When economic times get tough or financial events such as the blow-up of Silicon Valley Bank throw the markets for a loop, investors often turn to gold as a safe haven. With high inflation and the stock market trading well below its highs, some investors are looking for a safe asset that has a proven track record of gains, and that’s gold.
Investors like gold for many reasons, and it has attributes that make the commodity a good counterpoint to traditional securities such as stocks and bonds. They perceive gold as a store of value, even though it’s an asset that doesn’t produce cash flow.
Some consider gold a hedge against inflation, given the Fed’s actions to stimulate the economy – such as near-zero interest rates – and government spending, which can send inflation racing higher.
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4 Ways to Invest in Gold
1. Gold Bullion
Investing in physical gold can be a satisfying way to own this valuable commodity. Whether it’s in the form of bars or coins, the ability to hold and admire your investment is a big plus. However, there are also drawbacks that need to be considered, especially if you own a significant amount of gold. In this article, we’ll take a look at how to purchase and protect your investment in physical gold.
There are several ways to purchase gold bullion. One option is to buy from an online dealer such as APMEX or JM Bullion. You can also find local dealers or collectors, and even pawn shops that sell gold. When buying, it’s essential to note the gold spot price, which is the current market price per ounce. This information will help you negotiate a fair deal.
When purchasing gold bullion, you can choose between bars or coins. It’s generally advisable to go for bars if you’re looking to invest purely in gold content rather than collector value. Coins often come with a higher price tag due to their collector value, which can take away from the investment’s pure gold value.
While investing in physical gold can be satisfying, it also comes with some risks that need to be considered. The biggest risk is the potential for theft or loss, as gold is a valuable commodity that can be targeted by thieves. It’s essential to keep your gold holdings protected and insured. Another risk to consider is the difficulty of selling your holdings quickly, which can result in settling for less than the full market value.
2. Gold Futures
If you’re looking to speculate on the price of gold rising (or falling), gold futures might be worth considering. It’s a way to invest in gold without actually taking physical delivery of the metal, which isn’t the primary motivation for most speculators.
The most significant advantage of investing in gold futures is the leverage that comes with it. You can own a lot of gold futures for a relatively small sum of money. If the gold futures move in the direction you predicted, you can make a lot of money quickly.
However, the leverage that comes with gold futures also poses a significant risk. If the gold price moves against you, you’ll need to put up substantial sums of money to maintain the contract or face losing your investment.
This risk makes the futures market suitable for experienced investors who can tolerate high-risk investments. Additionally, not all brokers provide futures trading services, so it’s essential to find a broker that offers this option.
3. Gold ETFs
If you want to invest in gold without owning physical gold or dealing with the fast pace of the futures market, then buying an exchange-traded fund (ETF) that tracks the commodity is an excellent alternative.
Three of the largest ETFs in the market are SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Physical Gold Shares ETF (SGOL). The objective of these ETFs is to match the price performance of gold, minus the annual expense ratio. As of March 2023, the expense ratios for these funds are relatively low at 0.4%, 0.25%, and 0.17%, respectively.
The other significant benefit of investing in a gold ETF is that it’s more readily exchangeable for cash at the market price. You can trade the fund any day the market is open for the prevailing price, similar to selling a stock. This makes gold ETFs more liquid than physical gold, and you can trade them from the comfort of your home.
While investing in gold ETFs is a hassle-free alternative, it still comes with some risks. ETFs give you exposure to the price of gold, so if it rises or falls, the fund should perform similarly, minus the cost of the fund itself. However, like stocks, gold can be volatile, making these ETFs subject to market fluctuations.
4. Gold Mining Stocks
Investors who want to take advantage of rising gold prices can also invest in the mining businesses that produce the precious metal. This investment option provides a two-fold advantage as investors can profit in two ways from gold. First, if the price of gold rises, the miner’s profits rise too. Second, the miner can increase production over time, creating a double whammy effect.
