From ancient civilizations to today’s modern world, gold has always been a core element of the financial system. Its stability and reliability have made it the investment of choice for investors seeking protection against economic turmoil. This guide will look at the best ways to invest in gold, which are suitable even for beginners.
How to invest in gold for beginners?
There are various forms of investment in gold: gold bullion (i.e., gold bars), futures, ETFs, mutual funds, mining companies, and jewelry. Not all of these investments require directly purchasing and holding gold. Only bullion, jewelry, futures, and some specialty funds give you a direct investment opportunity in the precious metal. Other types of gold investments, such as gold mining companies, are indirectly based on gold but also have many other business factors affecting their values.
Note! Gold is not only a precious metal but also a hedge against inflation and portfolio diversification.
So you might be thinking: «How can I invest in gold?». Next, we will talk about each of these investment opportunities in detail so that you can start buying gold as an investment.
Bullion is the most common form of gold owned and held by people. But the large gold bars stored at Fort Knox are not their only form. Gold bullion is a term used to describe any form of gold certified for weight and purity. Bullions can be pure gold or almost pure gold and include bars, coins, and all other shapes and sizes of gold. Gold bars usually have serial numbers attached to them for security purposes.
Large gold bars are an impressive sight. However, their large size and heavy weight (up to 400 troy ounces) mean they cannot be kept as a liquid asset. They are also costly to buy, sell, and transport.
Imagine you own a heavy gold bar worth around $100.000, which is your entire gold holding. If you were to decide to sell 10%, you wouldn’t exactly be able to separate a portion of the bar and sell it. In contrast, gold bullion held as smaller-sized bars and coins have much more liquidity. This convenience is the reason they are common among gold owners.
Governments around the world have issued gold coins for many years. Investors commonly buy gold coins from private dealers, who charge a premium of about 1% to 5% above gold’s actual value. However, there has been an upward trend in the premiums being charged, and up to 10% is being charged in some cases.
Bullion coins are in such high demand because of their advantages:
- Their prices are accurate and available worldwide in numerous reliable financial publications.
- Because they are often minted in a smaller size and weight (one ounce or less), they are one of the various convenient forms of investment in gold or storage.
- Reliable dealers can be found in many large cities.
- Old and rare coins have a «collector’s» value. Their prices are well above and beyond the actual value of the gold.
Note! Some commonly traded gold coins include the U.S. Eagle, the South African Krugerrand, and the Canadian Maple Leaf.
On the other hand, the main disadvantage of gold bullion is that the cost of storage and insurance, along with the relatively large markups from the dealers, hinder most of the profit potential. In addition, buying gold bars as an investment affects the value of gold, and each dollar change in the price of gold changes the value of one’s holdings rateably.
In such cases, other forms of gold investment, such as mutual funds, can be made in smaller amounts than bullion. They might also be influenced lesser by any price changes in gold.
Gold ETFs and Mutual funds
The exchange-traded fund (ETF) and mutual funds are other ways to invest in gold. One ETF share represents a set amount of gold, such as a tenth of an ounce. Like stocks, ETFs can be sold and purchased in any trade brokerage or individual retirement account (IRA). Therefore, this method is much more convenient and cost-effective than owning actual bars or coins of gold.
Gold ETFs’ annual average expense ratios are often around 0.57%. It is much lower than the fees of most mutual funds and other forms of investments. It is especially true for small investors, as the investment needed to start trading gold ETFs is as low as the price of a single share of the ETF.
Numerous mutual funds hold gold bullion and shares in gold companies as a part of their total portfolios. However, investors should know that only a handful of mutual funds focus solely on gold investments (most of them own a diverse range of commodities).
The advantages of gold-only mutual funds are:
- Low minimum investment and cost required.
- Ability to diversify among different companies.
- Convenient ownership using a brokerage account or IRA.
- No need for individual company research.
Some of these funds invest in the indexes of mining companies, while others hold gold and are directly affected by gold prices. Read the prospectuses of the funds you are interested in investing in for more details.
Note! Beginning investors are better off choosing mutual funds and ETFs as one of the safest and easiest ways to invest in gold.
A futures contract is an agreement to buy or sell a set amount of a commodity (such as gold) on a specified date in the future. Futures are standardized and set at a predetermined amount of gold. They are widely used because the fees and margin requirements are much lower than that for traditional stock investments.
