Purchasing gold is sometimes the go-to option for investors hoping to hedge themselves against currency risk and inflation.
You surely won’t find any shortage of individuals talking about the advantages of (and trying to sell you) gold bullion.
Also, there’s no doubt that gold prices have a weak correlation with stock returns. Precious metals have remained a storage of wealth for many centuries. Similarly, gold enjoys practical uses in medicine, manufacturing, and other sectors.
Nonetheless, did you know that buying physical gold is not the only option for safeguarding your assets, nor is it essentially the best one?
Buy/sell spreads and storage expenses, together with the fact that physical bullion does not have cash flow, makes investing in gold a solid option for wealth preservation. However, at the same time, it is not an investment in the true sense of the world.
Practical Ways of Investing in Non-Physical Gold Investments
1. Gold ETFs and Mutual Funds
Gold ETFs and Mutual Funds offer an alternative to buying gold bullion directly. These specialized investment instruments represent a fixed amount of gold, like one-tenth of an ounce, and can be bought or sold just like stocks in brokerage or retirement accounts.
Investing in these funds is easier and more cost-effective than owning physical gold, especially for small investors. The minimum investment required is only the price of a single share of the ETF, making it accessible to more people. The annual expenses for these funds are usually lower, around 0.61%, compared to many other investments, like most mutual funds.
While some mutual funds include gold bullion and gold companies in their portfolios, only a few focus solely on gold investing. The advantages of gold-only mutual funds are their low cost, low minimum investment requirement, diversification among different companies, and easy ownership in brokerage or retirement accounts without the need for individual company research.
Some funds invest in mining company indexes, while others are directly tied to gold prices. Some are actively managed, while ETFs follow a passive index-tracking strategy, resulting in lower expense ratios. For the average gold investor, mutual funds and ETFs are normally the easiest and safest ways to invest in gold.
2. Gold Futures and Options
Gold Futures and Options are contracts used to buy or sell a specific amount of gold on a future date. These contracts are standardized and represent a predetermined quantity of gold, which can be quite substantial. Therefore, they are more suitable for experienced investors.
Futures contracts have low commissions and margin requirements, making them attractive to some investors. However, it’s crucial to pay attention to contract specifications to avoid taking delivery of a large amount of gold on the settlement date.
Options on futures provide an alternative to directly buying a futures contract. They give the option owner the right to buy the futures contract at a predetermined price within a specific timeframe. One advantage of options is that they allow leveraging your original investment while limiting potential losses. However, buying an option requires paying a premium in addition to the underlying value of gold.
Both futures and options can be volatile and may not be suitable for all investors. They are especially popular among those dealing with significant sums of money due to their cost-effectiveness in buying or selling gold.
When You Invest in Gold Using Indirect or Alternative Methods, There Are Certain Risks to Be Aware Of:
If you invest in gold mining stocks instead of physical gold, there are potential benefits like leverage and diversification. However, there are also risks to consider. These risks include market risk (the chance that the stock’s value will fluctuate with market conditions), credit risk (the risk that the company may not be able to pay its debts), liquidity risk (the difficulty of buying or selling the stock), and management risk (the risk of poor decisions made by the company’s management).
Investing in mutual funds or ETFs that focus on gold can be a way to invest in a variety of gold-related assets without owning physical gold. But these options also come with their own risks, including market risk and management risk.
Gold-based savings plans and gold certificates are other methods to invest in gold without having to physically hold it. However, they have their own set of risks, such as credit risk (the risk of the issuer not being able to fulfill its obligations) and potentially being less liquid than physical gold.
Gold futures contracts and options on gold futures are complex financial tools that allow you to buy or sell gold at a specific price on a future date. But they also carry risks, such as market risk, liquidity risk, and the risk of loss due to margin calls (having to put up additional money to cover potential losses).
It’s essential to carefully consider all these risks and advantages before making any investment decisions regarding gold.
How Do Gold Mining Stocks Differ from Investing in Physical Gold?
Gold mining stocks signify ownership in a company that mines gold, allowing you to share in the company’s profits. There are some potential benefits to investing in gold mining stocks compared to physical gold. One advantage is the use of leverage, which means you might have the chance to make higher returns on your investment than with physical gold. But remember, this also means there’s a higher risk of potential losses.
Another benefit is that gold mining stocks can add diversification to your investment portfolio. They might not move in the same direction as other assets like stocks or bonds, making them less affected by changes in those markets.
However, investing in gold mining stocks also comes with its own set of risks. The value of these stocks can be influenced not only by the price of gold but also by the performance of the mining company itself. Economic and political factors, like regulations or taxes, can also impact the value of these stocks more than physical gold.
The best gold investment for your portfolio depends on your resources and investment objectives. If you’re a larger investor seeking direct exposure, you might consider investing in gold bullion. However, keep in mind that this option involves paying a premium and storage costs. On the other hand, Exchange-Traded Funds (ETFs) and mutual funds that track the gold price can provide a low-cost way to gain exposure with lower minimum investments.