Studies have shown that investing in gold is a great hedge against inflation in the short run if you are in the USA. Should you only invest in physical gold bars, though?
Not necessarily. There are various mediums nowadays that you can invest in that may better serve your needs.
Whether you want a way to diversify your investments or a means to protect your money, you will need to know how to invest in gold.
As you make your way through this guide, you will find more ways to invest in this precious metal than gold bars. You will also learn about the basics of investing in gold, its advantages, and how to invest in each different type of gold asset.
Why Invest in Gold?
Gold helps create a balanced portfolio by adding diversity to investments. Because many investors see gold as a �safe-haven’ investment whenever the stock markets suffer. Usually, when stock market prices fall, gold’s demand increases, thus increasing its value.
Because of these perks, you can preserve your wealth or have an investment vehicle that will make you money during uncertain times.
What Determines Gold’s Price?
Gold vendors determine gold’s price by its �premium.’ The premium is the percentage of metal that the gold contains. Because of this, gold products that contain less metal cost more to manufacture and distribute than their larger counterparts.
That means it would be cheaper for you to buy a 100g gold bar or bullion than to buy many 1g physical gold pieces.
Gold’s Relationship With the Us Dollar’s Price
Many view gold as a hedge against fiat currencies—including the US Dollar. That is because when fiat currencies flow one way, gold moves the opposite. Thus, a weakened dollar can push gold’s growth or vice versa.
Advantages of Investing in Gold
Other than having a proven track record of diversifying portfolios and liquidity, gold offers various benefits to investors, such as the following:
- Defends your value: When you have a threatened economy, gold can protect your investments against short-term inflation and devalued fiat currencies.
- Low correlation: It’s not correlated in many ways to other assets, which means that if other assets were to lower in value, you can still profit from gold.
- Returns performance: Many times, gold has outperformed bonds and stocks.
- Asset liquidity: Depending on what gold you have, you can readily convert it into cash.
Despite all of gold’s advantages over other investment vehicles, it’s difficult to determine a good time to buy. Thus, it’s more difficult to use gold as an investment to make a living.
Different Types of Gold You Can Invest In
When determining what type of gold you should invest in, you can choose a physical asset, which best suits average investors. Otherwise, you can invest in assets that replicate gold’s price like exchange-traded funds (ETF).
Throughout this section, you’ll find information about the different types of gold you can invest in and how to invest in them.
Gold Bars or Collectible Coins
When buying gold bars, gold ingots, gold coins, or gold bullion, you have more ownership over your asset than when buying an asset like an EFT. You can display these in your home or hide them somewhere.
When owning gold bullion, you will need to consider the drawbacks, though. Since it is in your home, you will have to worry about thieves or disasters like house fires.
You will also have to worry about the elements. High humidity and heat can damage your ingots if you do not properly store them.
To profit from gold bullion, you must rely on the commodity’s price rising instead of owning shares.
You can find gold bullion or coins for sale at pawn shops and online or at local dealers. When buying physical gold, you will need to note gold’s current price per ounce.
Another aspect to consider is bullion vs. coins. Dealers will usually charge more for coins because of their collector value than the commodity’s price. It would be in your best interest to buy gold bars since they will be cheaper per ounce.
Mutual Funds or Gold ETFs
If you want to opt out of possessing physical gold or dealing with a fast-paced futures market, gold ETFs or gold mutual funds offer a way for you to track the commodity while still diversifying your investment.
This investment vehicle matches gold’s price performance minus the exchange-traded fund’s annual expense ratio.
Gold ETFs are more liquid than physical gold because you can readily exchange them at market price whenever the market opens.
While owning this type of ETF can protect you from the disadvantages of owning physical gold, you still face the same risks of physical gold’s price falling. And when the price falls, you will also need to pay for the cost of the fund.
You can find ETFs on three of the largest exchange-traded funds that include:
- SGOL, or Aberdeen Standard Physical Gold Shares ETF: 0.17% expense ratio
- IAU, or iShares Gold Trust: 0.25% expense ratio
- SPDR Gold Shares, otherwise �GLD’: 0.4% expense ratio
First off, only sophisticated investors should consider the futures market due to its complexity.
Otherwise, if you want to proceed, gold futures are a great way to speculate which way gold’s price will flow. They are standardized exchange-traded contracts where you would agree to take a certain amount of gold from the seller at a certain price on a future date.
The ability to buy gold for a certain price allows you to own many gold futures for cheap. This gives you a chance to make money quickly since investors trade futures almost 24 hours a day.
Gold futures provide great liquidity and allow you to invest in gold without owning risky bullion.
Despite its advantages, gold futures have a fair number of risks. One of the most significant risks is if gold moves against you, you will have to pay a lot of money for your predetermined price.
To trade gold futures, you will need to find a broker that allows future trading. You’ll also need to keep in mind that not all major brokers will allow you to trade futures.
Gold Mining Company Stocks
Instead of paying for ETF prices or finding futures brokers, you can take part in the stock market and own shares of the mining companies that produce gold bullions.
When owning these stocks, you can profit when the company raises its production in addition to when the gold prices rise. Because gold prices increase, the mining company makes more money.
When owning shares of any company, you will need to study the business that you want to invest in. You’ll also want to avoid investing in small mining companies that do not have a producing mine.
To buy mining company stocks, go through any brokers that list the company you would like to invest in.
If you do not mind paying the ETF annual expense ratio, you can take part in exchange-traded funds that own mining company stocks. These funds will give your portfolio exposure to the biggest gold mining companies.
Due to ETF investment diversity, if one company were to suffer, you would face fewer losses than if you were to have bought shares of that business. ETFs will not protect you from events that would affect the entire gold industry.
Larger ETFs for mining companies include:
- iShares MSCI Global Gold Miners ETF: 0.39% expense ratio
- VanEck Vectors Junior Gold Miners ETF: 0.52% expense ratio
- VanEck Vectors Gold Miners ETF 0.51% expense ratio
When Is the Best Time to Buy Gold?
During uncertain times, gold’s price will rise. These price increases may not happen during high inflation periods, though. However, that does not mean that it is wise to buy gold when inflation is high.
To find the best time to buy gold, study the economy and gather enough evidence to support a looming recession or financial crisis. During that time, you will want to buy this commodity.
Using Gold for Retirement
If you have gold in a retirement account like an IRA and need to withdraw it, you can face penalties for withdrawing too early. Gold is not like other investment vehicles that generate income or has predictable value appreciation.
It is a means to safeguard your investments during uncertain times. Thus, no matter what method you choose to invest in gold, keep in mind the true advantages of this commodity.
Start Investing in Gold Today
Whether you want to invest in gold bars or ETFs, you have plenty of options available that will give you more flexibility in how you invest. If you prefer keeping physical gold for sentimental reasons or as a collectible, opt for bullion.
Otherwise, use various investment options like futures, exchange-traded funds, or stocks. That way, you enjoy gold’s advantages without spending money on maintaining physical assets.
If you want more routes to take for investing in your future, explore additional guides from investment experts. These pieces will help you navigate taxes, avoid penalties, and more.