Gold has been one of the most valuable commodities over the centuries that man has been in existence. Gold investments have due to this managed to stand out as the best type of hedge against all forms of economic instabilities in the economy, including currency fluctuations and inflation.
When most people think about investing in gold, the main thing that comes to mind is the purchase and storage of physical gold in the form of coins and bullion. There, however, exist other alternatives to investing in gold that you can also explore and profit as well. Some of the most outstanding alternatives include purchasing shares of the financially stable and promising gold mining firms, buying gold exchange-traded funds (ETFs), and purchasing options and futures contracts.
The fact the price of gold is quite stable, and that it gets even more attractive (as an investment) as the years go by, is something that has led to many investors looking for means to invest a certain percentage of their money in this precious metal. Being the safest investment, investors have relied on it to help them from the tough economic times, when other assets are performing very poorly.
Gold has remained a favorite amongst most investors owing to its general market behavior. The prices of gold have in most cases been established to steadily increase when other commodities are losing their value. Most currency-backed commodities experience very sharp rises and declines in value, which can in one way or another affect an investors’ wealth status.
If investing in gold sounds like something worth looking into, let us explore the available options
How to Invest in Physical Gold
Investing in physical gold may be slightly different from the regular stocks and bonds that most investors are used to. For starters, one has to generally deal with several dealers and insurance companies before they can finally say that their investment is all set to make them money. The three main options that a person has when it comes to investing in physical gold are:
When we talk of gold bullion, we do not necessarily have to be referring to the big shiny bars of gold. This is possibly the idea of what gold bullion that has been popularized by society. The truth, however, is that you can access gold bullion in the form of bars that range from several grams to about 400 ounces. It is, however, mostly available in the form of 1 and 10 –ounce bars.
The price of gold today ( 29 December 2020) is $1890 ( per ounce), which makes gold bullion investments quite an expensive venture. Unfortunately, unlike stocks, there is no way in which you can get your fractional share of the gold bar.
The high prices of gold lead to it being a commodity that scammers rely on to rob people of their hard-earned wealth. This is why it is always important to use a reliable dealer, and to pay the necessary fees, including insurance and storage if necessary.
If you would like to get started with gold bullion investments then you should begin keeping up with the prices of gold, so that you can jump in at the right time. Fortunately, most of the dealers in the market usually price their gold based on the most current spot prices.
Most of the gold coins you’ll found in supply weigh about one to two ounces, though you can also purchase the half and quarter ounce options as well. There are many collectible coins, which are sold in their intact state, or as damaged and worn out coins. The common ones include:
- South African Krugerrands
- Canadian Maple Leafs
- American Gold Eagles
The above coins are available in different forms.
The prices of most gold coins may not necessarily align with their gold content. You will for instance find that there are in-demand collectible coins that go for a premium price in the market. The price of an ounce of the American Gold Eagle Coin is for instance 5% higher than the price of an ounce of gold bullion.
As much as you can get good deals from the local shops, you should always strive to safeguard your money by using reputable and licensed dealers.
This is yet another approach to investing in gold that has been popularized in today’s world. You can purchase gold that you can wear, or that has been used by another person (and damaged in the process) investing in jewelry, however, carries more risk than investing in pure gold does.
For starters, you have to be aware that secondhand jewelry purchases may not be genuine, hence you can end up losing a large amount of money. You should only purchase items that are authentic since this will be something that the next buyers in line will consider. Again, if possible, always buy your jewelry from a reputable dealer, and be sure to request all documentation.
Another thing to note is that you can also end up paying a higher amount for the jewelry, in comparison to the raw value of gold, per unit. Most jewelry manufacturers will actually charge anything between 20% to about 3 times the value of raw gold.
Finally, you should always be aware of the level of purity of the jewelry (the percentage of gold in it), that you are purchasing. The level of purity is based on karats. 100% gold is equivalent to 24 karats (24K).
