Is physical gold better than gold stocks? Which of the two options can benefit you most as an investor who is trying to invest for retirement? If these are some of the questions that have been at the top of your mind, then you are in the right place, since I will take you through what you need to know to make a solid decision. Read on till the end of this post to find out more.
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There is a significant distinction between buying actual gold and buying gold stocks. When you invest in gold, you’re usually investing in bullion, which means you’re buying the precious metal itself in the form of gold bars or coins. When you invest in gold stocks, on the other hand, you’re buying a stock like any other.
Gold stocks are generally linked to the price of physical gold, but they are also susceptible to other types of risk, as well as the stock market as a whole. So, which of these gold investment methods is better? That, of course, is dependent on your specific circumstances, such as your investment objectives and risk tolerance. Let’s look at the various ways you can invest in gold.
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Options for Investing in Gold Stocks
You can invest in gold stocks in a number of different ways (vs. physical gold). Your primary options are as follows:
- Gold certificates
- ETFs that are based on mining stocks
A gold mining stock is a share of a company that engages in gold mining. It’s a liquid investment that may be bought and sold on a stock exchange like any other stock.
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ETFs that invest in gold
A gold exchange-traded fund (ETF) is a fund that, like any other ETF, trades on a stock exchange. On the other hand, a gold ETF invests in a number of gold mining firms. It, like other ETFs, provides immediate diversification by spreading your risk across numerous companies.
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Gold certificates
Because the dollar is no longer backed by gold, this kind of gold investment isn’t as popular as it once was. A gold certificate, which isn’t strictly a stock, is an official document that proves you own gold that isn’t in your possession. On the other hand, your investment may become worthless if the certifying firm goes bankrupt.
The benefits and drawbacks of gold investments
Gold securities, like any other financial asset, offer both advantages and disadvantages.
Advantages of Gold Securities
Securities, in addition to some of the usual advantages of gold ownership, provide:
1. Liquidity
Gold securities are obviously easier to buy and sell than bullion because they trade on major exchanges. Aside from any administration or account fees your broker or fund manager may charge, there are no storage costs.
2. Returns that are compounded
While miner payouts are often modest at best, they are better than receiving no dividends at all, as you would with real gold. There’s also the risk that the stock price will rise.
3. The initial investment is minimal
Mutual funds and exchange-traded funds (ETFs) are the most cost-effective approach to investing in general.
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Drawbacks of Gold Securities
1. Volatility
Operating expenses, reserves, and management all have a role in a miner’s performance, just as they do in any other business. As a result, stock prices are typically more volatile: When gold prices fall 10%, gold stocks often fall 15%.
2. Risks that are systemic
The stock performance of a gold mining business reflects the political and economic situations in its home nation. Africa, Russia, and Latin America are home to some of the largest operations, which have seen their fair share of volatility and are frequently avoided by socially responsible and institutional investors.
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3. You are not the owner of the gold
Gold securities aren’t as pure a bet as they formerly were. They represent physical gold, but you don’t have the authority to exchange them for it. As a result, they don’t offer the same level of security as gold against a paper currency or financial market crash.
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Investing in Physical Gold
Physical gold (as opposed to paper gold) can be purchased in two ways:
- Gold coins
- Gold Bars
Gold Bars
Gold bars are divided into two categories: cast gold bars and minted gold bars.
Minted gold bars are formed by pouring molten gold over a long strip of metals, then cut into bars. Cast gold bars are made in a mold, whereas minted gold bars are made by pouring molten gold onto a long strip of metals, which is then cut into bars.
Between the cast and minted gold bars, there is a slight texture and aesthetic variation. Cast gold bars are rougher and less perfect, whereas minted gold bars are shinier, smoother, and more perfect-looking — and more like you’d expect a gold bar to seem.
The minted bars’ attractive look, along with the fact that they are frequently stored in their original packaging, helps them keep their appeal and value over time.
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Gold Coins
Investing in gold coins, rather than gold stocks, is another option to get actual gold. You’re probably thinking of the kind of coins you’d find in a pirate’s treasure in a fantasy movie. Gold coins, on the other hand, are quite genuine. Gold coins are produced in a number of mints around the world and are typically accepted as legal tender. This is due to the fact that gold coins frequently have a face value. The value of the real gold that makes up the coin, on the other hand, is frequently far more than the face value, rendering the face value largely unimportant.
Gold coins can have added value as collections in addition to their function as a store of money. This is especially true with gold coins struck before 1933 in the United States (which was the year gold coinage ceased its circulation in the U.S.)
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Physical gold’s advantages and disadvantages
For many people, possessing gold is all about having physical possessions. The majority of the intrinsic investment benefits are found in the metal itself.
Physical gold’s benefits
1. Hedging against inflation
Gold, as a tangible asset, is said to have an intrinsic worth that always reflects the cost of living, according to proponents.
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2. Stocks have a counterweight
Gold, like other commodities, works as a counterfoil to equities, moving in the opposite direction of the stock market most of the time. Consider the following example: When the subprime mortgage crisis hit in 2008, ushering in the Great Recession, gold, which had been trading in the $400-600 range for years, rocketed to $1,000 per ounce and stayed there for the following three years.
3. A safe haven
In uncertain times or when there is socio-political unrest, gold is viewed as a safe haven. For example, after the 2016 Brexit vote, its price increased by more than 10% in a month. Owning gold appeals to those who are concerned about the collapse of global markets or other risks to a government’s capacity to back its currency. Physical gold cannot be hacked or erased. Gold is impervious to natural disasters and will not deteriorate over time.
Physical gold’s drawbacks
1. Storage costs a lot of money
Storing gold at home exposes you to significant theft and loss concerns. Keeping it in a commercial facility comes with storage expenses, which are frequently determined by the size and value of the assets (anywhere from 0.5% to 2%). If you’re not storing your gold at a professional facility, you’ll also need to insure it – another recurring cost.
2. Illiquid.
A click of a button or a phone call to a broker will not sell physical gold. Even with dealers acting on your behalf, a sale can take days or weeks to complete, not to mention the shipping arrangements.
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Frequently Asked Questions on “Physical Gold Vs. Gold Stocks?”
1. What is the most effective technique for a beginner to gain exposure to gold?
There is no such thing as a perfect method to possess gold: each option comes with its own set of trade-offs. However, for most people, buying stock in streaming and royalty firms is definitely the best plan. What to invest in, on the other hand, is only one part of the puzzle: There are a few more things to think about.
2. How much money should you put into gold?
Because gold is a volatile investment, you shouldn’t invest a substantial portion of your assets; it’s advisable to keep it under 10% of your whole stock portfolio. The actual advantage, for both new and seasoned investors, is the diversity that gold can provide. Once you’ve established your gold position, make sure to rebalance your portfolio on a regular basis to maintain the same level of relative exposure to gold.
3. When is the best time to buy gold?
It’s advisable to buy in little amounts and spread them out over time. When gold prices rise, so do the prices of gold-related stocks. This may result in low short-term returns, but it doesn’t negate the long-term benefits of keeping gold to diversify your portfolio. You can dollar-cost average into the position by buying a bit at a time.
4. Is it possible for me to invest in gold jewelry as well?
Individuals who own gold jewelry can also invest in gold. Because the cost of the jewelry often exceeds the value of the underlying gold, this is the least effective way to invest in gold. Also, to pay the jewelry designer and jeweler, there is a significant markup.
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That will be all for today’s post in which we have looked at whether physical gold is better than gold stocks. I hope that you enjoyed it, and found it beneficial and that you now know what to do. If you still have more questions with regards to this post, drop them in the comments section and I will get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!
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