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Gold has long been associated with wealth. Long before paper money ever existed, kings and rulers would hoard as much of the precious metal as they could to support their people and pay for wars. Today, gold is regarded as an asset that can be used to provide some benefits to an investment portfolio.
Yet, when we polled our Minority Mindset readers about whether or not they invest in gold, only 46% replied “yes”. When it comes to alternative investments, precious metals don't seem to shine as brightly as other options such as cryptocurrency.
Part of the issue may be the false presumption that the only way to invest in gold is to buy it as bars. While that is certainly one to do it, there are plenty of other more efficient ways to capitalize on the metal. And investors would be wise to incorporate it into their overall strategy.
The best ways to invest in gold are to either purchase it directly (as bullion or coins) or to buy shares of funds that invest in the gold market. These may include mutual funds and ETFs that invest in gold, gold futures, options, and even gold mining companies.
In this post, we'll explore how investors can use gold to add safety and growth to their portfolios. We'll also discuss the pros and cons of each so that you can decide which one is the best path forward for you.
Top 5 Best Ways to Invest in Gold
For some people, investing in gold may conjure up cartoonish images of old western prospectors or rooms with gold bricks stacked to the ceiling. However, our modern financial markets have thankfully made it possible to invest in gold and gold-related assets much more efficiently.
If you’re interested in making gold a part of your investment portfolio, then here are five commonly used strategies that are at your disposal.
1. Gold Bullion
Gold bullion or bars is the classic method of buying gold. Generally, when government treasuries or financial institutions want gold, bullion is the preferred form. In fact, the United States Bullion Depository (more commonly known as Fort Knox) is said to be home to roughly 147 million troy ounces (4,580 metric tons) of gold bullion and was even depicted in the 1964 James Bond movie “Goldfinger”.
However, you don’t need to own your own country or be a billionaire to purchase bullion. It's also available to the average investor in smaller and more affordable formats.
Pros of buying gold bullion:
- Owning a physical asset. Having real gold is a quality that many gold enthusiasts appreciate over owning stocks or even cryptocurrency. Although valuable, these types of assets only exist on paper or through a computer. Like real estate, gold is something that you can see and touch.
- Easy accounting. One of the major appeals to bullion is its uniformity. A standard gold bar weighs approximately 400 ounces or 27.5 pounds and is said to be 99.9 percent pure. This gives the investor an easy way to know that their asset is certified and worth the top market rate.
Cons of buying gold bullion:
- Illiquidity. The hardest aspect of physical gold is that it can't always be readily exchanged for money. An investor can absolutely sell their bullion, but first, they would need to find an interested buyer and a secure exchange. They might even have to sell it at a discount depending on the buyer’s spread (i.e., the difference between the market price and the price offered).
- Cost. Given the current market value of one ounce of gold, a 400 oz gold bar could end up costing upwards of $600,000. Even in 1 kg and 100-ounce formats, this would still require a person to invest possibly tens of thousands of dollars. That could be a barrier to entry for some people.
- Security. Keeping gold bars in your home or even somewhere you believe is “safe” can be very risky. If someone were to steal your gold, then there would be little chance of tracking it down or getting it back unless you also paid for an insurance policy. It's also possible for the owners themselves to lose or misplace their gold.
One way around several of these issues is to use an exchange like Vaulted. Vaulted lets investors buy fractions of gold bullion and secure it within the Royal Canadian Mint. You can get started for as little as $10 and you can even request that the physical gold be sent to your home if you desire.
2. Gold Collectibles
Another way that people choose to invest in physical gold is through the collection of coins and jewelry.
Gold coins can be purchased from a variety of sources such as the US Mint and trustworthy online retailers. You can also buy them in person at coin shops, trade shows, and directly from other collectors.
Gold jewelry can of course be purchased from a reputable jewelry store. The best kind to buy will be 24-carat gold (also written as 24K) because it won't have any traces of other metals.
Pros of owning gold collectibles:
- Owning a physical asset. Similar to gold bars, having coins and jewelry gives an investor something they can see and touch.
- Affordability. Instead of spending upwards of tens of thousands of dollars on bullion, gold coins and jewelry allow for more reasonable price points. Investors may only spend somewhere between a hundred to a few thousand dollars instead.
