Last updated on September 22nd, 2022 at 07:12 pm
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There are many commodities in which people can invest in to grow wealth, with gold being among them. Gold has been used as a currency for centuries, with the first gold coins being made in 700 BC.
People make investments in gold for various reasons as many consider it a safe investment. If you’ve thought about investing in gold, here is some information you should know.
Why Invest in Gold?
People usually buy gold because it keeps its value better than paper currencies. If correctly invested, it can preserve a person’s wealth and allow them to pass onto their beneficiaries. Here are four other reasons to invest in gold.
Many people use gold as a hedge to protect their assets. When the dollar begins to weaken, which can happen due to large budget deficits or an increase in currency production, many investors will start buying gold. The price of gold then goes up, which can offset losses.
When the dollar declined during 1998 and 2008, the price of gold tripled and reached $1,000 per ounce in 2008. It almost doubled again during 2008 and 2012, reaching $1,800 to $1,900 per ounce. Those who lost money in the stock market, but had investments in gold, either made money or offset their losses.
When something in demand isn’t readily available due to it being in short supply, then the price will usually increase. Gold mining operations have slowed down since 2000, and most of the gold sold since the 1990s has been gold bullion from central banks around the world.
However, the selling of bullion has decreased since 2008, partially due to the slow down in gold production. No gold means no gold bullion. People with investments in gold have seen gold prices rise due to demand and a short supply of the commodity.
Gold is known as the “crisis currency” because of its dependability not only during financial crises but during political unrest and confrontations between countries. Gold usually outperforms most other investments during uncertain times in the world.
For instance, due to the problems with the European Union, especially because of Brexit, gold prices saw significant shifts in 2016. When the confidence in the world’s governments is low, gold prices usually increase.
Gold as an Investment
Many investors include gold within a diversified portfolio to take advantage of times when the price increases. Gold can be volatile and increase or decrease in value quickly, but it has a reputation for being a steady investment. Both governments and wealthy individuals usually have gold in their possession.
However, it is recommended that gold is not bought alone when investing in it. It should be part of a portfolio that includes other investments like stocks, bonds, oil, and other hard assets.
How to Invest in Gold
There are several ways to make investments in gold. You can invest in:
- Gold Bullion
- Gold Futures
- Gold Exchange-traded Funds
- Gold Mining Stocks
- Gold Streaming Companies
Many investors buy physical gold bullion, which includes coins, bars, and ingots. Gold bullion isn’t just the large gold bars that you may have seen in movies, but the definition of bullion includes coins and gold bars of any size. The most common gold bar, or ingot, sold is the one troy ounce bar.
The largest, or standard, gold bars are 400 troy ounces, which weigh 12.4 kilograms, 439.9 ounces or approximately 27.44 pounds. These bars are usually held by governments and central banks around the world, while investors are more likely to own gold ingots or coins.
- 1 gram
- 10 grams
- 20 grams
- 50 grams
- 100 grams
- 10 Troy ounces
- 1 kilogram
If you decide to invest in bullion, whether it’s coins or bars, there are two things you need to consider: where to store it and how to buy it, so you make money on your investment.
You can store gold bars in a safe deposit box at a bank or in a safe at home. It is up to you to decide where would be the safest place to put your investment.
To help ensure profiting from gold, it should be bought as close to the spot price as possible. However, usually there is a premium on the price of physical gold. Gold can be bought at local jewelers, online, stores that specialize in selling coins, and gold coins are also issued by the government.
You shouldn’t pay more than a 10% premium, but try to get it for less if possible. For instance, most coins are sold with at a four percent premium. To calculate how much of a premium you would be paying once you find an ingot or coins that you want to buy, you can use this calculation:
The [quoted price – spot price/ spot price] x 100 = premium.
The spot price is the cost of one troy ounce of gold on the current market. So, you would need to look up what it is trading for on the day you decide to buy physical gold. If the premium you pay is too high, it makes it more difficult to make money from your investment.
Gold Exchange-Trade Funds
If you don’t want to buy gold bullion but are interested in investing in gold, then you can buy gold exchange-traded funds or ETFs. When you invest in ETFs, you’re buying shares from companies that own gold. Shareholders can earn interest and dividends if the company makes a profit off their gold investments. If the fund is liquated, then shareholders may also get a residual value from the company.
ETF shares are bought and sold on public stock exchanges, so you would need to buy them through a licensed broker. The advantages to buying gold ETFs is having a diversified investment portfolio as an ETF is an index fund.
