home can increase the risk of break-ins and home invasions.
- Fraud concerns: With physical gold, including coins, you need to trust or ensure that the gold has the stipulated weight and purity.
Gold Bars
For those who want to invest in larger quantities of gold, gold bars are a common choice. They offer a more efficient way to buy gold since they often come with lower premiums compared to coins, i.e. buying gold bars is typically more cost-effective per gram than buying gold coins.
Bars come in various sizes, from small one-gram gold bars to kilogram bars or even larger. Larger bars can be harder to sell compared to smaller ones.
Refineries like PAMP Suisse and the Royal Canadian Mint sell standardized gold bars. Having a bar from a reputable refinery will increase market faith in the gold content of your bar.
Larger gold bars are often produced by casting molten gold into molds. Such bars are also known as ignots. Smaller gold bars are more likely to be produced by starting out with rolled gold sheets and then use minting or stamping to produce the bars.
The manufacturers of gold bars have developed various measures to mark their bars and ensure the authenticity of their product. Bars can for instance be embossed with registered serial numbers and sold accompanied by a certificate of authenticity. Even very small bars can be marked with a serial number.
Small minted gold bars are often sold in protective see-through packaging that is ment to stay on to prevent tampering and damage. So called “kinebars” are bars embossed with a security feature named the Kinegram, which is a type of hologram.
Pros of investing in gold bars:
- Lower Premiums: Bars often have lower premiums compared to gold coins.
Cons of investing in gold bars:
- Storage: As with other types of gold, storing gold bars can be costly and risky.
- Fraud concerns: You need to trust or ensure that the gold has the stipulated weight and purity.
Gold Jewelry
Gold jewellery is another common form of physical gold ownership. In many cultures, gold is both a symbol of wealth and a medium for personal adornment. While jewellery can be a beautiful investment, its value is often reduced by the craftsmanship and design premiums, meaning it may not be as cost-effective as other forms of gold. Nevertheless, in countries like India, where gold jewellery is a traditional investment, it remains a preferred choice for combining aesthetic appeal with value preservation.
Pros:
- Dual Purpose: Gold jewellery can be worn and enjoyed while also serving as a store of value.
- Less Obvious: Some preppers prefer gold jewellery since selling or trading a modest piece of gold jewellery does not signal that you are a person who is likely to be sitting on a big stash of investment gold.
Cons:
- High Markups: The retail price includes a markup for craftsmanship and more, making it less cost-effective as an investment.
- Variable Purity: Jewelry is usually not 24k gold, as pure gold is soft and can easily be damaged and worn down by daily wear and tear. Before you buy gold jewlery, make sure you know its purity. Gold jewelry where a reputable stamp indicates the purity can be easier to sell.
Paper Gold
Investing in paper gold is a more modern approach to gold investment. Rather than owning physical gold, investors buy assets or instruments that derive their value from the price of gold. Paper gold offers convenience, liquidity, and ease of trading, often making it more accessible for investors looking for exposure to gold without the challenges of storing physical assets. However, unlike physical gold, you don’t have direct ownership of a tangible asset, which is an important consideration for some investors.
Gold ETFs (Gold Exchange-Traded Funds)
Gold ETFs are one of the simplest and most popular ways to invest in gold without owning physical gold. These funds are designed to track the price of gold, allowing investors to gain exposure to the gold price without the need to store actual gold.
Gold ETFs are traded like stocks on exchanges, which means they are highly liquid and can be bought or sold easily throughout the trading day. Some well-known gold ETFs include SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). The main advantage of gold ETFs is the ability to invest in gold without dealing with storage or insurance costs, but the tradeoff is that you don’t own the gold. You will not have any rights to any gold. You only own shares in a fund, and the market price and liquidity for these fund shares will vary over time.
Pros:
- Liquidity: Gold ETFs can be easily traded on stock exchanges, allowing investors to buy and sell quickly.
- No Storage Worries: Since you don’t physically hold the gold, you don’t have to worry about storing it.
