Investing in gold
Investing in gold is low-risk and a stable investment to diversify your portfolio. More so than economic fluctuations, gold investments depend on supply and demand. You can invest in gold bullion (bars or coins), gold options, company shares and ETFs.
Why invest in gold?
In a modern economy where we pay with paper bills or credit cards and cryptocurrency is gaining popularity, you might think it is a bad time to invest in gold. However, precious metals have a relatively fixed value over time.
It is protected against inflation and not sensitive to destabilizing world events, such as government collapse.
Gold is protected against inflation and not sensitive to world events.
This is why central banks and other financial organizations hold about one-fifth of the world’s gold supply. In recent years central banks have even increased their gold reserves to cushion the global economy. The Covid-19-pandemic has also positively impacted the gold market’s prospects.
Risks and returns of gold investments
Compared to many other investments, owning gold is quite a safe bet for investors. With gold you are not dependent on company results, for example, but on supply and demand. This is different in that it does not relate to economic growth.
When companies perform badly or there is an economic crisis, gold is actually more in demand as an investment. Therefore investing in gold carries minimal risk. For this reason, it can act as a good diversifier in your investment portfolio.
Gold can be a good diversifier in your investment portfolio.
While stocks and bonds can generate income, the returns of gold are entirely based on price appreciation. To illustrate: between 2005 and 2020, the gold price has more than tripled. Stocks often generate higher returns, but also carry more risk. Bonds, which carry similar risks to gold, have been outperformed by the gold market in the last decades.
Where can I invest in gold?
You can invest in gold through a bank that offers gold assets or use an online trading platform. The latter is by far the most popular and easier option.
This is because, first of all, a bank might not offer your gold investment product of choice. Online investment platforms are also usually cheaper and more accessible for novice investors.
Gold versus bonds
Bonds, such as government bonds, are often compared to gold in that they carry very little risk. Bonds are a type of tradable loan. The value of government bonds depends on the operations of an entire country, which means they are quite stable as well. After all, the chances of the whole country going bankrupt are very small.
In the long term, gold has a higher chance of good returns.
However, the downside to bonds is that the returns are limited too. Profits from bonds are mainly based on interest rate as well as a possible price gain in times of economic downturn. While financially bad times can be profitable for gold investments too, it can also benefit from a flourishing economy. This is why, in the long term, gold has a higher chance of good returns while also being risk averse.
Buying physical gold
Gold is an easy to store raw material. Therefore investing money in it can be very simple by buying gold bullion like physical gold bars or coins and keeping it somewhere safe.
To improve liquidity, most investors choose to buy gold coins. A novice investor can also easily buy golden coins. Take for example the Krugerrand from South Africa, the American Eagle or the Maple Leaf from Canada. Besides safekeeping, it is recommended that you insure your gold possessions as well.
Just like with other markets and raw materials like oil, the value of physical gold can fluctuate. In theory you can sell your physical gold when the price goes up, but this can be a hassle when dealing with physical materials. There are also transaction and storage costs. Trading in gold is therefore much easier via online trading platforms. The cost of entry is usually lower as well.
Trading gold derivatives
Besides buying and storing gold bars or coins, you can invest in gold without physically owning any. This is also known as indirect investing. The first way to do this is to buy gold derivatives: financial documents whose price corresponds with that of physical gold.
Gold derivatives are more suited for short-term investors.
Gold derivatives are less expensive upfront and you do not have to insure or store them. Gold options or futures are also more suited for short-term investors than physical gold or funds. The returns come from buying and selling options for capital gains when the price of gold moves up or down. The main risk that comes with it is the premium you paid for the contract or unfavorable price fluctuations.
Investing in gold mining companies
Alternatively you can invest in gold mines, which are companies that profit from mining gold. Gold mines can be huge companies, like Barrick from Canada and Newmont from the United States. Companies like these mine gold for tens of millions euros a year.
Investing in a gold mine is like buying shares, which does make you dependent on company results after all. However, gold mines are so interconnected with the gold prices that it is very much like investing in the material itself. There are some additional risks, though.
Gold mines are interconnected with the market for gold.
Buying shares in gold mines has its risks though. For example, mines are sometimes located in less stable countries. War, plundering or illnesses can all influence the possible returns. Or the gold mining company is managed badly and goes bankrupt, which means you lose your investment.
Besides buying derivatives or shares in a gold mine, you can invest in Exchange Traded Funds (ETFs). ETFs function like a fund that follows an index.
But instead of a fund, an ETF has a fixed strategy and is not actively managed by advisors. This means an ETF is often less expensive. Gold ETFs are very popular and perhaps the easiest way to profit from the gold market.
Gold exchange traded funds are very popular and perhaps the easiest way to profit from the gold market.
A gold ETF may invest in various large gold mines across the world. Often there are also silver mines or other mining companies involved, though gold is the main asset. ETFs have the added benefit of automatic risk spreading, without the extra overhead costs of an actively managed fund.
Even though gold funds automatically spread the risks across different companies, it is not totally risk-free. For example, the value of gold can still decrease, impacting your returns. With an ETF you do lower the risk of national or regional affairs, since it consists of mines all over the world.