The Ultimate Guide to Investing in Gold

The gold market presents lucrative opportunities for investors due to its limited supply and high demand. Unlike fiat currencies or stocks, the world has a finite amount of physical gold, making it a sought-after asset.

Gold’s value extends beyond its aesthetic appeal; it also serves vital roles in industrial and technology sectors due to its unique properties.

Over the years, the price of gold has witnessed significant growth, soaring from about $20 per ounce in 1919 to approximately $1,850 per ounce today. This remarkable increase even accounts for inflation, reaching over 440%.

One of the driving forces behind the surge in gold demand is global inflation. In 2022, the world witnessed a staggering 40-year high in U.S. inflation rates, prompting many individuals to seek refuge in gold and cryptocurrencies as potential hedges.

While gold prices remained relatively stable in 2022, the price of Bitcoin, often referred to as digital gold, plummeted by 64% during the same period.

Looking ahead to 2023, analysts anticipate that the drop in cryptocurrency values will further bolster the gold market. Besides the usual factors such as incremental purchases, jewelry sales, and central bank accumulations, this additional support could lead to continued growth in the gold industry.

5 ways to invest in gold

Gold has attracted significant attention from investors due to its remarkable price trajectory and increasing global demand. There are various ways to invest in gold, providing investors with diverse options based on their preferences and risk appetite.

Gold bullion 

One common method of investing in gold is through gold bullion. This involves purchasing physical gold in the form of coins or bars. Gold bars are available in different sizes, ranging from as small as 1 gram to as large as 1 kilogram. On the other hand, gold coins are typically available in weights starting from one-tenth of an ounce up to one ounce.

The United States government offers gold bullion coins known as American Eagle coins, which contain 91.67% gold. Additionally, several private companies produce gold bullion coins, offering investors a broader selection.

When buying gold bullion, it’s crucial to acquire it from a trustworthy source or a reputable metals and coins dealer like APMEX, SD Bullion, or JM Bullion. This ensures the authenticity and quality of the gold purchased.

However, investing in physical gold also requires careful consideration of storage options. Investors can choose to store their gold at home, in a safe deposit box at a bank, or with a private depository. Opting for a private depository can provide enhanced security and added convenience, as they often offer online access for easier buying and selling. Yet, it’s essential to be aware of the storage costs associated with private depositories.

Gold stocks

Gold mining stocks and gold streaming or royalty stocks offer alternative ways to invest in gold. As the price of gold rises, these stocks can become more profitable due to their strong correlation with gold returns.

Some well-known gold mining stocks in the market include Newmont (NEM), Barrick Gold Corp. (GOLD), and Franco-Nevada Corp. (FNV). However, it’s essential to recognize that gold stocks tend to be more volatile than the actual gold spot prices, even though they remain closely correlated.

In essence, investing in gold mining stocks can serve as a proxy for owning physical gold in an investment portfolio, providing investors with exposure to the precious metal without directly holding it.

Gold ETFs 

If you want to diversify your gold investments, consider looking into gold exchange-traded funds (ETFs). These funds offer a range of options to suit your preferences and risk tolerance.

One popular type of gold ETF is the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), which focus solely on holding physical gold bullion, providing a straightforward exposure to the precious metal.

Alternatively, if you are interested in investing in gold mining companies, you can explore ETFs like VanEck Vectors Gold Miners ETF (GDX) and iShares MSCI Global Gold Miners ETF (RING). These funds offer exposure to a basket of gold mining stocks, providing you with indirect exposure to gold through the performance of mining companies.

For investors seeking potentially higher returns and are willing to take on greater risk, leveraged gold ETFs like ProShares Ultra Gold (UGL) and WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE) can be considered. These funds use futures contracts to amplify daily or monthly returns on gold prices. However, it’s important to note that leverage also increases the potential for losses, so caution is advised.

Overall, gold ETFs present a convenient way to invest in gold, whether you prefer direct exposure to the metal itself or a diversified portfolio of gold-related assets, tailoring your investment strategy to your specific financial goals.

