During times of economic uncertainty, investors often turn to gold as a safe haven asset. With its proven track record of gains and perceived store of value, gold is seen as a counterpoint to traditional securities such as stocks and bonds.
Some investors also view gold as a hedge against inflation, making it an attractive option in times of high inflation.
However, owning gold comes with its own set of risks. In this article, we will explore five different ways to own gold and examine the potential risks associated with each method.
By gaining a deeper understanding of the different ways to invest in gold, investors can make informed decisions about how to incorporate this precious metal into their portfolios.
1. Gold Bullion
Gold bullion is a popular way for investors to own physical gold. It can be purchased in bars or coins from online dealers like APMEX or JM Bullion, local dealers or collectors, and even pawn shops.
However, owning physical gold has its drawbacks, especially if you own a significant amount. One of the biggest drawbacks is the need to safeguard and insure the gold.
Unlike owning shares in a gold mining company, where the company can produce more gold and drive the investment higher, buyers of physical gold are wholly reliant on the commodity’s price rising to make a profit. Therefore, it is essential to keep an eye on gold’s spot price, which is the price per ounce in the market, while buying.
When purchasing gold bullion, it is recommended to transact in bars rather than coins, as coins may have a collector value that can drive up the price beyond its gold content. It is also advisable to note the risks involved in owning physical gold.
The biggest risk is that someone can physically take the gold from you if you don’t keep it protected. The second-biggest risk is that it can be difficult to receive the full market value for your holdings, especially if they’re coins and you need the money quickly.
In summary, owning gold bullion can be emotionally satisfying for investors, but it also has its drawbacks. It is essential to keep an eye on gold’s spot price, transact in bars rather than coins, and safeguard and insure the gold to mitigate potential risks.
2. Gold Futures
Gold futures are contracts that allow investors to speculate on the future price of gold. These contracts can be bought or sold on futures exchanges, and they represent an agreement to buy or sell a specified amount of gold at a future date and price.
One of the biggest advantages of using gold futures to invest in gold is the amount of leverage that investors can use. This means that investors can control a large amount of gold with a relatively small investment. If the price of gold moves in the direction that investors predict, they can make significant profits in a short amount of time.
However, there are also significant risks associated with investing in gold futures. The leverage that investors use can work against them if the price of gold moves in the opposite direction. In this case, investors may be required to put up additional funds to maintain the contract, or the broker may close the position, resulting in a loss.
Investing in gold futures requires a significant amount of knowledge and experience, and it is generally considered to be a more sophisticated investment strategy. Not all brokers offer futures trading, so investors should carefully research and select a reputable broker before investing in gold futures.
Overall, gold futures can be a useful tool for investors who want to speculate on the price of gold, but they should approach this investment strategy with caution and be prepared to manage the risks involved.
3. ETFs that own gold
For investors who prefer not to own physical gold or engage with the fast-paced and margin requirements of the futures market, there are exchange-traded funds (ETFs) that track the commodity.
Three of the largest ETFs that own gold are SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and abrdn Physical Gold Shares ETF (SGOL). The goal of these ETFs is to match the price performance of gold, minus the fund’s annual expense ratio. As of January 2024, the expense ratios for these funds are only 0.4 percent, 0.25 percent, and 0.17 percent, respectively.
Owning an ETF over physical gold has the added benefit of being more readily exchangeable for cash at the market price. These funds can be traded on any day the market is open for the prevailing price, just like selling a stock, and avoid the significant transaction costs of selling physical gold. Therefore, gold ETFs are more liquid than physical gold, and investors can trade them from the comfort of their home.
However, ETFs come with risks. They provide exposure to the price of gold, so if the price rises or falls, the fund should perform similarly, minus the cost of the fund itself. Like stocks, gold can be volatile at times, but these ETFs allow investors to avoid the biggest risks of owning the physical commodity, such as protecting their gold and obtaining full value for their holdings.
In summary, ETFs that own gold are a great alternative for investors who want exposure to the commodity without the hassle of owning physical gold or dealing with the futures market.