Also, there is the ability to sell short or buy on margin, and the ability to purchase just one share because there are no minimum deposit requirements. Anytime the stock market is open, gold ETFs can be bought, and the costs are usually lower than buying physical gold.
A broker may recommend some of these gold EFTs to you:
- Spider or SPDY, which is one of the most heavily traded ETFs. It’s listed on the market as SPY.
- iShares Comex Gold Trust, it only charges a fee of 0.25%, so it is one of the cheapest ETFs on the exchange.
- IWM or iShares Russell 2000 Index Fund
- QQQ, which was previously QQQQ.
Gold Futures Contracts
Buying gold futures is a good way to control a lot of gold at low cost. Gold futures investing involves buying gold futures contracts on the New York Mercantile Exchange (NYMEX), where they are sold in units of 100 ounces.
Currently, with gold trading at $1,318 per ounce, the price can fluctuate every day, 100 ounces of gold would cost $131,800 if bought outright. However, with gold futures, you only pay a smaller initial margin and maintain at a certain minimum level.
The current margin on the NYMEX is $4,950, which is almost four percent of the cost of 100 ounces of gold, and the maintenance margin is $4,500. While gold futures can be a good way to get into the gold market without spending a lot of money, it has its risks as well.
Since the market price of gold can fluctuate, investors could lose money and need to replenish the margin on gold futures. If gold prices go down and the investor’s maintenance margin goes below the required $4,500, then their broker will call and ask them to put more money into their account to bring it up to the initial margin price of $4,950.
For some people, the risks of buying gold futures can be worth the reward, especially if gold prices increase.
Gold Mining Stocks
Another option for making investments in gold is to buy gold mining stocks. One of the reasons many investors don’t like buying gold is that it doesn’t produce income. It may be used to make jewelry, electronic components or dental prosthetics, but it doesn’t produce additional revenue.
Some gold investors buy mining stocks because they can produce an income. Gold mining stocks are linked to the price of gold, but their price also depends on how well the company does, just as with other stocks. Usually, when gold prices increase, mining stocks will increase in value.
If gold prices decrease, then some mining stocks, which are more volatile, may drop drastically. However, investors also take the risk that a company’s stocks may drop even as the price of gold increases.
A stock can drop due to bad business practices, a mining accident, or if an exploration effort fails to find gold. As with other stocks, you need to hire a stockbroker to buy and sell gold mining stocks.
Gold Streaming Companies
Stocks can also be purchased from businesses that finance gold mining companies. They don’t directly own any gold, but they usually provide the financing in exchange for a share of a company’s gold production.
While these companies have the benefit of gold prices, they also receive income from their financial activities. Some of these streaming companies have been able to increase their dividends each year for several years.
When gold prices fall, shares may follow, but if a mining company needs money due to its losses or other problems with the business, streaming companies can make profitable business deals that can prevent their stock prices from decreasing.
While there are risks with most forms of investments, there are some less risky than others. Buying stocks allows investors to get into the gold market at a fraction of the cost of buying gold or gold futures. If you’re interested in gold investments, consult with a broker about getting started.
Should You Invest in Gold?
Investment experts are divided when it comes to gold investments. Some think it is a good idea because gold can help investors hedge against downturns in the stock market, inflation, and a weakening dollar.
However, other experts and investors think that gold investments are useless because it doesn’t produce an income, and they consider a diversified investment portfolio a better option.
In the long run, stocks, bonds, and other investments can be better than gold. Also, gold prices can be volatile, causing losses for investors in gold futures or stocks. However, gold prices can increase, which can make a gold investment a worthy risk.
When a country has a large budget deficit or the stock market crashes, gold prices often increase. In 2002, when the stock market dropped 22%, gold prices increased by 24%. Gold was also one of the few investments that did well in 2008, and gold prices also increased in 2009 and 2010.
If you’re asking yourself “should I invest in gold?” consider how you would invest in it. Would you accumulate physical gold, buy futures, ETFs, or stocks?
With any investment, you need to consider how much you can afford to risk. If you’re new to investing, then you don’t want to risk money you cannot afford to lose because you can lose money investing in gold.
If you have family or friends with investment experience, ask them if they have invested in gold and ask them is gold a good investment in their experience. Also, do some research on gold investments, then consult with an investment advisor.
They can help you decide whether gold is a good investment for you, and then help you decide where to put your money. Many investment advisors recommend buying gold ETFs because they are more liquid than physical gold because they can be sold on the market quickly.
If you’re an experienced investor, then you should be familiar with the volatility of the market. However, you should consult your broker to find out if they recommend gold investments.