— Jordan Roy-Byrne CMT, MFTA (@TheDailyGold) July 10, 2021
Gold has been a tried-and-true investment option for those who want a safe alternative to traditional stocks and bonds. It has weathered unstable markets and unpredictable economic environments. For any investment portfolio, many financial experts suggest that gold should be a small part of it. It can be in the form of an exchange-trade fund or in futures.
So, what does it really take to invest in gold?
When you hear people say that they invested in gold, they probably mean they own it through one of these methods:
– physical gold coins or bars
– shares in a gold mine
– ETFs, or exchange-traded funds
Based on a report from the World Gold Council, the amount of gold that has been mined in this world is about 200,000 metric tons, with an approximate total worth of $11 trillion at current market prices. Here we have outlined the basic ways that you can make a reliable gold investment.
What are the reasons to invest in gold?
The top reason for investing in gold is a way to protect your portfolio when the markets are unstable. However, gold prices can be affected by many factors, and prices do fluctuate even though people see gold as a safe haven for their money.
Whenever there is news about political and economic upheavals, the price of gold tends to go up because stock prices tend to suffer when the market is unstable.
Gold can also be used as a protection during inflation. When the price of consumer goods goes up, price of gold also goes up, thus boosting the value of your gold holdings. The worth of a dollar also declines during inflation. That means foreign investors take advantage of the weak dollar to purchase gold.
Gold is also used as a hedge against declining interest rates. When interest rates go down, government bonds are less attractive. That increases the appeal of gold investments as a safer haven. And unlike bonds, it does not pay out regularly to investors.
Gold investors monitor the movement of interest rates based on inflation trends and determine how it will affect prices.
How can you purchase physical gold?
You can purchase gold coins or bars, or bullions. These are sold by global dealers such as JM Bullion and AMPEX. You can place orders online through their websites.
The dealers have various gold products that they sell directly to consumers. They take measures to verify their gold products’ authenticity. They deal with the U.S. Mint, Perth Mint (https://www.perthmint.com/), the Royal Canadian Mint, and other such official agencies. The prices of the gold products are adjusted to the market price of gold. Recently, a gold coin that weighs one ounce costs around $1,500 to $1,900 because of the fluctuations in the gold market.
How to invest in gold funds
You can purchase gold ETFs, or exchange-traded funds. This has been a popular method for gold investors. You do not own the physical gold, but you own a fund that monitors gold prices. You can buy gold ETFs generally through your brokerage account.
The largest gold ETF is currently SPDR Gold Shares. When you purchase shares in this or other gold ETFs, you are purchasing part of a trust. The trust holds assets which are gold bars. So, the price of the ETF shares move with the gold prices. You also generally pay a yearly fee when you invest in ETFs.
Most of the larger gold ETFs own physical gold, but other gold ETFs can hold gold future contracts. This means their investors have the obligation to purchase gold at a specific price on a specific date. Other ETFs also utilize a mix of derivatives and debt in order to monitor the movement of gold prices.
How are gold options and futures traded?
Gold futures are legal agreements that offer buyers the obligation to buy or sell gold at a pre-determined price on a pre-determined date. Investors in gold futures speculate how gold price will move in the future. Gold mining businesses invest in futures as a protection from possible price declines in the future.
When the gold future contract expires, the investor usually is expected to take possession of a specific amount of physical gold. In order to avoid that obligation, a lot of gold investors will sell their contract before its expiration, then purchase a contract for a future month. This “rolling” approach keeps the investor from getting unfavorable returns. When gold futures expire, instead of physical gold, some contracts can be settled with cash.
Gold options are much like gold futures, but instead of being an obligation, the investor is given the choice of buying or selling gold at a future date at a specific price. Options and futures are actively traded everyday globally through brokerages like TD Ameritrade and Charles Schwab.
Investing in gold mining stocks
How about buying shares in a gold mine? Brokers sell shares in gold mining companies like Barrick Gold Corp. and Newmont Corp. Although the price of gold mining stocks move with the price of gold, these stock prices have more extreme fluctuations.
What this means is that when the market price of gold moves up or down, the gold mine stock prices go up faster but can also lose value very quickly. Some mutual funds and ETFs also include shares of gold mines, so you can invest that way.
All investments come with pros and cons, plus a level of risk. If you prefer not to own physical gold, you can consider purchasing stocks in a gold mining company. If you want protection against inflation, owning physical gold in the form of bullions, coins, or gold jewelry is an option. If your goal is to leverage gold to profit from potentially higher gold prices in the future, then investing in the futures market would be your approach. Just keep in mind that speculation always comes with a fair level of risk.