Gold is a historically popular investment used to offset worries about inflation and other financial difficulties. Before getting started, however, investors need to learn how to invest in gold to build financial security.
Why Is Gold a Good Investment?
Many investors consider gold a safe option due to its long history of gains in value. It is usually more secure than other commodities like stocks. Traditionally, the advantages of gold that draw in investors include:
- Liquidity. Gold is more readily converted to cash than some other types of investments.
- High Returns. Gold often outperforms stocks and bonds.
- Low Correlations. Gold performs differently than other assets and may rise when they fall. For this reason, it’s often used as a hedge for inflation and economic downturns.
Gold is a great way to diversify an investment portfolio to make it more stable. It’s also a way to store value to offset potential economic threats.
Downsides to Investing in Gold
Gold assets need to bring in more money when sold than what they cost. This is the only way to make a profit.
While precious metals like gold are typically a solid choice for investment due to their relative stability in the market, prices fluctuate often. Times of financial turmoil inspire more people to snap up gold and gold assets, driving up prices.
However, prices eventually drop. This cycle makes it difficult to predict the value of gold at any given time.
Different Ways to Invest in Gold
Investors have several options when putting their money into gold investments. Anyone interested in gold should learn more about each to make an informed choice.
Physical Gold
Purchasing physical gold is satisfying for investors that want to see and hold the proof of their assets. Owning physical gold also has downsides, including the need to store it safely and insure it to protect it from losses.
Another point for investors to consider is commodity value. The value of physical gold depends entirely on the current market price of the commodity, which is often subject to increases and decreases. This can make gold tricky because an investor may lose out on getting full market value if they need to sell quickly.
Gold is available for purchase in bars, coins and even jewelry. The coins may have higher prices as they reflect the collector value of the coin in addition to their gold content. It’s also possible to buy gold online through dealers. Buyers can usually receive the physical gold or store their purchases in one of the company’s secure holding facilities for a fee.
Gold Stocks
Another option for those who prefer to keep it simple by refraining from buying up physical gold is gold stocks. Investors can purchase shares of stock in various mining companies.
One of the benefits of buying gold mining stocks is that fluctuating market prices have less of an effect on the value of your assets since the mining company can redirect focus to another high-cost metal during times of low gold value.
As any savvy investor knows, purchasing stocks always comes with some risk. They can decline without warning for factors that have nothing to do with the price of gold. The stock market and the mining company’s management and financial situation have a significant impact.
Gold EFTs
Investors who prefer to avoid putting their money into a specific company can choose EFTs. Instead of single-company assets, EFTs are pools of investment money funneled into multiple mining companies and other gold assets.
Gold EFTs typically have less risk due to their diversification but are still subject to changes in the stock market. Another thing to note is that all investors must pay a percentage of their investment as a management fee each year.
Gold Futures
A more complex option, gold futures are contracts to buy a specified amount of gold at a predetermined price at a future date. This route is complicated and requires the investor to speculate on future prices.
Making a profit by buying and selling futures depends on the current price of gold when the contract comes due. If gold moves positively, the investor could make a lot of money. However, if gold drops in value, the investor must pay a lot to keep the contract or close it and take a loss. Futures typically require a higher initial investment, with 100 ounces being the standard minimum purchase required to buy in.
Tips for Making Smart Gold Investments
As with any investment, those looking into gold should understand the risks involved and do prior research. A careful approach to investing is best to prevent losses that may have long-term consequences on the investor’s overall financial well-being.
Tips for investors to keep in mind include:
- Determine risk tolerance: Learn the difference between various types of gold investments and how risky each is. Investing always comes with a certain level of risk, but investors should avoid purchasing investments that can wipe them out financially if they go south. A good rule of thumb is to only invest extra funds that aren’t earmarked for other needs. Profits can always be used to broaden their investments in size and scope.
- Research: Investors must conduct careful research before deciding on a specific asset, such as a gold mining company, by thoroughly looking into the company’s past performance and future prospects.
- Start off slowly: Beginners need time to learn how the process works and to choose smart investments. It’s best to spread out investments to create a diversified portfolio instead of sinking everything into just a few.
- Work with an advisor: Financial advisors understand the intricacies of investments and can offer sound advice and suggestions to build a healthy investment portfolio with minimal risks.
Investors looking to diversify their portfolios may want to consider investing in gold. There are always risks to factor, but history shows that gold is generally a secure option. Plus, today’s varied market means there are more ways to invest in gold assets than ever.
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