Someone trying to figure out how to start investing in gold is probably in a dilemma.
Gold is generally considered a great way to diversify someone’s portfolio and protect themselves against market downturns, but most people don’t know where to start. Some might even wonder if it’s worth the trouble.
But here’s the thing: when it comes to investing in gold, there are many ways to do it. Unfortunately, not all of them are created equal. The good news is, that once someone understands how investing in gold works, finding a strategy that works for them is easy as pie.
Why Should One Invest in Gold?
Gold is a smart investment decision for the following reasons:
- Gold is a safe investment. It has remained a consistent, stable investment for thousands of years. There is no limit to how much gold is produced beyond what’s already mined. This makes it an excellent hedge against inflation and other economic crises.
- Gold is an effective way to diversify one’s portfolio. It’s not correlated with other assets, so adding gold will not only help offset risk but also improve returns—especially if the price of gold goes up, as some analysts predict.
- Investors may soon start buying gold again, which could push the price up even further. Many traders are betting on a rebound in the price of gold this year as more investors view it as a safe-haven asset.
Adding gold to one’s portfolio could help someone protect themselves from a volatile stock market and potentially provide them with better returns than traditional investments.
Ways to Invest in Gold
If someone is new to the world of gold investing, they may wonder how to get started. It’s easy to feel intimidated by all the different ways they can invest in gold, but there are plenty of straightforward options.
Here are some common ways to buy gold:
1. Buying gold bullion coins and bars
Buying physical gold bullion is one of the most common ways for investors to get exposure to the precious metal. The most common forms of physical gold bullion include bars and coins. Buying physical gold bullion offers investors direct exposure to the price of gold, allowing them to take advantage of price movements without paying commission fees associated with buying and selling futures contracts.
However, there are some drawbacks associated with this approach. Chief among these are storage costs, which are significant when housing large amounts of gold. There is also the risk of theft while in storage.
Most common gold coins include:
- American Eagle – The American Eagle is the most popular gold bullion coin. It comes in four sizes (1 ounce, 1/2 ounce, 1/4 ounce, and 1/10 ounce) with similar designs on all four sizes.
- Australian Kangaroo coins – The Australian Kangaroo coin is also a very popular gold bullion coin. The Australian Kangaroo gold coin comes with a face value of AUD100.
- Canadian Maple Leaf – The Canadian Maple Leaf is one of the most popular gold coins in the world and is backed by the Canadian Commonwealth. The coins have a face value of CAD 50.
- Gold Krugerrand – The South African Gold Krugerrand is considered one of the most popular gold bullion coins ever produced due to its high purity and beautiful design.
2. Investing in gold stocks and mutual funds
For someone looking for a way to invest in gold, they must understand the difference between gold stocks and mutual funds.
Gold stocks are investments that represent ownership in mining companies. These companies are responsible for extracting, refining, and selling the precious metal. They also have some degree of control over its price.
Mutual funds are investment vehicles that pool money from many investors and buy shares in other companies on their behalf. These funds may use derivatives or futures contracts to gain exposure to gold without actually owning any physical bullion.
The advantages of mutual funds include low cost and diversification across multiple industries, while gold stocks allow you to benefit directly from price fluctuations in gold as well as any potential gains made by mining companies.
3. Buying exchange-traded funds (ETFs) that invest in gold companies
Buying exchange-traded funds (ETFs) that invest in gold companies are a great way to invest in the precious metal. But there are several different ways to do this. Not all ETFs that claim to invest in gold companies do.
To get the best bang for one’s buck, someone needs to know what to look for and how to avoid pitfalls. Here are some questions to should ask before buying an ETF that claims to invest in gold companies:
How much of their portfolio is allocated to this asset class? Do they want exposure at all, or just enough to hedge against inflation?
What is the expense ratio? This tells someone how much money they are paying annually per unit of exposure. An expense ratio of 0.5% means that every year, half a percent of their money goes towards fees and expenses — and if they are not careful, those fees could erode all the gains from their investment over time.
How liquid is this fund? Liquidity refers to how easily an investor can buy or sell shares without affecting the price too much.
What Causes the Gold Demand?
Gold demand is the result of a complex set of factors and influences. Some of the main drivers of gold demand around the world include jewelry and investment, as well as industrial uses for this metal.
Jewelry Demand
Jewelry accounts for over half of all gold demand in the world and has since at least 2000. Jewelry is an important part of many cultures around the world and is often seen as an important part of one’s identity. It’s estimated that the jewelry industry accounted for 55.4% of global gold demand.
Investment Demand
While jewelry remains by far the largest driver of global gold demand, investment demand has grown considerably in recent years as investors look for ways to diversify their portfolios and protect themselves against inflationary pressures. Gold is traditionally considered a safe haven asset — an asset that does not lose its value during times of economic uncertainty or crisis. As such, it is viewed by many as an excellent way to preserve wealth during volatile economic times. In addition, investors are often attracted by recent price movements, which have seen gold prices move higher over.
Industrial Demand
Industrial uses account for around 12% of all gold demand. This includes coins, bars, and standard bullion, as well as specialty products such as catalysts or dental crowns (which are made from purer grades of gold).
How Do Gold Prices Perform During Recession?
Gold is one of the most popular hedge assets because it has traditionally been thought to protect against inflationary times. But how well does gold hold its value during a recession?
Gold tends to perform well when the economy is doing poorly and vice versa. This means that when the economy falters, and people start to lose faith in their financial system, they move into safe-haven assets, like gold. And when things are going better, they move out of those assets and into riskier ones, like stocks and real estate.
That’s why it’s important to remember that gold isn’t an investment – it’s a hedge for investments. If someone wants to protect themselves against currency devaluation or inflation, then gold is right for them.
The Bottom Line
There is no perfect investment, but gold is certainly one that deserves a place in someone’s portfolio. If someone is looking for somewhere to get started, these tips will help them begin easily and without sacrificing quality. If someone is already a gold investor, they can hopefully provide new insights into refining their strategy and making the most of their precious metals holdings.
Related: Interested In Investing In Precious Metals That Aren’t Gold? Consider These 9 Options
