Gold is a precious and sought-after metal on Earth, with many uses, including making jewelry, decorations, and an investment option. Gold is a preferred investment in various parts of the world, with the gold market one of the largest globally. Although the gold market is large, most people do not understand how gold is traded. The gold market consists of numerous participants, including physical players, financial intermediaries, and the investor. Physical players are the producers and fabricators, while intermediaries are mainly financial institutions, such as banks.
However, it is the investors who make gold investments possible, and they have many investment options.
Why Invest in Gold?
From buying physical gold to paper gold, there are a plethora of gold investment options. Too many options may confuse you as a potential gold investor, leaving you wondering which investment option suits you. However, that is a lesser problem than not knowing why you should consider the yellow metal as an investment.
There are many reasons why you should invest in gold. The fact that most, if not all, Central Banks around the world maintain part of their reserves in gold is proof enough that the yellow metal is not your ordinary metal. Gold is scarce but highly liquid and can play an essential role in your investment portfolio. As a potential gold investor, you should know that;
- Gold, being a mainstream asset, is driven by investment demand and other factors.
- Gold acts as a diversifier
- Fiat currencies, such as the US dollar, will always fall in value against gold
- Gold provides better returns than most financial assets
- Gold can protect you from possible losses.
Let’ delve deeper into the reasons why you need to invest in gold. When Central Banks maintain part of their reserves in the form of gold, what they are doing is protecting their currency purchasing power. They want their currencies to remain competitive in the global market. Gold often offers some protection level during an economic crisis, such as inflation, deflation, or fall in currency value. As the rate of inflation increases, the value of gold will also increase. That is why most people resort to trading in gold when the economy isn’t doing so well.
During periods of uncertainties, such as the current pandemic or political instability, your first reaction would be to stockpile some of the basics like foodstuffs. But, you will most likely stockpile goods that can stay fresh for long and not the perishable ones like tomatoes. The same applies to gold. During an economic crisis, most people will use their local currencies to purchase gold, increasing value.
Investing in gold enables you to have a diverse investment portfolio comprising of other assets. How will you benefit from this? Well, during a crisis, the value of some of your stocks will decline. However, the value of gold will likely increase during this period, offering you the much-needed protection. Because returns from gold investment can be relatively high, it can cover other investment losses.
The number one motive for getting into any business is to make better returns. Investing in gold, especially sovereign gold bonds, is one of the best ways of getting better returns. Economic factors such as demand and supply affect the gold price in the global market. The world gold supply is getting smaller due to the decreasing number of mines, but the demand is increasing. This means that gold prices may increase in the future. So, the best time to invest in gold is now if you want better returns in the future.
How to Invest in Gold
Now that you already know why you need to invest in gold, the other huddle you need to deal with is how to start investing. Some people consider the process of investing in gold as complicated and confusing. But, this is far from the truth. This is how you invest in gold;
Step one: Decide how much you want to invest.
Although there is no limit to investing in gold, some investment options have the minimum investment limits, meaning that you cannot invest less than the minimum amount. However, experts recommend that your gold investment represents about 20% of your overall portfolio because gold is a volatile commodity. If you are a small investor, it is recommended that you invest at most 10% of your money.
Step two: Decide your investment option.
There are modern and conventional gold investment options. There are different products you can use to achieve your investment objectives. It would be best to consider an investment option appropriate to your circumstance and the professional advice you may get. Before deciding on the gold investment option, you need to review all the investment products, their return profiles, possible risks, fees charged, and liquidity characteristics. Below are some of the gold investment options that you can consider.
Buy Physical Gold
Physical gold accounts for about 67% of the annual investment gold demand and about 25% of the overall global gold demand. Physical gold is demanded in various forms, including coins, bars, jewelry, and other gold forms.
Gold coins and bars come in various denominations and fineness. The fineness is usually measured in carats or gold parts per thousand. The standard coin denominations are one troy ounce, ½, ¼, 1/10, and 1/20. If you want to invest in gold bars, you can buy in denominations such as 1,000, 100, 50, 20, 10, and 1 gram. Most Central Banks and other institutions rely on the London Gold Delivery bar, which is the standard for clearing London’s gold bar. This gold bar often weighs 400 troy ounces.
When buying physical gold, you will have to pay a premium of the spot gold price. However, you need to bear in mind that if your investment size is smaller, you will pay a larger premium per ounce. Also, a larger investment may involve additional expenses, such as storage and insurance.
