Blog Details

Throughout history, from ancient civilizations to the present day, gold has consistently held its position as the preferred global currency.

There are several avenues to purchase gold. These range from investing in physical bullion (such as gold bars) to mutual funds, futures, mining companies, and jewellery. However, it's important to note that only bullion, futures, and select funds offer a direct exposure to gold, while others derive their value from different sources.

Today, investors primarily buy gold as a safeguard against political instability and inflation due to its historically low correlation with other asset classes. Additionally, many investment experts advocate for portfolio diversification with commodities like gold to mitigate overall portfolio risk.

Key Takeaways:

• The most straightforward method to acquire gold is by purchasing physical gold bars or coins, though these can be less liquid and require secure storage.

• Exchange-traded funds (ETFs) and mutual funds tracking gold prices are popular alternatives.

• Gold ETFs and mutual funds allow for smaller investments compared to bullion and may offer less direct price exposure.

• For those with access to derivatives markets, gold futures and options present another avenue for investment.

• Indirect ownership of gold can be achieved through investing in gold mining stocks, though their share prices may not closely track gold's value over the long term.

Gold Bullion

When discussing direct ownership of gold, one of the most recognized forms is gold bullion. Commonly associated with the hefty bars safeguarded in places like Fort Knox, such bullion actually encompasses any pure or near-pure gold certified for its weight and purity. This broad definition includes gold coins, bars, and various other forms, regardless of size. Often, gold bars are marked with serial numbers to bolster security measures.

While the sight of hefty gold bars is impressive, their sheer size, sometimes reaching up to 400 troy ounces, poses liquidity challenges, rendering them costly to buy and sell. Imagine owning a single gold bar worth $100,000; selling even a fraction of it proves cumbersome. Conversely, smaller-sized bars and coins offer greater liquidity and are favoured by many gold owners.

Problems with Bullion

Despite its allure, gold bullion poses several challenges. Storage and insurance costs, coupled with dealer markups, can erode profit margins. Additionally, investing in gold bullion directly ties one's investment to gold's value, meaning any fluctuation in gold prices directly affects the value of the holdings.

Gold Coins

Gold coins have long been issued by sovereign governments worldwide, offering investors a tangible form of investment in precious metals. Typically procured through private dealers, these coins often carry a premium ranging from 1% to 5% above their intrinsic gold value, although this premium can vary.

The benefits of investing in bullion coins are numerous:

• Their prices are readily available in global financial publications, aiding transparency in the market.

• Bullion coins are frequently minted in smaller denominations, such as one ounce or less, providing investors with a more manageable and liquid investment option compared to larger gold bars.

• Reputable gold dealers are easily accessible, particularly in major urban centers, facilitating secure transactions.

Prominent examples of widely traded gold coins include the South African Krugerrand, the U.S. Eagle, and the Canadian Maple Leaf.

It's essential to note that while some gold coins hold additional value due to their rarity or historical significance, known as numismatic or "collector's" value, investors primarily interested in gold as a financial asset should focus on widely circulated coins. Reserved for collectors, rare coins carry additional premiums beyond their gold content and may not align with the investment objectives of gold-focused investors.

Gold ETFs and Mutual Funds

Gold-Based Exchange-Traded Funds (ETFs)

For those seeking an alternative to directly purchasing gold bullion, one avenue is through gold-based exchange-traded funds (ETFs). Each share of these specialized securities represents a fixed amount of gold, typically one-tenth of an ounce.

ETFs can be bought and sold similar to stocks, through any brokerage account or individual retirement account (IRA). This method offers greater ease and cost-effectiveness compared to owning physical bars or coins. It's particularly advantageous for small investors, as the minimum investment is only the price of a single share of the ETF.

The annual average expense ratios of these funds are often around 0.61%, significantly lower than fees and expenses associated with many other investments, including most mutual funds.

Mutual Funds

Many mutual funds include gold bullion and gold companies within their portfolios. However, it's important for investors to note that only a few mutual funds concentrate solely on gold investing; most also have exposure to various other commodities.

The primary advantages of gold-only mutual funds include:

• Low cost and minimum investment requirements

• Diversification across different companies

• Ease of ownership within a brokerage account or IRA

• Elimination of the need for individual company research

Some funds invest in mining company indexes, while others are directly linked to gold prices. Some are actively managed, while others follow passive index-tracking strategies. Investors should refer to their prospectuses for detailed information.

