Gold has long been thought of as a store of value. The precious metal seems to have a certain mystique about it, with gold jewelry and bars of gold giving off an aura of wealth. At one point, the U.S. dollar was linked to the price of gold via the gold standard. This relationship started in the 1830s and lasted until 1971. Some historians say the gold standard contributed to the Great Depression.
Gold as an investment is a bit of a different endeavor versus more traditional investments in stocks and bonds. Here we will discuss some key aspects of investing in gold and how to get started trading it.
Gold has long served as a hedge against rising inflation and a declining U.S. dollar. It also serves as a haven in times of economic and political turmoil.
‚ÄúGold, along with silver and other ‚Äėtangible‚Äô assets like real estate, protect wealth as currency depreciation erodes purchasing power,‚ÄĚ said Brien Lundin, editor of Gold Newsletter and CEO of the New Orleans Investment Conference. ‚ÄúThe prices of these tangible assets tend to rise as the currency they‚Äôre priced in erodes. But historically ‚ÄĒ for about 5,000 years, in fact ‚ÄĒ gold has stood above all other options as the standard of wealth preservation as currencies devalue.‚ÄĚ
Multiple factors affect the price of gold:
Buying and selling gold is not just limited to one format. There are several ways to trade gold and use it as an investment.
According to Lundin, there‚Äôs a wide spectrum of gold investments, ranging from physical metals ‚ÄĒ bars and coins, to securitized physical holdings ‚ÄĒ ETFs, futures and options, mining stocks, and more. ‚ÄúAnd within each category, there are many options as well,‚ÄĚ said Lundin.
Several forms of physical gold can be owned ‚ÄĒ gold bars and coins are two of the most popular ways available. When buying physical gold, you will want to check the current spot price of gold to ensure that you don‚Äôt pay too much of a premium for the gold.
Also, try to ensure that you are buying the physical gold from a reputable gold dealer. Gold can be purchased online and at local jewelry stores. The U.S. Mint has a site to help you locate a gold dealer in your area. These dealers are checked against BBB reports, but the Mint does not make any guarantees.
You can also buy gold coins directly from the U.S. Mint.
It‚Äôs also important to ensure that any gold you own is stored in a safe place. This might be a bank safe deposit box or if it is a small quantity you could store it at home. You want to be sure the gold is stored securely to avoid theft, just like any other valuable.
Futures contracts trade on exchanges like the Chicago Mercantile Exchange and allow the holder the right to buy gold in a specified quantity for a specified period of time.
Trading gold futures contracts on an exchange like the Chicago MERC requires an initial deposit called a margin to open a trading account. Each day that you hold the contract, it will be marked-to-market based on the value of the amount of gold each contract controls.
If the value of your futures account drops below a specified amount, called a maintenance margin, you will either need to add additional cash or liquidate your futures position.
Typically, futures contracts do not end with the contract holder taking physical delivery of the underlying quantity of gold upon expiration. Settlements are made in cash. Trading gold futures should generally be thought of as a way to speculate on the price of gold.
That said, futures contracts can occasionally result in the physical delivery of the metal. This process will vary a bit based on the exchange involved.
Gold exchange-traded funds (ETFs) are funds whose underlying portfolio consists of physical gold. Investors in these ETFs don‚Äôt have to worry about the storage of physical gold, tracking futures contracts or maintaining sufficient levels in their account. Gold ETFs are traded on exchanges just like other ETFs that invest in stocks, bonds and other instruments.
Some popular gold ETFs include:
According to ETF Database, GLD and IAU had just over $33 billion and just under $12 billion in assets as of January 2019, respectively. The next largest gold ETF had about $860 million in assets, according to their data.
As far as mutual funds, there are a number of funds that are in the precious metals space. Many of these funds invest in stocks of companies in the gold and precious metals space. Examples of a few popular mutual funds in this space include:
Note in both cases, these funds invest in gold stocks as well as the stocks of other firms in the precious metals space versus holding gold in reserve as with the ETFs described above. The underlying stocks held in the portfolios of these mutual funds and those of other similar funds are sensitive in large part to the price of gold, but again are not a direct investment in the commodity.
Gold-mining stocks are another popular way for investors to get exposure to gold. These are stocks of companies who mine the metal and participate in other stages of the process.
An example of two well-known gold mining stocks:
These and other gold mining and processing stocks will track the price of gold to a point but will also rise or fall based on the underlying fundamentals of the companies much like the stocks of companies in various industries.
‚ÄúThere are lots of potential pitfalls in this sector, which is why it‚Äôs so important for an investor to take the time to educate themselves,‚ÄĚ said Lundin who shared some areas of caution for investors considering gold. ‚ÄúIn buying physical gold or silver bullion, for example, steer clear from rare coins (numismatics) or limited-edition modern coins. These areas are for hobbyists, and no one makes money from them without it first becoming a hobby that they avidly follow.‚ÄĚ
‚ÄúAlso, again, check prices, and if you‚Äôre buying or selling to a coin dealer, make sure they‚Äôre a member of the Professional Numismatists Guild,‚ÄĚ Lundin added. ‚ÄúOne other good idea: If you‚Äôre selling grandpa‚Äôs coin collection to a dealer, do some research on the web and check with at least three dealers. And don‚Äôt ask them, what will you pay me for these coins? Instead, ask what are they worth?‚ÄĚ
Gold is a popular and often misunderstood investment. It has long been considered a store of value and serves as a hedge against inflation and currency fluctuations. Gold investing, in its various formats, can be a potentially lucrative addition to an investor‚Äôs portfolio as long as the opportunities ‚ÄĒ as well as the risks ‚ÄĒ are well understood.