Gold is often seen as a safe investment. Over the long term, the price of gold tends to rise, making it a solid investment choice. Investing in gold is one way to protect your money and ensure you have a valuable future asset, but figuring out where to start can be overwhelming.
If you want to start buying gold and adding this asset class to your portfolio, it’s essential to understand the basics before finalizing your investment decision. That’s why we compiled everything you need to know about investing in this precious metal in this ultimate guide.
Why invest in gold?
Gold is one of the precious metals used as a currency, and it has been a valuable commodity for centuries. Gold is abundant enough that coins can be created from it, but also rare enough so that it can only be produced selectively.
Gold investments are a hedge against inflation because they hold their value, while currency fluctuations can cause investors to lose purchasing power. In addition, gold investors tend to do well when stock markets are struggling, as gold is often seen as a safe-haven asset. When the stock market crashes, many investors flock to gold to protect their money.
6 Ways To Invest
Although there are various reasons to invest in gold, it’s still important to remember that there are also some risks. Below are six common ways to invest in gold and the advantages and disadvantages of each.
- Gold Jewelry
A gold jewelry investment is probably the most direct way to invest in gold. When you purchase gold jewelry, you’re buying physical gold that has both a value as jewelry and a value based on the current price of gold. Of course, you’ll also have to factor in the cost of having the jewelry made or purchased and other associated costs such as insurance.
Advantages:
Selling gold jewelry can be a good way to get cash in a pinch. It can also be beautiful and serve as a fashion statement. Gold jewelry is easy to purchase, as jewelry accounts for approximately 49% of global gold production.
Disadvantages:
The value of your gold jewelry is only as good as the current spot price of gold per gram times the number of grams of the item. Since jewelry can be marked up significantly for sale, you may earn quite a bit less than you spent if you re-sell an item for its gold value.
- Gold Mining Companies & Stocks
Gold mining companies are a popular way for investors to gain exposure to gold without owning any physical gold. If you invest in a gold mining company, you’re essentially betting that the company will be successful in finding and mining gold.
On the other hand, gold mining stocks are stocks of companies involved in the gold mining industry. These gold stocks can be a risky way to invest in gold, as they rely on both the company’s success and the gold prices.
Advantages:
You don’t have to worry about storing or insuring your gold. Gold mining companies are a leveraged way to invest in gold, meaning you can get exposure to more gold than if you were to buy physical gold.
Disadvantages:
Gold mining companies are subject to all normal business risks, including management changes, operational problems, and even fraud. In addition, the gold market tends to be more volatile than the price of gold itself.
- Gold Coins
Gold coins are popular among investors and collectors for their beauty, historical worth, and rarity, as opposed to widely circulated coins. Gold coins can be purchased from various dealers, banks, coin shops, and online retailers. They come in multiple weights and sizes, and you can buy new and old coins.
Advantages:
Owning gold coins can be a good investment because they have the potential to increase market value over time. They also offer the advantage of being tangible assets you can hold in your hand, which can be a great hedge against inflation.
Disadvantages:
Gold coins can be expensive, and their value can be volatile. They also require storage and insurance, which can add to the costs of investing in gold coins.
- Gold Bullion
Gold bullion refers to gold bars or ingots of pure gold. Investors frequently use them to protect against inflation and store cash. Gold bullion is available in various weights and purities and can be purchased from multiple dealers.
Advantages:
Gold bullion is a tangible or physical asset that you can hold in your hand. They can help you outperform inflation which is a good strategy in wealth management. Physical gold bullion is also relatively easy to buy and sell.
Disadvantages:
Gold bullion can decrease in value and does not produce cash flow. Plus, throughout history, it has been subject to a slow appreciation. You will also need to store and insure it, which is less convenient than some other ways of investing in gold.
- Gold Exchanged Traded Funds (Gold ETFs) and Mutual Funds
Investors can invest in gold through ETFs and mutual funds rather than buying physical gold. ETFs monitor the price of gold and have lower fees than mutual funds. Rather than owning physical gold, investing in gold mutual funds and gold mining companies can be a riskier approach to gold investing.
Advantages:
You don’t have to worry about storing or insuring your gold when you invest in gold mutual funds. Gold mutual funds and ETFs offer the advantage of being a more diversified way to invest in gold.
Disadvantages:
Gold mutual funds and ETFs can have fees, which may decrease your earnings. Another drawback with gold ETFs is liquidity; some funds are illiquid, which impacts their buying and selling flexibility.
- Gold Futures Contracts
Gold futures are legal agreements to acquire or sell gold at a specific price on a future date. Investors use them as a way to hedge against inflation and store wealth. Gold futures contracts are available from various exchanges and can be traded online.
Advantages:
You can profit from “call” or “put” contracts by taking advantage of rising gold prices. Plus, gold futures contracts are generally sold at a fraction of the cost that gold is traded at.
Disadvantages:
Gold futures contracts can be a complicated investment and are not suitable for all investors. If you overleverage your gold futures contracts, this may magnify losses exponentially and exceed your original investment amount.
FAQs about investing in gold
Below are some commonly asked questions about investing in gold.
Why do investors like gold?
Gold has a long history of being used as a store of value and as a hedge against inflation. Its long-term value indicates its consistency and appeal across time. Gold investment demand typically increases when there is economic or political uncertainty.
When should you buy gold?
There is no one perfect time to buy gold. Investors typically buy gold when they believe it is undervalued or during economic downturns.
How much should you invest in gold?
Generally, it is recommended that you allocate 5-10% of your portfolio to gold, depending on your goals and risk tolerance. How much gold you invest in may change as the economy changes.
The Bottom Line
Gold is a popular investment choice for a variety of reasons. Gold investing is a great way to ensure your investment portfolio has some stability and security. Moreover, gold prices may fluctuate, but the value of gold as an investment usually remains relatively consistent.
However, before investing in gold, it’s essential to understand the risks involved. Do your research and consider consulting with a financial advisor. Then, select the right gold investment for your risk tolerance and financial goals.