- Salability. With bullion costing so much, it will be more difficult to find a qualified buyer. On the other hand, since gold coins and jewelry are more affordable, investors will have a much easier time selling them when the time comes.
Cons of owning gold collectibles:
- Markup. Gold, especially when it’s made into jewelry, is marked up significantly between 20 and 50 percent. Even some coins are priced much higher than the value of the metal itself.
- Authenticity. Unless your gold comes with a certificate or documentation to back up its purity, it will be difficult to know its quality.
- Security. Again, if someone breaks into your home and steals your gold, it’s very unlikely that you'll be able to get it back. Even most homeowners’ insurance policies will only cover the value of most personal items up to around $1,000, so you’d need an additional rider to cover the full amount.
3. Gold Funds
Investors who want the performance of gold without actually having to buy or manage it physically can invest passively through gold-specific mutual funds and ETFs (exchange-traded funds). These will be funds that buy actual gold or gold-related securities on behalf of their shareholders.
For example, the SPDR Gold Shares ETF (ticker: GLD) trails the performance of an ounce of gold at about one-tenth of the market value. They buy gold reserves and hold them in a trust so investors know that their shares are backed by a physical asset.
Pros of investing in gold funds:
- Simplicity. Rather than buying gold and then trying to secure it, investing gets reduced down to just a few clicks. Shares of these funds can be purchased just as easily as a share of stock.
- Passive investing. Investors never have to worry about buying, selling, or securing physical gold. These tasks become the responsibility of the fund managers while you can be more hands-off.
- Liquidity. Unlike physical gold which takes time to sell, shares of gold funds can be liquidated very quickly. Investors who no longer wish to own the funds can unload them anytime they wish (similar to stocks).
- Price stability. Because most gold funds trail the value of gold, investors will buy and sell their shares at a value that’s much closer to the official market price. This will be an advantage over those with physical gold who may have to deal with price spreads and having to sell at a discount.
Cons of investing in gold funds:
- No physical asset. If you were looking forward to holding gold in your hands or wearing it as jewelry, then forget it. As with all securities, your ownership will be on paper. You won’t have any entitlement to the actual gold that the funds own.
- A mixed portfolio. Many of the major financial institutions won't have a pure gold mutual fund. For example, Vanguard has what it calls it's Precious Metals Fund which invests in several types of precious metals and metal mining companies. Other funds may invest in gold through other means such as options, futures, insurance, etc. These alternative investments could also lead to performances that may not necessarily coincide with the market value of gold itself.
4. Gold Futures and Options
Experienced investors can also profit from fluctuations in the gold market by investing in futures and options. Futures would require the investor to buy shares of a gold-related security at a date in the future whereas an option would give them the ability to decide whether or not to execute the contract. Both types of financial instruments can be effective ways to hedge or protect against market turbulence.
Pros of gold futures and options:
- Passive investing. Similar to gold funds, investing in gold is done virtually. There's no physical asset to manage.
- Hedging. Because of the nature of futures and options, savvy investors can use these tools to their advantage to make money on both gains and losses in gold value.
Cons of gold futures and options:
- Complexity. Investing in futures and options is not for beginners. An investor needs to be very familiar with these instruments to use them properly.
- Risk. Futures and options are very risky investments. Investors need to do their analysis and have a clear plan about how they will execute these contracts. Otherwise, they could lose a lot of money.
- No physical asset. Again, as is the case with gold funds, you won't actually own any real gold. You'll just be profiting off of the price movements in the market.
5. Indirect Investments
Finally, investing in gold can be broader than just the precious metal itself. Some investors and fund managers will also pour money into the companies that mine, refine, and hold the rights to gold. Examples include:
- iShares MSCI Global Gold Miners ETF (ticker: RING)
- Gold Mining Newmont Corp. (ticker: NEM)
- Gold Rights Franco-Nevada Corp. (ticker: FNV)
Pros of indirect investments:
- Diversity. Provides another way for investors to capitalize on gold while spreading out their risk.
- Passive investing. Again, no physical gold to manage.
- Liquidity. Shares of these funds can be bought and sold any time the investor wishes.
Cons of indirect investments:
- Not actually investing in gold. While investors will be in the gold market, they won't be investing directly in gold itself.
- Risk. Even though gold may be doing well, it’s possible these companies could run into trouble. This means you may lose money even if the value of gold is on the rise.