- Low Costs: ETFs typically have lower transaction costs compared to buying physical gold.
Cons:
- No Tangible Asset: You don’t actually own physical gold; you’re investing in a fund that tracks its price.
- Fees: ETFs charge management fees, which can diminish returns over time.
Gold Mining Stocks
Another way to invest indirectly in gold is through gold mining stocks. Instead of investing in gold itself, you invest in companies that mine and produce gold. Barrick Gold and Newmont Mining are examples of large gold mining companies that investors often consider.
The market value of gold mining stocks is influenced not only by the price of gold, but also by the performance of the individual company. This type of investment offers potential for higher returns, especially if gold prices rise sharply, but it also carries more risk due to factors such as operational issues or changes in mining costs. The geopolitical situation in the country where the mining and processing is taking place is important to consider.
Pros:
- Leverage: Gold mining stocks tend to outperform gold during bull markets because companies can scale up production.
- Dividends: Some gold mining companies pay dividends, providing income along with potential capital appreciation.
Cons:
- Higher Risk: Mining stocks are subject to operational risks, such as management decisions, mine failures, or cost overruns. Geopolitical factors must be taken into consideration.
- Volatility: The stock market can be more volatile than gold prices themselves, adding an extra dimension of risk.
Derivates, such as Gold Futures and Gold Options
For more advanced investors, derivatives such as gold futures and gold options offer a way to speculate on the future price of gold.
An gold option gives the holder a right, but no obligation, to carry out a specific gold transaction at a predetermined price on a future date or dates. It is the writer of the option that has an obligation to honor the option. Both buy options and sell options are available with gold as the underlying asset.
Gold futures contracts involve two parties agreeing to buy or sell a specific amount of gold at a predetermined price on a future date, allowing traders to bet on price movements. Leverage is often used in futures trading, meaning you can control a large amount of gold with a small initial investment.
While derivatives such as options and futures can generate significant profits, they also come with high risk. If you use leverage, both profits and losses will be amplified.
Derivatives traded on the financial markets typically come with terms and conditions that mean they will only be cash settled. If you instead want an options contract or similar that actually gives you the right to purchase and take delivery of physical gold (or sell and transfer physical gold), you need to specifically search out that type of contract.
Pros:
- Profit from Falling Prices: Derivatives can be profitable in both rising and falling gold markets, depending on the position taken. You can use them to speculate on falling gold prices without carrying out any actual short-selling of gold.
- Access to Leverage: Some derivatives are offered with leverage, allowing you to control a large amount of gold with a relatively small initial investment.
Cons:
- High Risk: Derivatives tend to be highly speculative and can result in significant losses if the market moves against your position.
- No Physical Ownership: As with ETFs, you don’t own any physical gold. You are speculating on the gold price.
- Counterparty Risk: Since you do not own any actual gold, there is counterparty risk. It is important to use reputable and well-regulated brokers.
Examples of Advantages and Risks of Investing in Gold
Advantages
- Inflation Hedge: Gold is often seen as a hedge against inflation, preserving purchasing power when fiat currencies lose value.
- Diversification: Adding gold to a portfolio can help spread risk, as gold typically moves independently of stocks, bonds, and other assets.
- Safe Haven: In times of economic or geopolitical uncertainty, gold is often considered a safe haven because it tends to hold or increase in value while other assets are declining.
Risks
- No Income: Unlike stocks or bonds, gold doesn’t generate dividends or interest. Your profit comes only from price appreciation. A notable exception would be dividend paying gold mining stocks.
- Issues With Short-selling: If you want to speculate on the gold price using physical gold, short-selling becomes extra complicated and risky. Therefore, you might not be able to profit from falling prices.
- Volatility: While gold is traditionally viewed as stable, its price can still fluctuate significantly in the short term, especially in response to global financial events.
- Premiums and Fees: Physical gold often comes with premiums above the spot price, and gold ETFs and mining stocks have management fees that can erode returns over time. Derivatives also come with costs, including broker costs.