Gold mutual funds

In the realm of precious metal investments, there are two primary options available: gold ETFs and gold mutual funds. Each has its unique advantages and characteristics to consider when making investment decisions.

Gold ETFs provide an opportunity to invest in the metal itself or shares of precious metal mining companies. These ETFs offer a lower-cost alternative and are generally more liquid, making it easier to enter or exit positions. This liquidity aspect can be particularly appealing to investors looking for flexibility and quicker access to their funds.

On the other hand, gold mutual funds also present a viable option for investors. These funds typically hold stocks of mining companies, but some may choose to invest in physical metals directly. By investing in mutual funds, investors gain exposure to a diversified portfolio of mining company stocks, which can help spread risk across different assets.

When considering gold mutual funds, there are specific options worth exploring. For instance, the First Eagle Gold Fund (SGGDX) is heavily weighted toward gold stocks, such as Newmont and Barrick Gold. Another option is the Invesco Gold and Special Minerals Fund (OPGSX), which focuses on gold mining companies in its portfolio.

Gold futures and options 

Consider gaining exposure to gold through futures and options contracts if you’re looking for a sophisticated investing option. These contracts are traded on exchanges and provide the contract buyer with the right or obligation to buy a predetermined quantity of gold at a set price on or before a future delivery date.

One advantage of using futures and options is that you can speculate on physical gold without the need to worry about storage and associated costs like insurance or specialized storage services. This convenience can make them an attractive choice for investors interested in gold.

With options, you have the flexibility to sell your contracts before they expire, providing you with more control over your investments. On the other hand, commodity futures contracts require the contract holders to either buy or sell the underlying commodity.

While options offer this flexibility, they come with a premium cost, making them relatively more expensive upfront compared to futures contracts. As an investor, it’s essential to weigh the pros and cons of both options and decide which one aligns better with your investment strategy and risk tolerance.

Advantages of investing in gold

Gold is often included in diversified portfolios due to its unique characteristics. However, it should be noted that gold doesn’t primarily function as a wealth generator like other investments. Instead, its key advantage lies in its ability to act as a hedge against market volatility. One of the reasons investors consider gold as a part of their portfolio is its reputation as a reliable store of value, especially during uncertain economic times. By holding gold, investors aim to mitigate the impact of inflation on their overall portfolio. Furthermore, gold’s lack of strong correlation with other assets makes it a valuable tool for balancing a diversified investment strategy.

Disadvantages of investing in gold

Gold is unique compared to stocks and bonds in that it doesn’t generate dividends or interest. Additionally, there are expenses involved in storing and insuring physical gold, which can reduce potential profits. It’s worth noting that the performance of gold is not consistently outstanding. Although it tends to perform well during times of market instability, in a stable and strong economy, gold often falls behind other commodities.

Should you invest in gold?

Gold’s inclusion in a balanced portfolio is advisable to achieve diversification, especially for long-term investment goals. Its low or even negative correlation to stocks and bonds makes it a valuable asset for offsetting potential stock market losses. For example, while the S&P 500 experienced a significant loss last year, gold managed to maintain a slight gain.

Looking ahead to 2023, the outlook for gold remains bullish due to the Federal Reserve’s efforts to tighten monetary policy and combat inflation, which puts pressure on the U.S. economy. In case inflation persists and the Fed raises rates beyond market expectations, the risk of a recession could increase, leading to gold benefiting as an inflation hedge and safe haven asset.

However, gold has certain drawbacks as an investment. Over the long term, gold prices have considerably lagged behind the stock market. While the Dow Jones Industrial Average has delivered substantial returns since 2013, gold’s returns have been relatively modest.

Another limitation of gold is that it does not generate cash flow or provide interest or dividends. Its price is solely determined by supply and demand dynamics. In contrast, stocks represent ownership in companies that have the potential to grow and increase profits over time, which can enhance the value of the investment. Additionally, many stocks pay dividends that can be reinvested to compound returns.