- No physical asset. Again, if your goal was to own physical gold, you won't be entitled to any. You'll own shares of companies or funds.
Why Do Investors Still Use Gold?
Despite all of the different ways to invest in the gold market, some people might be thinking: Why bother? What's the value in owning gold when there are so many other great things that can make you rich like stocks, real estate, and crypto?
The answer lies in three important characteristics that gold possesses.
1. Gold Has Universal Appeal
Even though we tend to think of money as being paper currency, the truth is that gold has been around for centuries longer. Rulers have waged war and fought neighboring countries all to possess the resources they have, which included their gold. Up until the 1900s, the world’s superpowers such as the U.S. and England were using the gold standard to back their fiat currencies.
Because of its appeal, gold is universally perceived as having value. Even though the world has moved on from the gold standard, many countries around the world still keep significant amounts of gold reserves. It’s safe to say that you could go pretty much anywhere in the world with gold and there will be someone who wants to buy it from you.
2. Gold is a Hedge Against Recessions and Inflation
Ever since taking the U.S. off of the gold standard, there’s been a trend that investors will pour their money into gold during the first signs of economic trouble or a possible recession. Amidst falling stock prices, gold is a tangible asset and can be perceived as a more secure investment option.
It can also be a defense against rising inflation. Since gold is a commodity and commodity prices tend to increase along with all other goods when there’s inflation, investors know that they can preserve some of their fortunes by taking a stake in the precious metal.
3. Gold Tends to Hold Its Value Over Time
There have been many attempts throughout history to use other precious metals such as silver and even seashells as money. But amongst them all, gold has always prevailed as the main contender.
Why? Because of the nature of gold’s supply. Unlike silver or other commodities, gold is relatively difficult to mine.
Oftentimes the cost of adding more resources to mine additional gold is not profitable, and so the supply remains limited. And as we know from economics, limited supply and steady or even increasing demand creates value.
This again ties to gold’s universal appeal. Not only is it heavily recognized as being an object of wealth, but it also serves many other practical purposes too such as the making of jewelry and electronics. For as long as gold remains useful, desirable, and relatively scarce, it will hold some intrinsic value.
The Best Ways to Invest in Gold – What Works for Your Investments?
There are many ways that an investor can make gold an intricate part of their portfolio. Here are some of the most common ways that it can be used to benefit yours.
Whereas most investors are fixated on stocks and bonds, a well-diversified portfolio should also extend to other asset classes such as real estate, energy, and precious metals (like gold). This will allow the investor to capture the returns of these alternative assets while also providing a hedge in case the stock market takes a turn.
If you’re particularly worried about the performance of equities, inflation, or a possible recession, then buying gold could be a way to alleviate your worries. Gold does a good job of holding its value during difficult times, so it can be used to offset potential losses.
Being Active vs Passive
Depending on what type of investor you prefer to be, you may wish to buy physical gold or invest in it through shares. Actively buying gold bullion or coins can be fun because it gives you something real and tangible. However, if you’d rather not deal with the issues that come with physical gold like having to sell it at a discount or finding a way to secure it, then buying shares of funds will be a better fit for you.
Will You Invest in Gold?
Despite what some financial gurus might want you to believe, gold still has its place within your portfolio. Not only does gold have universal appeal, but it also has a long-proven history of holding its value and protecting your money in times of economic turbulence.
There are several great ways to invest in gold. The main way is to buy it directly as either bullion (i.e., bars), coins, or jewelry. Owning physical gold gives the investor something tangible but can present challenges when reselling or securing it.
You can also invest in gold passively through gold-centric mutual funds, ETFs, options, and futures. All of these are financial instruments that have been used for years and can provide instant liquidity if needed. However, they won't give you any rights to tangible, physical gold.
Finally, you could always capitalize on gold indirectly by investing in gold mining companies. This is another easy way to be a passive investor and can even provide some diversification. However, it also introduces some risks that may not be tied to the price of gold itself.
Before you invest in gold, consider how it might help you to better diversify and mitigate your risk. Also, think about whether being an active or passive investor is the right path for you.
Though it may seem like investing in gold is old-school, the thing to remember is that gold has and always will be desirable. No matter which way you decide to invest, consider the benefits having even just a little bit of gold could make to your financial security.