They are more liquid and readily exchangeable for cash at the market price, and investors can trade them from the comfort of their home. However, they come with risks, and investors should be aware of the volatility of gold and the potential for losses.
4. Mining Stocks
Investors can take advantage of rising gold prices by owning mining businesses that produce gold. This approach offers two benefits: first, if the price of gold increases, the miner’s profits also increase, and second, the miner has the ability to raise production over time, resulting in a double whammy effect.
However, investing in individual mining stocks comes with risks. Investors need to understand the business and be careful when selecting a proven player in the industry. It is best to avoid small miners and those that do not yet have a producing mine. Additionally, mining stocks, like all stocks, can be volatile.
Investors should consider the following factors when selecting mining stocks:
- Production growth potential
- Cost management
- Balance sheet strength
- Political and social risks
- Management quality
By considering these factors, investors can make informed decisions about investing in mining stocks and potentially benefit from rising gold prices.
5. ETFs that own mining stocks
Investors who want to gain exposure to the gold mining industry without the risk of investing in individual companies may consider buying an ETF. Gold miner ETFs are designed to provide investors with diversified exposure to the largest gold miners in the market. By owning shares of an ETF, investors can benefit from the safety of diversification and avoid the risk of underperformance from any single miner.
The largest ETFs in the gold mining sector include VanEck Gold Miners ETF (GDX), VanEck Junior Gold Miners ETF (GDXJ), and iShares MSCI Global Gold Miners ETF (RING). As of January 2024, the expense ratios for these funds are 0.51 percent, 0.52 percent, and 0.39 percent, respectively. These funds offer the benefits of owning individual miners with the safety of diversification.
It’s important to note that while diversified ETFs protect against the underperformance of individual companies, they do not protect against industry-wide risks such as sustained low gold prices.
Additionally, investors should carefully consider the type of fund they choose, as some funds may hold established miners while others hold junior miners, which are typically more risky.
ETFs that own mining stocks are a great option for investors who want to gain exposure to the gold mining industry without the risk of investing in individual companies. By owning shares of an ETF, investors can benefit from the safety of diversification and potentially achieve higher returns than investing in individual miners.
Why Investors Like Gold
Gold has been a popular investment for centuries, and for good reason. Investors are drawn to gold because of its proven track record for returns, liquidity, and low correlations with other assets, making it an effective diversifier.
One of the major benefits of investing in gold is its potential for returns. While gold doesn’t always outperform stocks and bonds, it has shown to do so over certain periods. However, it’s important to note that gold’s track record shows much lower returns over time.
Another advantage of gold is its liquidity. Investors who purchase gold-based assets, such as ETFs, can easily convert them to cash. This makes gold a popular choice for those who want to have the ability to quickly access their investments.
Gold’s low correlations with other assets make it an effective diversifier. Because gold is generally not highly correlated with other assets, it can help diversify portfolios, ultimately making the overall portfolio less volatile.
In addition to its diversification benefits, gold serves as a defensive store of value. Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
Despite its benefits, gold also has its drawbacks. For instance, it’s not always clear when to purchase gold since it doesn’t produce cash flow. Additionally, in order to make a profit on gold, investors must rely on someone else paying more for the metal than they did.
Overall, gold is a popular investment choice due to its potential for returns, liquidity, low correlations, and diversification benefits. However, investors should carefully consider the risks and drawbacks before investing in this precious metal.
Conclusion
Investing in gold may not be suitable for everyone, as some investors prefer to invest in cash-flowing businesses rather than relying on the fluctuating price of gold.
Legendary investors like Warren Buffett caution against investing in gold and instead recommend buying cash-flowing businesses. Stocks and funds are easy to own and highly liquid, making it easy to convert your position to cash if necessary.
For those interested in investing in gold, buying a fund is a simple way to get started. However, it is important for all investors to conduct their own independent research into investment strategies before making any investment decisions. It is also important to note that past performance of investment products is not a guarantee of future price appreciation.
Overall, investors should carefully consider their investment goals and risk tolerance before deciding whether to invest in gold or cash-flowing businesses.