Investing in Gold Mining Companies
Gold mining companies that specialize in the exploration, mining, and refining processes are also bound to profit whenever there is an increase in the prices of gold. This means that you can also invest in such companies and profit from gold, without necessarily bearing as much risk as you would with the other methods.
There are gold mining companies that have extensive global operations. This means that the business factors that affect other multinational businesses also play out when it comes to the success of these companies.
This means that these companies can still remain profitable at a time when the prices of gold are falling. These companies do this by ensuring that they hedge against the decline in the prices as a normal process of their business activities. There are companies that do this successfully, but others unfortunately do not.
That said, the gold mining companies also offer investors the opportunities to own gold bullion at the end of the mining process. To get a company that will guarantee profitability, however, one has to ensure that they conduct enough research. This may actually be time-consuming, which is something that leads to most investors avoiding this option.
The thing about investing in a mining company is that you have to trust its ability to deliver good results. If the company’s performance declines, or it is shut down, then you can as well call it a wrap on your investments.
Investing in Gold ETFs and Mutual Funds
You can also make your investment income by investing in gold ETFs. The share of each ETF usually stands for the price of a given amount of gold, say a tenth of an ounce. ETFs can be bought and sold like stocks through a brokerage or IRA account.
Investing in ETFs is perhaps the easiest and most cost-effective approach for small investors, in comparison to purchasing and investing in physical gold. The minimum investment is in most cases usually the single unit price of an ETF. The average expense ratios for most ETFs are typically 0.65% less than those of other investments.
One can also own gold through a mutual fund. Investors should, however, take note of the fact that very few mutual funds are solely based on gold. Most of them have many other commodities in the investment portfolio. Some of the outstanding benefits of gold-based mutual funds are:
- Lower costs and lower minimum investment
- Diversification (since different companies are involved)
- Ease of ownership – all you need is a brokerage or IRA account
- You do not have to spend lots of time researching individual companies.
Investing in Gold futures and options
These may be the riskiest approaches to investing in gold, owing to the fact that they are speculative approaches. Futures and options are simply derivatives, hence their value is based on the underlying assets.
A futures contract exists as an agreement to purchase or sell given security for a given price at a specific date, regardless of the state of the economy or market conditions. An options contract, on the other hand, is an agreement that allows you to sell or purchase a security if it hits a certain price before a given date.
To invest in futures and options, you are required to create an account through an online broker who offers any of these vehicles. Most secure online brokerages offer these securities, so you will not have a hard time finding one. The owners of these accounts, however, require that you acknowledge the risk of investing in such derivatives.
Upon creating your account, you can start selling or purchasing the futures and options directly via the platform provided. You will in most cases be charged a commission for any futures and options trades. The commissions vary from platform to platform and from one trade to the other.
Those who choose to invest in this precious metal through this option need to be keen on monitoring their investments so that they can take action before their assets expire worthless.
In most cases, these securities include a given degree of leverage or debt. This means that investors who overuse them can experience significant cumulative losses over a given period.
Should you start investing in gold?
If you are very concerned about market forces such as inflation, and other unprecedented calamities, then you should think about gold as your safe haven. In the short term, it can be as volatile as most stocks in the market, but its value holds quite well in the long term.
Depending on your appetite for risk, you can invest in any type of gold investment, from physical gold to gold ETFs, and the more speculative futures and options. Regardless of the option that you decide to go with, most financial advisors will suggest that you do not allocate more than 10% of your investment portfolio to it.
All forms of investment come with significant risk, and gold is no different. You should therefore minimize your risk by investing through companies that educate you about your investment. We, at Gold Retired, have identified some reliable partners that you can rely on if you want to start investing in gold.
I hope you now know a thing or two about Gold Investments and that you can now make a decision as to which approach to wealth generation you will follow. If you need more guidance on how to go about investing in gold safely, do let me know in the comments section. Hoping to hear from you soon.
I wish well,
Eric, Investor and Team Member at Gold Retired!