Buying physical gold can be tricky, especially if you do not know how to go about it. This is because of the many gold scammers outside there. Therefore, great diligence and care are required. Here are steps to follow if you want to buy physical gold.
- Decide the form of gold you want to purchase. You can choose gold coins, bars, jewelry, or other forms.
- Find a reputable and credible gold dealer. Check with relevant authorities, including Central Bank, to find a licensed gold dealer. You can also buy gold from authentic vending machines.
- Compare gold prices: Gold prices vary between dealers due to the cost incurred in selling the commodity. The reason for comparing gold prices is to buy at the lowest price.
- Verify and buy the gold: After settling on a gold seller, you need to verify if it is authentic. Use the assay mark to verify its authenticity. Once you are convinced that the gold is authentic, go ahead and buy.
- Store your gold: Now that you have purchased your gold, you need to store it securely. You can opt for a bank custodial services or store it in a safe at home.
Gold ETFs and Similar Funds
Gold Exchange Traded Funds (ETFs) and similar funds, such as Exchange Trade Commodities (ETCs), account for about 30% of gold investment demand. These funds were established in 2003 and currently hold over 2,300 tons of physical gold on behalf of investors.
The ETFs and similar funds are gold-based mutual funds that allow you to track gold prices and access securities and properties of possessing physical gold without storing it. In essence, you can trade in gold without having it in your possession.
Like the stock market, gold ETFs are regulated. Each share corresponds with a given quantity of gold and share prices. Also, only licensed brokers can exchange gold for shares or vice versa. You may also exchange your shares for physical gold.
Gold ETFs and similar funds are considered as defensive assets and have the same traits as bonds. You can use them to secure your investment against economic crisis and currency debasement. They can also boost your long-term investment, especially if you invest large sums. Steps to investing in gold ETFs and similar funds involve the following.
- Select the gold ETF you want to buy
- Make your investment budget.
- Define your investment strategy (long-term or short-term)
- Select your broker-dealer
- Open an investment account with your broker-dealer and fund it.
- Buy the gold ETF and monitor its performance.
- Sell your gold ETF holding at the appropriate time.
Gold Mining Stock
As an investor, you have the option of buying shares of a gold mining company. The company’s gold stock may be an equivalent gold price. However, your future earnings from this investment are directly related to the company’s performance and not just the value of gold. Over 250 gold mining companies are listed and publicly traded, with the sector still expanding.
Several factors may determine your future earnings from investing in the mining companies. Some of these factors include production cost, management, mine exploration, and reserves. So, you may get lower or higher returns than the gold price. The steps involved in buying gold mining stock are as follows.
- Allocate a budget for the investment
- Analyze the gold mining companies
- Choose a broker and open a brokerage account.
- Start investing and monitor your investment.
Sovereign Gold Bonds (SGBs)
Besides gold stock, you can buy or invest in gold without the stress of having to keep the physical gold. All you need to do is pay for the mandate certificate equivalent to the grams of gold you want to purchase. SGBs are secure investment tools because market fluctuations rarely affect gold prices.
In countries such as India, these bonds are issued by RBI. The bond schemes are not available throughout. They are often issued at particular times of the year and in tranches. You will be issued with a holding certificate once your purchase of the SGB is successful. The good thing about SGBs is that you will earn periodic interest, often half-yearly.
Internet Investment Gold
The internet has opened up a plethora of investment opportunities, including investing in gold. The Internet Investment Gold allows you to purchase gold online and have your dealer store it on your behalf. You don’t have to strain over how and where you will store your gold.
Before you decide on this gold investment option, you need to understand what you are getting into altogether, Dealers should also embrace the best online practices and ensure that they adhere to World Gold Council rules.
Gold dealers, especially bullion banks, can offer you a gold account with gold deposits. So, when you order gold in whichever unit, your bank will buy the gold on your behalf and electronically reflect your account’s transaction. Once you buy the gold and the transaction reflected in your account, the bank cannot lend that gold. Additionally, if the dealer or bullion bank becomes insolvent, the creditors cannot touch your gold. It is important to note that you will have to pay transaction costs and fees.
Every gold investment option has drawbacks and benefits. You can always choose an option that you understand and will benefit you more. If holding physical gold is risky, you can opt for ETFs or Internet Investment Gold alternatives. Gold can provide you with excellent liquidity and overcome inflation. Mostly, investing in gold has more advantages than disadvantages.