How to Invest in Gold – All the Ways You Can Diversify
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History is proof that gold has been the world’s choice of currency and whether it is a war or inflation, it continues to remain the top choice today. Most investors today buy gold as a hedge in case of political unrest and inflation. Investment advisors recommend having a portfolio allocation in commodities including gold so as to balance the overall portfolio risk. According to the World Gold Council report Gold Demand Trends 2021, the global gold demand increased to 10% in 2021 and hit 4,021 tonnes. The demand was driven by the Central Bank purchasing gold in the fourth quarter of 2021 mainly in China and India.
If you have decided to add gold to your investment portfolio, there are several options to choose from. We will cover all the opportunities in this article including mutual funds, bullion, jewelry, futures, stocks, and mining companies. However, only futures contracts, bullion, and some specialty gold funds provide a direct opportunity to invest in gold. A direct way to hold gold is to buy physical coins or gold bars but they need to be stored in a safe place and are illiquid. To invest in gold indirectly, consider gold mining stocks and mutual funds.
In this article
Gold Investment Options
Gold bullion
The best and a very common way of owning gold directly is gold bullion. A lot of people think of them as gold bars. But gold bullion is any form of pure or nearly pure gold that carries a purity and weight certification. It includes bars, coins, etc., of any size. Owning gold bars may seem attractive but their large size could make them highly illiquid and difficult to sell.
If you have a large gold bar costing $50,000 as your holding in gold and want to sell 20% of it, you will not be able to cut the bar and sell. But small-sized bars and coins can offer high liquidity which is why they are very common among investors.
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Gold coins
Sovereign governments around the world issued huge quantities of gold coins for many years in the past. They are also purchased by investors from private dealers who pay a premium ranging from 1% to 5% on the gold value, however, it can increase as the gold price increases.
The benefits of bullion coins are their easy availability and quick comparison of prices in financial publications. They are also minted in various smaller sizes which adds to the convenience of buying and owning them. If you want to invest in gold coins, stock the widely circulated ones and keep the collectibles or rare coins for the collectors.
Some popularly circulated gold coins are the Canadian Maple Leaf, the U.S. Eagle, as well as the South African Krugerrand. The only problem with gold bullion is the insurance and storage costs which are relatively high. That said, investing in gold bullion is investing in gold’s value, and every dollar change in the price of gold will change the value of your holdings.
Gold mutual funds and ETFs
A great alternative to gold bullion is to invest in mutual funds or exchange-traded funds (ETFs). Every share of the specialized instrument will represent a specific amount of gold and the funds can be bought and sold just like stocks, through your online brokerage account or the . Thus, it is easier and cost-effective as compared to owning and holding the bars or coins directly, especially if you are a small investor. The minimum investment is the cost of a single share of the ETF and the expense ratios of the funds are low as compared to the expenses and fees on other investments.
Several mutual funds own gold companies and gold bullion in their portfolios but only a few mutual funds will solely focus on gold investing. The top benefits of investing in gold mutual funds and ETFs are the minimum cost and low minimum investment, you can easily make an investment through the brokerage account while enjoying high diversification among the different companies.
Many funds also invest in the mining companies' indexes; some are tied to the gold prices but many others are actively managed. Most the mutual funds are actively managed but ETFs follow a passive index-tracking strategy and have low expense ratios. Gold mutual funds like the Gold and Precious Metals Fund are managed by professional investors. If you are a beginner gold investor, gold mutual funds and ETFs are an easy and safe investment option.
Consider the SPDR Gold Shares ETF, it holds deposit receipts as well as physical gold. On the other hand, there is VanEck Vectors Gold Miners ETF which is a passively managed fund focused on the underlying stocks of gold mining companies.
Gold ETNs
An exchange-traded note (ETN) is a combination of bonds and ETFs. However, it does not generate regular interest as bonds do nor does it hold the physical commodity. The value of the ETN is based on the market index; it is a debt note which will rise or fall in value based on the performance of gold. Gold ETNs are issued by financial institutions and are useful for traders, not for long-term investors.
Gold futures and options
A future is a contract to purchase or sell a certain amount of item, in this case, gold on a certain date in the future. They are not shares but are traded as a contract and represent a specific amount of gold. Futures are ideal for experienced traders since the amount can be large. A lot of people use futures since they have low commission and low margin requirements as compared to basic equity investments. Many contracts are settled in dollars and many others in gold. Hence, you need to focus on the specifications of the contract in order to avoid taking the delivery of a large amount of gold on the date of settlement.
The options on futures are another alternative to investing in a futures contract. It will give you the option of a right to purchase the futures contract in a specific time frame, at a specific, pre-determined price. This will leverage your original investment and limit the losses to the price paid. If you buy a futures contract on margin, it will require more capital than the amount you originally invested if the losses mount. Options on futures are different from futures investment since it is based on the present value of gold.
