Funding Varieties, Techniques & Suggestions
You have probably heard that gold is being discussed as one of the most reliable investments available. Investors often view gold as a type of safe haven investment that is confident of maintaining its value even in the most unexpected social or economic circumstances.
But investing in gold is not as easy as it sounds. There are many different types of gold investments, and each has advantages and disadvantages that can alter or destroy your portfolio.
Are you thinking of investing in gold? Read on to learn how to invest and how to make sure you are buying the right assets for you.
Why Invest in Gold?
There are many reasons why gold is and has remained such a popular investment for much of history. The value of paper currency and other assets can vary based on social and political changes, but gold has maintained its value since it was in the 7th century BC. First used for money
Because gold remains stable under almost all circumstances, investors value it as a hedge against possible economic changes, including inflation and deflation. Gold is also a globally valuable commodity, so it does not wane along with the actions of a particular government, as is the case with national currencies.
Even if you’re not a gold enthusiast (or “gold bug” as they are commonly called), investing in gold can be a smart way to anchor a diversified portfolio in a fundamental asset that can withstand virtually any market fluctuation. Here are some ways you can get started investing in gold.
Invest in physical gold
The most obvious way to invest in gold is to buy it as a physical asset. Your main options for purchasing physical gold are gold bars, coins, and jewelry.
When buying physical gold, there are a handful of related terms to familiarize yourself with:
- Troy ounces / Troy pounds: A weight system commonly used to measure precious metals; 1 troy ounce is equivalent to about 31.1 grams.
- mint: A manufacturer of precious metal products such as gold bars or silver coins.
- Sovereign coin:: A mint operated by a nation that makes products to be used as legal tender (e.g., the United States Mint, the Royal Canadian Mint, the Perth Mint). Sovereign mint products must meet national standards for purity and metal content.
- Private Mint: An independent mint that manufactures products according to its own purity and metal content standards (e.g. Engelhard, PAMP Suisse). Private mint products are not considered legal tender.
When buying physical gold, it is important to consider how you plan to secure and insure your gold. Unlike stocks and ETFs, physical gold can be stolen. Hence, keeping gold in your home is rarely a good idea. Most gold owners invest in bank storage or use online platforms like Vaulted.
Most people consider gold bars to be the large, unitary physical gold bars that are stored in massive vaults at places like Fort Knox and the Federal Reserve. In reality, gold bar can be in any quantity or shape as long as it meets a minimum purity threshold and has been certified for its weight and quality.
You can buy gold bars in units of as little as a fraction of a gram, or units of one kilogram or more.
Often times, gold bars come in the form of gold coins, which are a little more popular because they come in more manageable denominations and are easier to transport and store safely.
The main disadvantage of gold coins is that they often trade at a premium over an equivalent amount of gold bars. You can find deals on gold coins at independent dealers and pawn shops, but it is more likely that you will come across untrustworthy dealers and counterfeit products this way.
Investing in gold jewelry instead of coins or bars can be a good idea because gold jewelry fulfills a function and increases in value at the same time. However, gold jewelry carries much more risks than gold bars or coins and is only a good idea if you are a seasoned gold investor who knows exactly what to look for.
Gold jewelry is often sold in independent stores and pawn shops, where it is more difficult to verify the authenticity of a piece. It is wiser to shop at an established, reputable retailer and request documentation of the authenticity of your item.
However, you are less likely to get good business in a jewelry store. This is the second disadvantage of investing in gold jewelry: it comes at a significant premium compared to gold coins or gold bars because the price of the item includes the cost of manufacture and the cost of design. Often times, the price of a piece of jewelry is far higher than the value of the raw materials from which it is made.
If you are in the market for a piece of jewelry anyway, it may be wise to go for a verified gold piece in case you decide to sell it later. However, once you get closer to the market as an investor, there are better ways to invest in gold.
Investing in gold mining stocks
Buying physical precious metals is just one way to invest in gold. You can also buy stocks in the gold industry yourself, most often by investing in gold-mining companies.
Popular gold mining companies trading on the New York Stock Exchange include Sibanye Stillwater Ltd (NYSE: SBSW), Barrick Gold Corp (NYSE: GOLD), Newmont Corporation (NYSE: NEM), and Franco-Nevada Corp (NYSE: FNV).
As you build your gold investment strategy, keep in mind that the value of gold mining stocks is not tied solely to the value of tangible gold. The company’s performance and profitability play a bigger role in determining the share price. So make sure you research the stocks you choose carefully. Using a stock screener from a company like Atom Finance can help you find quality companies to invest in.
Investing in gold ETFs and mutual funds
Just as diversifying your portfolio can help increase your financial stability, there are gold ETFs and mutual funds to offset the higher risk of investing directly in gold mining stocks.
These funds contain “bundles” of gold investments that are spread across material assets, stocks of mining and refining companies, and futures and options on bullion. By combining these different investment types into a single mutual fund, gold ETFs and mutual funds offer investors the “best of both worlds” scenario. Investors get exposure to stable gold investments and the flexibility of trading through a broker without the risk of buying individual gold mining stocks.
Investing in Gold Futures and Options
Only experienced investors should trade futures and options, whether gold or otherwise. A futures contract says that you agree to buy or sell an asset at a certain price on a certain date, regardless of what the market does. An options contract is similar, but allows you to buy or sell the asset if it reaches a certain price at a certain time.
Investors who trade futures and options need to monitor their holdings consistently. Hence, these are only good choices for those who watch the markets on a daily basis. If you are not careful, these contracts will expire and you will lose your investment entirely.
If this is your first foray into gold investing, stick to the safe bets: gold ETFs and mutual funds that are balanced and can help balance your portfolio too. Once you’ve decided to buy physical gold, start small and make sure you shop with verified sellers and get plenty of documentation to confirm your purchase.
Like any investment, gold can be a great addition to your portfolio as long as you do your research, make informed decisions, and don’t try to bite off more than you can chew. Once you are a seasoned gold trader, you can experiment with riskier investments and see where it takes you!