Investing in gold mining companies is an excellent alternative for investors looking to diversify their portfolio. It’s a way to benefit from rising gold prices without having to own physical gold or navigate the fast pace and risk of the futures market. Additionally, owning mining businesses also provides the potential for dividends and capital appreciation.
As with any investment in individual stocks, it’s crucial to research and understand the business carefully. Some mining companies are riskier than others, so it’s best to choose a proven player in the industry. It’s advisable to avoid small miners and those that do not have a producing mine yet. Finally, like all stocks, mining stocks can be volatile, making this investment option subject to market fluctuations.
How to buy gold stocks, mutual funds and ETFs
Investing in gold can be a smart move for diversifying your portfolio. Here’s a quick guide to help you get started:
Step 1: Open a Brokerage Account
To buy gold stocks, mutual funds, or ETFs, you’ll need a brokerage account. You can easily open one online by following a step-by-step guide provided by the broker. Once you’ve opened an account, you’ll need to fund it with some money to get started.
Step 2: Pick Your Investments
Once your brokerage account is funded, you can start exploring the gold-related assets you’d like to invest in. You can pick individual gold stocks or ETFs, which are purchased for their share price that can range from $10 to four figures. Alternatively, you can invest in mutual funds, which have a minimum investment requirement that is often $1,000 or more.
Step 3: Place Your Order
Once you’ve made your selection, you can place an order for your chosen gold investment through your broker’s website. Keep in mind that the process for buying gold stocks, mutual funds, and ETFs is similar to buying other types of securities, so you may need to set a limit or stop order to manage your investment risk.
Tips for buying physical gold
1. Find a trustworthy dealer
Buying and selling gold can be a tricky business, with pushy salespeople and potential scams lurking around every corner. It’s essential to take precautions to avoid getting ripped off and make a wise investment. Here are some tips to help you find a reliable dealer for buying physical gold.
Firstly, always do your research ahead of time. Look for reviews and feedback from other customers to gauge the dealer’s reputation. Additionally, use the National Futures Association’s Background Affiliation Status Information Center to check the dealer’s background and see if they are trustworthy.
It’s also essential to check the dealer’s certifications and accreditations. The most reputable dealers will be members of professional associations such as the Professional Coin Grading Service (PCGS) or the Numismatic Guaranty Corporation (NGC). These organizations provide assurance that the gold being sold is authentic and of the highest quality.
Another way to find a reliable dealer is to ask for recommendations from trusted friends or family members who have experience in buying gold. Word-of-mouth recommendations are often the most reliable source of information.
Lastly, beware of dealers who use high-pressure sales tactics or offer prices that seem too good to be true. Reputable dealers will provide transparent pricing and won’t pressure you into making a purchase.
2. Watch out for fees
If you’re considering buying physical gold, it’s important to be aware of the fees that gold dealers may charge you. These fees are typically added on top of the “spot price” of gold, which is the price at which gold is traded on commodities exchanges. The premium you’ll pay will typically include a dealer’s fee, as well as charges for manufacturing and distribution.
To avoid getting ripped off, be sure to do your research before making a purchase. Look for reputable gold dealers who are transparent about their pricing and fees. Compare prices from multiple dealers to make sure you’re getting a fair deal.
When comparing prices, be sure to take into account all of the fees and charges associated with the purchase. Some dealers may advertise a low price for gold, but then tack on additional fees at checkout. Make sure you understand exactly what you’ll be paying before you make a purchase.
Another way to avoid hidden fees is to buy gold in larger quantities. Many dealers offer discounts for bulk purchases, so if you’re planning to buy a significant amount of gold, it may be worth it to shop around for the best deal.
Finally, be aware that there may be additional fees associated with storing your gold. If you’re buying physical gold, you’ll need to find a safe place to store it, which may involve renting a safe deposit box or paying for a secure storage facility. Make sure you factor these costs into your overall budget.
3. Look for secure storage
Gold is a valuable commodity, which unfortunately makes it a target for theft. That’s why it’s crucial to anticipate storing your gold somewhere safe.