Traditional mutual funds typically employ active management strategies, while ETFs generally adhere to passive index-tracking approaches, resulting in lower expense ratios.

For the average gold investor, mutual funds and ETFs are typically the simplest and safest ways to invest in gold.

Gold Futures and Options

Gold Futures

Gold futures are agreements to buy or sell gold at a predetermined date in the future. Investors often favour futures due to their low commissions and margin requirements, which are significantly lower than those of traditional equity investments.

These contracts standardize the amount of gold being traded, typically representing a substantial quantity, such as 100 troy ounces multiplied by the current market price per ounce, resulting in a significant total value, for instance, $100,000. Consequently, futures trading is better suited for experienced investors who can manage larger-scale transactions.

Gold futures contracts may settle in either dollars or physical gold, necessitating careful attention to contract specifications to avoid unexpected obligations, such as taking delivery of a considerable amount of gold upon settlement.

Options on Future

Options on futures offer an alternative approach to directly purchasing futures contracts. With options, investors gain the right to buy a futures contract within a specified timeframe at a predetermined price.

One notable advantage of options is their ability to amplify the original investment while capping potential losses at the premium paid. In contrast, purchasing a futures contract on margin may demand more capital than initially invested, particularly if losses escalate swiftly.

However, opting for options entails paying a premium above the underlying gold value. Given the volatile nature of futures and options trading, these investment instruments may not be suitable for all investors.

Gold Mining Companies

Investing in gold mining and refining companies can yield profits alongside a rising gold price. Such investments often carry lower risks compared to other methods. These companies, with their expansive global operations, are influenced by common business factors, contributing to their potential success.

Their global reach enables them to navigate through periods of stagnant or declining gold prices. Many employ hedging strategies against downward price trends, mitigating potential losses. However, not all companies opt for this approach.

Investing in gold mining companies presents a relatively safer alternative to direct ownership of bullion. Nonetheless, it demands thorough research and due diligence from investors, which can be time-intensive and may not be viable for all.

Gold Jewellery

About 49% of global gold production is used to make jewellery. With the world’s population and wealth growing annually, demand for gold used in jewellery production should increase over time.

On the other hand, gold jewellery buyers are known to be somewhat price-sensitive, buying less if the price rises swiftly.

Buying fine jewellery at retail prices involves a substantial markup—up to 300% or more over the underlying value of the gold. Better jewellery bargains may be found at estate sales and auctions. The advantage of buying jewellery this way is that there is no retail markup. The disadvantage is the time spent searching for valuable pieces.

Nonetheless, jewellery ownership provides an enjoyable way to own gold, even if it is not the most profitable from an investment standpoint. As an art form, gold jewellery is beautiful. As an investment, it is mediocre—unless you are the jeweller.

Gold As a Hedge

Due to its historically low correlation with other investment assets, gold has long been regarded as a safeguard during economic downturns. Notably, gold's correlation with stock market performance has consistently remained minimal, often moving inversely to the dollar. Consequently, periods of dollar depreciation often coincide with strength in gold prices.

Investors may increasingly turn to gold as a hedge against declines in other asset classes, especially in anticipation of a recession. Historical data indicates that gold prices typically rise when inflation-adjusted bond yields fall, suggesting prudence in allocating a portion of one's portfolio to gold to mitigate risks during economic challenges.

What Is the Best Way to Invest in Gold?

The optimal choice varies based on your resources and investment objectives. For substantial investors seeking direct involvement, purchasing gold bullion is an option, albeit with associated premiums and storage expenses. Alternatively, exchange-traded funds (ETFs) and mutual funds offer cost-effective exposure to gold with minimal investment thresholds. Investing in gold mining companies is another avenue, although their performance may not consistently align with the long-term trajectory of gold prices. Lastly, owning gold in the form of jewellery can provide personal satisfaction, yet it's less inclined to yield significant investment returns.

How Do Beginners Buy Gold?

The choice hinges on your resources and investment objectives. For sizable investors seeking direct engagement, gold bullion may be the route, albeit entailing premiums and storage expenses. Alternatively, ETFs and mutual funds mirroring gold prices provide cost-effective exposure with minimal investment requirements. Investing in gold mining firms is an option, although their stock performance may not consistently align with gold's long-term trends. Lastly, owning gold through jewellery can offer personal satisfaction, yet it's less inclined to yield substantial investment returns.

Is Gold a Good Investment During a Recession?

For more details, Check out the related blogs on this topic.