Learning how to invest in gold is a great way to diversify your portfolio as well as prepare you for a downturn in the markets.
There is an old saying that goes “Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.”
Although in the 21st century, people no longer use gold as a genuine currency, Gold has always been associated as a safe haven for those with money.
Even putting this aside, however, there are many good reasons why you should consider adding some gold-based investments to your portfolio.
How Gold Works as a Commodity
Gold’s appeal extends as far back as the ancient times, where it was used in both jewelry as well as in minting early coins. Coupled with the fact that gold was both rare and hard to extract from the ground, it made sense why early civilizations favored this yellow metal.
Prices for gold, like most other commodities, are determined by supply and demand, with existing gold mines providing fresh gold ore that will later be used in industrial and commercial purposes.
Around 50% of all demand for gold comes from the jewelry industry, but unlike many other types of commodities, a massive chunk of all gold demand comes from the physical purchase of gold to be used in gold bars, coins, medals, etc.
Another major buyer of gold in recent years has been various central banks, including the central banks of Russia and China. Central bank buying alone accounts for around 10% of global yearly demand.
How Gold Can Protect Your Wealth
If you are expecting a major economic downturn, keeping your cash in the bank account and away from investments might not be the best strategy. While your wealth would be protected from a decline if the stock market collapses, it won’t be doing much else. Coupled with the possibility of a hike in inflation, your money can easily find its value eroding away.
Gold prices, on the other hand, has a track record of doing well when economic times are tough. In most of the economic collapses of the past few decades, gold has not only outperformed the economy in a bear market but in many cases, has accurately preceded a recession as well.
On the other hand, gold tends to struggle in bull markets.
In the mid-1990s, gold prices struggled to stay afloat amidst a growing GDP and an increasing interest rate. More recently, gold prices have fallen for the past several years following 2011 as the U.S. stock market returned to a bull market, with only the past few months seeing prices jump past the $1,500 per ounce mark.
How to Buy Gold
There are few different ways you can invest in gold including:
- Buying gold ETFs
- Buy actual gold bullion or jewelry
- Invest in gold mining companies
Perhaps the simplest way for an individual to buy gold would be to acquire some jewelry. Within an hour of leaving your home, you can be in the possession of thousands of dollars worth of gold. As a serious investment, however, this is a pretty bad way of buying the precious metal.
Not only can jewelry have hefty markups, but it’s hard to evaluate a piece of jewelry’s resale value, effectively guaranteeing you will lose money in the process when you want to sell back your gold.
A much better way is to buy it from certified dealers. This can come in the form of bullion – gold bars or gold coins. These types of physical gold can be converted back to cash fairly easily as the price of gold changes. There are a couple of problems with this, however.
First of which is finding a place to store the gold, whether that be in your basement, a safe in your home, or a third-party vault. The second problem, however, is that money that has been tied up in buying gold can’t give you any more returns besides the changes in gold’s price.
The last form of direct, albeit not physical, form of gold ownership are gold certificates. These let you buy gold without having to deal with physically storing it somewhere. As these certificates tend to be issued by a few primarily private issuers, however, these certificates are only as valid as the companies that back them are.
How to Invest in Gold ETF
An Exchange Traded Fund (ETFs) is a way to get broad exposure to an industry without having to buy a bundle of stocks yourself. It’s worth differentiating between gold ETF’s and gold mining stock ETFs.
The former, such as the SPDR Gold Shares, is a fund that purchases gold on your behalf in exchange for a small annual fee. A gold mining ETF, such as the VanEck Vectors Gold Miners ETF, buys a bundle of stocks in the gold mining industry.
The similarities between both are that they make it easy for an investor to get exposure to the gold sector. The difference, however, comes down to the fact that gold mining stocks offer more potential ways to grow your investment, as well as risks, whereas a pure gold ETF can only make money depending on how the price of gold moves.
Gold Futures Contracts
Futures contracts give investors the option to buy an asset or commodity at a specific time at a specific price.
Unlike buying stocks or commodities, however, buying a futures contract doesn’t require you to pay for the entire value of the commodity or asset in question upfront. Instead, only a small portion of the overall value of the contract is needed to buy it.
This means that investors can easily leverage themselves far more than they otherwise could traditionally. This means you can profit widely from a big swing in gold prices while paying only a small amount to buy the rights of the contracts in the first place. Futures contracts are also highly liquid as well.
Gold Mining Stocks
In contrast to physically owning gold, investors can buy shares of companies that produce gold. As the price for the precious metal goes up, so does the profit margin for gold miners, which helps increase their stock prices.
This indirect form of exposure also gives investors are a number of potential upsides as well. News announcements, as well as gold mine developments/discoveries, can help propel share prices even further than gold prices by themselves could have.
Many large mining stocks such as Newmont Goldcorp (NYSE: NEM) and Barrick Gold (NYSE: ABX) also offer dividends, something which gold doesn’t.
On the other hand, mining stocks are vulnerable to the risks of operating a mine, alongside other potential issues that can plague a public company. Gold mining companies have traditionally struggled to see strong growth figures, leading to a series of major acquisitions this past year as firms look to cut costs and streamline their operations.
While the U.S. economy has done fairly well for itself over the past several years, there are some signs that it is getting weaker. Under such a situation, keeping some gold in your portfolio is one of the best ways to protect your wealth.
Whether that’s in the form of direct exposure or more indirect investments, the gold sector is a great way to hedge your investments while possibly making some impressive returns in the process.
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