There are a few options for storing your gold, depending on your needs and budget. One option is to invest in a high-quality safe. A good safe will not only protect your gold from theft but also from fire, flooding, and other natural disasters. Of course, a high-quality safe can be expensive, but it’s worth the investment if you have a significant amount of gold.
Another option is to rent a safety deposit box at a bank. Safety deposit boxes are typically secure, as they are stored in a bank vault. However, they can also be expensive, with prices ranging from $30 to a couple of hundred dollars per year, depending on their size.
If you choose to store your gold at home, be sure to take extra precautions to protect it. This may include installing a home security system, hiding your gold in a well-concealed location, and not sharing the location of your gold with anyone outside of your immediate family or trusted advisors.
4. Consider buying insurance
Buying physical gold can be a smart investment, but it’s important to remember that with any investment comes risk. That’s why it’s worth considering purchasing insurance to protect your gold from loss or damage.
Insurance is an additional cost, but it can provide peace of mind knowing that your investment is protected. If you do decide to purchase insurance, make sure that your policy covers the exact type of asset you have. Some policies may only cover certain types of gold, such as bullion or coins, so be sure to read the fine print before purchasing.
It’s also important to choose a reputable insurance provider. Look for a provider with a strong reputation and a history of paying out claims promptly and fairly.
When deciding whether to purchase insurance, consider the value of your gold investment. If you have a significant amount of gold, the cost of insurance may be worth it to protect your investment. On the other hand, if you only have a small amount of gold, the cost of insurance may not be worth it.
Pros and cons of investing in gold
- Potential for Higher Returns: Although gold doesn’t always outperform stocks and bonds, it has historically proven to be a profitable investment over certain periods. In other words, while it doesn’t always beat other investments, gold has the potential to provide higher returns.
- High Liquidity: One of the advantages of investing in certain types of gold-based assets is that they can be easily converted to cash. This means that you can quickly and easily sell your gold investments and obtain cash when you need it.
- Hedge Against Volatility: Gold often behaves differently from stocks and bonds, meaning it may go up when they go down and vice versa. As a result, gold can be a useful hedge against market volatility. Adding gold to your investment portfolio can help reduce the overall risk of your portfolio.
- Diversification: Because gold typically has a low correlation with other assets, such as stocks and bonds, it can help diversify your portfolio. This means that adding gold to your investment mix can help to reduce the overall volatility of your portfolio.
- Defensive Investment: Investors often turn to gold as a defensive investment during times of economic uncertainty. This is because gold has historically retained its value during times of market turbulence. So, when there are threats to the economy, investors tend to retreat to gold as a safe haven.
- Lack of Clear Signals: Determining when to purchase gold can be challenging because it doesn’t produce cash flow. Unlike stocks, where there are clearer signals based on the company’s earnings, it’s difficult to determine when gold is cheap. This lack of clarity can make it challenging for investors to time their entry into the market correctly.
- No Cash Flow: Gold doesn’t produce cash flow, which means that investors must rely on someone else paying more for the metal than they did to make a profit. In contrast, owners of a business, such as a gold miner, can profit not only from the rising price of gold but also from the business increasing its earnings. This means that investing in gold isn’t the only way to profit from rising gold prices.
Investing in gold may not be the best option for everyone. Some investors prefer to invest in businesses that generate cash flow rather than relying on the value of gold to increase. In fact, even legendary investors like Warren Buffett discourage investing in gold and recommend buying cash-flowing businesses instead.
Moreover, owning stocks or funds is a hassle-free way of investing, and they are highly liquid. This means you can easily convert your investment into cash if needed. So, if you are not comfortable with taking risks, investing in gold may not be the right choice for you. However, if you are willing to take risks and believe in the potential of gold, then it may be worth considering as part of a diversified investment portfolio.
Ultimately, the decision to invest in gold should be made based on your personal financial situation and risk tolerance.