There has always been a fascination with gold. It is a store of value, it's used in jewelry and is a legitimate alternative investment. Here are some things to know when considering an investment in gold.
Ways to invest in gold
There are a number of ways for individuals to invest in gold, here are a few to consider.
Gold bullion involves purchasing the actual metal either in coin or gold bar formats. Typically investors would purchase the bullion from a gold dealer, but they may also be available from other sources including banks or brokerages in some cases.
With physical gold, you will need to consider how and where the bullion will be stored, if you own more than a small amount keeping it at home is not a good idea due to the prospect of theft or other risks.
Gold bullion is a physical asset, unlike paper or digital assets it is not subject to hacking. Physical gold can also offer a level of privacy, other than a record with your gold storage facility there are no online records of your ownership as with stocks, mutual funds, ETFs or other investments.
Gold coins usually weigh one or two ounces. Collectible gold coins such as the South African Krugerrand, the Canadian Maple Leaf and the American Eagle coins are commonly available to those who wish to invest in gold coins.
The value of these and other gold coins will be based on both the relative value of gold and the collectible value of the coins. The price often may not correlate exactly with the price of the underlying weight of the gold in the coins.
Purchases can be made from local collectors or even a local pawn shop, but a reputable gold dealer may be your safest bet. As with gold bars, you will need to find a safe place to store these coins.
Gold jewelry can be both an investment and something to wear. As an investment the gold content of the jewelry is important. In some cases jewelry from a particular designer or of a certain type may have value beyond just the level of gold content.
If you are buying the gold jewelry for its collectible value, it's critical to ensure that you make this purchase from a reputable dealer and obtain appropriate documentation to ensure that the jewelry is authentic.
Gold miners stock
Buying stock in gold miners means buying the stock of companies engaged in the mining, processing and selling of gold and perhaps other precious metals. Buying these shares is as much about trading in stocks as it is tied to investing in gold.
Gold miners typically engage in mining and processing the metal. To the extent that the price of gold is up, demand for the metal will likely be higher. However, the price of the shares will depend on factors beyond the relative price of gold.
Buying stock is an investment in a company. As such, gold miners need to be evaluated based on factors like the growth of revenues and profits, as well as the quality of their balance sheets.
Gold ETFs can be a means to invest in either the metal or in gold miners and other companies whose business is related to gold.
Some gold ETFs such as the SPDR Gold Shares ETF (ticker GLD) hold physical gold and at times cash. The fund is backed by gold which is held in a secure vault. Investing in GLD is a way for investors to track the price of gold, less the ETF’s expenses, without having to worry about owning or storing the metal. Investing via an ETF also provides daily liquidity when the investor wants to buy or sell.
There are also ETFs that invest in the stocks of gold mining companies. This is the same principle as any type of sector ETF. VanEck Vectors Gold Miners ETF (ticker GDX) tracks the NYSE Arca Gold Miners Index. This index is a market capitalization weighted index of publicly traded companies involved in the mining of gold and silver. This type of ETF is tied to the performance of these companies and not directly to the price of gold or silver.
ETFs are traded daily on stock exchanges and provide investors with the same daily liquidity as stocks.
Gold mutual funds
Investing in gold mutual funds is similar to investing in gold ETFs except that mutual funds are only traded at the end of each business day that the markets are open.
Franklin Gold and Precious Metals fund (ticker FKRCX) is an actively managed mutual fund that invests in shares of gold miners plus shares of companies that mine and process other types of precious metals such as silver, platinum and palladium. While this fund is actively managed and doesn’t follow a passive index like the GDX ETF, the returns of this fund are also tied to the performance of the shares of the underlying holdings versus directly to the price of gold or other precious metals.
Futures and options
Futures and options are derivative instruments. As such these instruments are very speculative and are a bet on the price movement of gold.
A gold futures contract is an agreement to buy or sell a quantity of gold at a set price on a certain date. The price of the futures contract is tied to the price of the underlying amount of gold covered by the contract. An options contract gives you the right to buy or sell a set amount of gold if it reaches a certain price on or before a specified date.
In order to invest in gold futures or options contracts you will need to open a brokerage account that offers the ability to trade these types of contracts. Many online brokers offer this capability. When opening an account that allows trading in futures and options, some brokers will require you to sign paperwork acknowledging that you fully understand the risks of trading options or futures contracts.
Trading gold options contracts or futures is simply about making a bet on the price movement of gold. In the case of gold futures, this can also be a way to hedge against a drop in price of physical gold that you might own or are considering purchasing. If you own a long futures contract, you are agreeing to accept delivery of a set quantity of the physical metal. If you sell a futures contract, a short position, this can obligate you to deliver a set quantity of gold by a certain date. Most speculators either sell their futures or offset the position to which physical delivery doesn’t occur.
Why invest in gold?
Gold has long been considered a store of value. At one time the U.S. dollar was backed by gold. While it no longer backs the dollar, gold still can have value as an investment.
Gold is an alternative asset and can serve as a source of diversification for an investor. Gold typically has a relatively low correlation with stocks, bonds and real estate.
Gold is generally a solid hedge against inflation. The price of gold will generally keep pace with or exceed the general level of inflation, though this can vary from time to time.
Major financial institutions such as some central banks and the International Monetary Fund hold a significant percentage of the world’s gold supply on their balance sheets. This speaks to the quality of gold as a store of value and potential inflation hedge.
Historically gold has held its value over time, through good times and bad. Additionally, gold has value in some industrial applications as well as a raw material for jewelry.
Gold is often considered a safe haven asset during periods of currency fluctuation. For example during the decade of 1998 to 2008, the value of the U.S. dollar declined, however the price of gold nearly doubled over this period. Gold can be a hedge against declines in major currencies like the U.S. dollar.
Gold is sometimes known as the “crisis commodity” and can act as a hedge against an economic and financial crisis, as well as global instability. Often in times of past economic instability we’ve seen the price of gold rise to new highs.
Should you invest in gold?
Gold can have a place in your investment portfolio as it is a legitimate alternative asset. It’s relatively low correlation to traditional asset classes provides diversification. For long-term investors this diversification can help reduce the volatility inherent in the stock market and the potential impact of rising interest rates and inflation on bonds. That said, it is important to understand that the price of gold can be volatile as well.
As with any type of investment, it's important to understand what you are investing in and to have an objective for your investment in gold. If you are investing in physical gold bullion, either coins or gold bars, you will need to arrange for secure storage of the gold. You will want to fully understand how to access the gold if needed and how to arrange for the sale of your gold if needed.
You will want to educate yourself about gold before investing. How does the sale and purchase and sale work? What types of fees are involved with any type of broker or middleman on either side of the transaction.
If you decide that investing in gold is right for you, the next step is to decide how to best make this investment. We’ve mentioned some of the issues surrounding an investment in physical gold.
Investing in the stocks of gold miners, or in mutual funds and ETFs that invest in these stocks is a way to participate in the industry. These stocks will tend to do well when the price of gold and some related precious metals do well, but this is not an investment in gold per say. As with any stock in any company in any industry, the price of the stock will be impacted by the company’s profitability, the quality of its balance sheet and factors related to the stock market as a whole.
For those who purely want to speculate on the price of gold, options contracts and futures offer a way to play the price movements. It’s important to understand the risks of both types of vehicles before moving forward.
A practical way for any investors to participate in the movement of gold’s price is via a gold ETF. These ETFs are backed by physical gold, but offer daily liquidity via their ETF format.