Investors frequently look to gold as a safe haven when financial events throw the markets for a loop, such as the collapse of Silicon Valley Bank. Gold is a safe asset with a track record of gains that appeals to certain investors in light of the high rate of inflation and the stock market’s record highs.
Gold is a popular commodity among investors for a variety of reasons, and it has qualities that set it apart from more conventional assets like bonds and stocks. Some regard gold as a hedge against inflation, while others view it as a store of value despite the fact that it is an asset that does not generate cash flow.
Here are five different ways to own gold, and a look at some of the risks that come with each.
1. Gold bullion
Buying gold in bars or coins from places like Costco is one of the more fulfilling ways to own the metal on an emotional level. Although touching and viewing it will bring you satisfaction, owning more than a small portion of something has significant disadvantages as well. Keeping physical gold safe and insured is one of the biggest disadvantages.
Physical gold buyers are completely dependent on the commodity’s price increase in order to profit. In contrast, owners of businesses (like gold mining companies) can increase their company’s production of gold and, consequently, profit, which raises the investment in their enterprise.
There are several ways to buy gold bullion: from a local dealer or collector, or from an internet dealer like APMEX or JM Bullion. Gold may also be sold in pawn shops.
As you purchase, keep an eye on the spot price of gold, which is the current market price per ounce, to ensure you get a good deal. Instead of using coins, you might want to transact in bars since the collector value of a coin will probably cost you more than its actual gold content. (These are nine of the most valuable coins in the world; they may not all be made of gold.)
Risks: The largest risk is that, if you don’t keep your holdings secure, someone could physically take your gold. The necessity to sell your gold presents the second-largest risk. Getting paid the full market value for your holdings can be challenging, particularly if they are coins and you need the money right away. Therefore, you might have to make the decision to sell your holdings for a much lower price than they would otherwise fetch on the national market.
2. Gold futures
Although physical delivery is not what drives speculators, gold futures are a good way to bet on the price of gold rising (or falling). You could even take physical delivery of gold if you so desired.
The largest benefit of investing in gold through futures is the enormous leverage available. Put differently, for a comparatively small amount of money, you can own a large number of gold futures. In the event that gold futures move in the way you anticipate, you could quickly become extremely wealthy.
Risks: Investing in futures contracts gives investors a two-way leverage. If the price of gold moves against you, the broker will close the position and you will lose money, or you will be required to put up large amounts of money (called margin) to keep the contract in place. You can therefore lose a lot of money in the futures market just as quickly as you can make it.
The futures market is typically reserved for experienced investors, and not all of the big brokers offer this service. You’ll also need a broker who permits futures trading.
3. ETFs that own gold
An excellent substitute for dealing with the fast-paced and margin-requirement-heavy futures market is to purchase an exchange-traded fund (ETF) that tracks the commodity, if you don’t want the headache of holding physical gold.
iShares Gold Trust (IAU), abrdn Physical Gold Shares ETF (SGOL), and SPDR Gold Shares (GLD) are three of the biggest ETFs. These kinds of exchange-traded funds (ETFs) aim to replicate the price performance of gold less the annual expense ratio of the ETF. As of January 2024, the aforementioned funds have expense ratios of just 0.4 percent, 0.25 percent, and 0.17 percent, respectively.
The fact that ETFs are easier to exchange for cash at market value is another significant advantage of owning them over bullion. Similar to selling a stock, you can trade the fund for the going rate on any day the market is open and avoid the significant transaction expenses associated with selling physical gold. Therefore, you can trade gold ETFs from the comfort of your home and they are more liquid than actual gold.
Risks: Since ETFs expose you to changes in the price of gold, the fund’s performance should follow any changes in the metal price, again net of the fund’s expenses. Similar to stocks, gold can fluctuate in value, but these exchange-traded funds (ETFs) help you avoid the two main risks associated with physical gold ownership: safeguarding your investment and realizing its full value.
4. Mining stocks
Owning the mining companies that produce gold is another way to profit from rising prices for the metal.
Given that investors can profit from gold in two ways, this might be the best option. First, a rise in the price of gold increases the miner’s earnings. Secondly, the miner can gradually increase production, creating a twofold benefit.
Risks: You should always understand the company before making an individual stock investment. When choosing a reputable participant in the market, exercise caution as there are many extremely dangerous miners out there. Small miners and those without a producing mine are probably best avoided. And last, mining stocks can be volatile, just like any other stocks.
5. ETFs that own mining stocks
Are you not interested in learning more about specific gold companies? It might then be very wise to purchase an ETF. You will be exposed to the largest gold miners on the market with gold miner exchange-traded funds (ETFs). You won’t be too badly hurt by a single miner’s underperformance because these funds are diversified throughout the industry.
iShares MSCI Global Gold Miners ETF (RING), VanEck Junior Gold Miners ETF (GDXJ), and VanEck Gold Miners ETF (GDX) are some of the larger funds in this industry. As of January 2024, the corresponding expense ratios for those funds are 0.51%, 0.52%, and 0.39%. With the security of diversification, these funds provide the benefits of individual miner ownership.
Risks: A diversified exchange-traded fund (ETF) shields investors from the negative performance of a single company, but it does not shield investors from industry-wide events like persistently low gold prices. Additionally, exercise caution when choosing a fund because not all funds are made equally. While junior miners are more dangerous, some funds have established miners.
Why investors like gold
Global head of research at the World Gold Council Juan Carlos Artigas states, “Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversified.”
These qualities are especially important for investors:
Returns: Although it doesn’t always beat stocks and bonds, gold has occasionally outperformed them. Over time, however, its track record demonstrates significantly lower returns.
Liquidity: You can easily convert certain gold-based assets, like ETFs, into cash if you’re purchasing them.
Low correlations: Gold frequently behaves differently from stocks and bonds, so a rise in those assets may cause a decline in gold, or vice versa. Thus, gold could be employed as a hedge.
In addition, gold offers other potential advantages:
Diversification: Gold can aid in portfolio diversification, which lowers overall portfolio volatility, as it is typically not highly correlated with other assets.
Defensive store of value: Gold is a defensive investment since investors frequently turn to it when they see economic dangers.
These are some of the main advantages of gold investing, but like all investments, there are risks and disadvantages.
Although gold occasionally performs well, it’s not always obvious when to buy it. It’s hard to tell when gold is cheap because it doesn’t generate cash flow on its own. This isn’t the case with stocks, though, as the company’s earnings provide clearer signals.
Additionally, since gold doesn’t generate cash flow, investors must rely on someone else paying more for the metal than they did in order to profit from gold investments. On the other hand, business owners, like gold miners, stand to gain from both the rising cost of gold and the expansion of their company’s profits. Thus, there are numerous ways to use gold for investment and profit.
Not every investor is interested in gold, and some prefer to stick with betting on profitable ventures rather than expecting someone else to pay more for the precious metal. This is one of the reasons why renowned investors like Warren Buffett advise against purchasing gold and in favor of investing in cash-flowing companies. Additionally, owning stocks or funds is easy, and because of their high liquidity, you can quickly turn a position into cash if necessary.