But there is a downside. You need to pay a premium on the value of gold if you want to buy the option. Futures and options are volatile in nature which is why they might not be suitable for all investors. However, futures are also the cheapest way to purchase and sell gold when you are investing large amounts.
If you want to invest through futures contracts, you need to follow the holdings so that you can roll over, sell or exercise the option before it expires. Each of the investment options includes some amount of leverage so if you overuse them, your losses mount significantly.
Gold mining companies
There are several companies that specialize in mining as well as refining and they profit from the increase in the price of gold. By investing in these companies, you can effectively profit from gold and carry low risk.
Some of the biggest gold mining companies have extensive global operations. Hence, they still show a profit in times of a dip in gold prices. They do this through hedging against a dip in gold prices as a regular part of their business but many companies do not do this. Even so, most mining companies provide a safe way to invest in gold indirectly. However, it is important to research and select the individual companies. You can start investing using your online brokerage account. The top stocks in the sector are:
- Barrick Gold Corp. (GOLD): Located in Toronto, the gold mining giant has operations across 13 countries around the world.
- Newmont Corp. (NEM): The gold mining company is the largest in the world and is located in Colorado. They have mines in Africa, North America, and South America.
- Kinross Gold (KGC): The gold and silver mining company in Canada is a mid-cap producer and has operations around the world.
You must keep in mind that the performance of gold stocks is correlated with the gold price but is also based on the stock market movement and the company’s current expense and profitability. This means you will invest in gold companies that carry similar risks to investing in another stock. The volatility in single stocks will be higher compared to that of investing in diversified funds.
Gold jewelry
More than 40% of the global production of gold is used for jewelry. Since the demand for gold is growing annually, the demand for gold specially for the production of jewelry is also increasing with time. In contrast, gold jewelry buyers have shown some price sensitivity and they tend to buy less when the price of the gold is rising swiftly. The purchase of jewelry at retail prices involves a significant markup over the underlying value of gold.
It could be as high as 400% but if you do not want to pay for the markup, you can consider buying jewelry at an auction house. However, you will need the skills and knowledge to identify valuable pieces. You must also know the purity of your jewelry or what percentage of gold it is. The purity is calculated based on karats and 24 karats mean 100% gold. Low purity will decrease the value of the precious metal.
Jewelry ownership is an enjoyable way to own gold, even if it is not the most profitable. It is beautiful and can be worn by you while you enjoy the capital appreciation over the years.
Pros and cons of investing in gold
Pros
- Diversification. Gold helps diversify your portfolio and reduce risk since it is a low-risk option. You can achieve your personal finance goals through a well-diversified portfolio.
- Hedge against inflation. Gold investment can help protect your wealth from losing its value in times of inflation.
- Safe haven. Gold is and has always been high in demand. It is a safe haven in case of difficult times.
- Easy to get started. Investing in gold is easy and hassle-free if you own an online brokerage account. It is less hassle than choosing stocks or property.
Cons
- Low capital gains in the short term. Buying gold tends to generate low capital gains in the short term as compared to other investment options like stocks or real estate.
- Storage. If you own physical gold, you will have to handle the storage costs. It could become a regular expense for you.
- Does not generate regular income. Unlike property that can be leased to generate cash flow, gold does not generate regular income for you.
One place for all your investing
Options Trading
- Get up to a $0.18 rebate
- No commission or per-contract fees
High-yield cash
- Earn 5.1% APY*
- No fees. No subscription required.
Bonds
- 6% Yield or more
- Explore thousands of bonds yielding 6%+
The bottom line
If you want to have direct exposure to gold, you can consider investing directly in bullion. It will offer a level of security but you will have to pay a premium over the underlying value of gold in addition to incurring the cost of storage. Those who are aggressive may want to consider futures and options. But you need to be aware that the investments are derivatives of the price of gold and can see ups and downs, especially when made on a margin. But futures are an efficient way to invest in gold, however, the contracts must be rolled over regularly as they expire.
It is ideal to consider gold-focused mutual funds and gold ETFs over jewelry since they are a safe and convenient way to invest in gold. Very few investments have rivaled gold in popularity as a hedge in times of trouble. Whether it is a political issue, pandemic, war, or currency fluctuations, nothing has stood its ground like gold. It is a safe haven.
When you think of gold, do not limit yourself to just buying physical gold like bars or coins. Instead, consider the alternatives like ETFs, gold stocks, or mutual funds in your investment strategy to make the most of the rising gold prices. Regardless of your risk appetite, financial advisors recommend you allocate only 10% of the investment portfolio to gold investments.
All types of investments carry a certain amount of risk and gold is no different. However, it is much safer compared to several other investment options.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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