The scale of money involved can be significant. For example, a future of 10 troy ounces at the rate of $1000/ounce would mean a total sum of $10.000 changing hands. For this reason, futures are more suitable for well-experienced investors.
Some contracts settle in dollars, while others might settle in gold, making it essential for investors to pay attention to the specifications of the contract to avoid the need to arrange the logistics to accept the delivery of 150 ounces of gold on the agreed date.
The volatile nature of futures means most investors are better off staying away from them. But futures remain the best way to invest in gold when investing large amounts because of the low commissions and interest rates involved.
Gold Mining Companies
The rise in gold prices also benefits companies specializing in its extraction and processing. Investing in such companies can be an effective method to profit from gold with the additional advantage of carrying lower risk than other forms of gold investment.
Since the largest gold mining companies have extensive operations globally, many more business factors play into their success than gold prices. As a result, mining companies can still profit in periods of static or declining gold prices. A critical way they accomplish this is by hedging against a drop in gold prices as a routine part of their business operation. However, only some mining companies do this.
To sum it up, gold mining companies provide a safer form of investing in gold compared to the direct ownership of the bullion. However, just like with all investments, investors need to play their part and carry out due diligence by researching the individual companies they intend to invest in. It can take a long time, so this gold investment plan is unsuitable for all investors.
Approximately 49% of the gold produced globally is used to make jewelry. The demand for gold jewelry is only expected to increase due to population growth and wealth. But the demand for gold jewelry is price-sensitive: customers will buy less in case of the price rises too much.
The retailing of fine jewelry involves a substantial markup over the underlying value of the gold. This markup can go up to 300% or more in some cases. Buying jewelry at auctions and real estate sales is much more profitable. The absence of a retail markup is a significant advantage when buying jewelry this way. However, finding the best offer on the market can take quite a long time.
Owning jewelry might not be a profitable investment, but owning gold is enjoyable. Gold jewelry is beautiful, with its craftsmanship often considered an art form. But again, as an investment, it has little meaningful value as a financial investment unless you are a jeweler.
Gold as a Diversifier
The value of gold has a very low correlation to most types of investment assets. Investors have traditionally considered investing in precious metals as a reliable hedge against economic uncertainty. Gold has earned this role due to its consistently low correlation with the stock market performance. In fact, at times, gold tends to move opposite to the dollar. Thus, periods of dollar weakness can mean a gold price boost.
Based on data from the past decades, gold prices generally go up when yields from inflation-adjusted bond decline. The potential strength of gold as a hedge against drops in the value of other asset classes makes it one of the best hedges when times of economic recession are expected.
For these reasons, it makes sense to set aside part of your investment portfolio for gold. It can act as a cushion against adverse economic conditions.
We do not offer you a gold investment guide in PDF, but we will answer beginner investors’ most common questions.
How can we save by buying gold as an investment?
There is no one size fits all answer to this. Finding the best form of gold investment for your portfolio depends on various individual details, such as your goals and resources. Large investors targeting direct exposure might opt to invest in gold bullion. However, this involves storage costs and paying a premium at the time of purchase, making it unsuitable for small investors.
Mutual funds and ETFs that track the price of gold provide low-cost exposure with low minimum investments. These funds, however, vary in their expense ratios and investment strategies, making it essential for every investor to carry out appropriate due diligence before investing.
Investments in gold mining companies are yet another form of investment in the metal. However, the performance of these stocks only sometimes closely follows the performance of gold. Lastly, enjoying gold jewelry can be a very satisfying way to own the metal, although it is unlikely to generate any profit. Jewelry is considered one of the best gold investments in India.
How do beginners invest in gold?
ETFs and mutual funds are the safest and easiest ways to invest in gold. One share of each of these securities is defined as a fixed amount of gold; these funds can be quickly sold or bought in a retirement account or from a broker. Gold ETFs and mutual funds are recommended for beginner investors because of their low running costs (fees and interest rates) and low investment needed to start investing.
Is gold a good investment during a recession?
Historically, gold has had a low correlation with other investment commodities. Many investors add gold to their portfolios as a hedge against potential economic recessions, as gold prices generally go up when bond yields begin to decline.
Due to everyone’s individual goals, you should personalize the role of gold in your portfolio. Its effectiveness in recessionary periods and how it fits into your overall investment strategy and objectives should be considered when investing in gold.
You and other investors can access gold in several ways, and not all require physical possession of the precious metal. It also doesn’t necessarily need significant initial investment. It is essential to learn which method is suitable for you to profit from your investment ultimately.