Investors frequently look to gold as a safe haven when economic conditions are difficult or international crises like the Russia-Ukraine War cause the markets to become unbalanced. Some investors are seeking for a safe asset with a proven track record of returns, and gold fits the bill because inflation is on the rise and the stock market is trading much below its highs.
Gold is popular among investors for many reasons, and it possesses qualities that make it a useful alternative to conventional securities like equities and bonds. Despite the fact that gold is an asset that doesn’t generate cash flow, they nevertheless view it as a store of value. Because of the Fed’s measures to boost the economy, such as cutting interest rates close to zero, and government spending, some people view gold as a hedge against inflation.
Here are five distinct methods to own gold, along with an overview of some of the associated hazards.
Gold bullion
Buying gold in bars or coins is one of the more emotionally fulfilling methods to do it. You’ll enjoy the gratification of seeing it and touching it, but if you own more than a small amount, ownership also comes with significant disadvantages. The requirement to protect and insure actual gold is one of the biggest downsides.
Purchasers of physical gold are entirely dependent on an increase in the price of the commodity to turn a profit. This is in contrast to business owners, where a firm (like a gold mining company) can generate more gold and, as a result, more profit, raising the investment in that business.
A local dealer or collector may also be able to help you buy gold bullion. Online dealers like APMEX and JM Bullion are also options. Gold can be purchased from a pawn shop. As you are purchasing, take note of the spot price for gold, which is the price per ounce that is currently being offered on the market. To avoid paying more for a coin’s collector value than its actual gold content, you might wish to trade in bars rather than coins.
Risks: If you don’t keep your possessions secure, the largest risk is that someone will physically remove your gold from you. When you have to sell your gold, you run the second-largest risk. Receiving the full market value for your holdings can be challenging, especially if they are coins and you require cash immediately. Therefore, you might have to be content with selling your assets for far less than they would normally fetch on the open market.
ETFs that own gold
A excellent option to owning actual gold is to purchase an exchange-traded fund (ETF) that tracks the commodity if you don’t want to deal with the trouble of doing so or the frantic speed and margin needs of the futures market.
iShares Gold Trust (IAU), SPDR Gold Shares (GLD), and Aberdeen Standard Physical Gold Shares ETF are three of the biggest ETFs (SGOL). These types of ETFs aim to replicate the price performance of gold less the yearly expense ratio of the ETF. As of October 2022, the expense ratios for the aforementioned funds are only 0.4 percent, 0.25 percent, and 0.17 percent, respectively.
The ease with which an ETF can be converted into cash at market value is another major advantage over owning bullion. Similar to selling a stock, you can trade the fund on any day the market is open at the going rate. As a result, gold ETFs are easier to trade and have greater liquidity than real gold.
Risks: ETFs provide you exposure to the price of gold, so if it rises or decreases, the fund should perform similarly, again minus the cost of the fund itself. Like stocks, gold may be erratic sometimes. The major hazards associated with owning the physical metal, however, can be avoided by using these ETFs: safeguarding your gold and getting the most out of your holdings.
Gold futures
Although actual delivery is not what drives speculators, gold futures are a fantastic opportunity to bet on the price of gold growing (or dropping). You could even take physical delivery of gold, if you chose.
The main advantage of buying futures to invest in gold is the huge level of leverage that you can employ. In other words, for a relatively small investment, you can hold a substantial number of gold futures. You might quickly make a large sum of money if gold futures move in the direction you anticipate.
Risks: Investors in futures contracts face a double-edged sword when it comes to leverage. If the price of gold swings against you, you’ll have to put up a sizable amount of money to keep the contract open (this is known as margin), or the broker will close the position and you’ll lose money. Therefore, even if the futures market gives you the opportunity to earn a lot of money, you also have the potential to lose it quickly.
ETFs with mining stock holdings
Don’t want to learn too much about specific gold companies? Then owning an ETF could make a lot of sense. You may gain exposure to the largest gold miners on the market by using gold miner ETFs. You won’t be significantly harmed by the underperformance of any one miner because these funds are well dispersed across the industry.
VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Junior Gold Miners ETF (GDXJ), and iShares MSCI Global Gold Miners ETF are some of the biggest funds in this industry (RING). As of October 2022, the cost ratios for the funds are 0.51 percent, 0.52 percent, and 0.39 percent, respectively. The benefits of owning individual miners are combined with the security of diversification in these funds.
Risks: While the diversified ETF protects you against any one company performing poorly, it won’t protect you against anything that impacts the whole sector, such as extended low gold prices. Additionally, keep in mind that not all funds are created equally when choosing your investment.
While some funds invest in senior miners, which are less risky, others do so with junior miners.
Mining Stocks
Investing in the mining companies that create the gold is another method to benefit from increased prices for the metal.
Given that they can earn from gold in two different methods, this solution may be the greatest one for investors. First, if the price of gold rises, the miner’s revenues rise, too. Additionally, the miner can gradually increase production, creating a double-whammy effect.
Risks: You should thoroughly study the business before investing in particular stocks. There are a lot of really unsafe miners out there, so you should be careful to choose a reputable participant in the market. Avoid little miners and those that don’t yet have a mine that is producing as much as possible.
Finally, mining stocks can be volatile, just like any equities.
Appeal of gold to Investors
Juan Carlos Artigas, worldwide head of research at the World Gold Council, asserts that gold is a highly effective diversifier because of its shown track record for returns, liquidity, and low correlations.
Especially crucial for investors are the following characteristics:
- Returns: Gold has occasionally outperformed stocks and bonds, though it doesn’t usually do so.
- Liquidity: You can easily convert some types of gold-based assets you purchase into cash.
- Low correlations: Gold frequently behaves differently from equities and bonds, so when they rise, gold may fall.
Gold also has additional potential advantages, including:
- Gold can aid in portfolio diversification by reducing the correlation between gold and other assets, making the portfolio as a whole less volatile.
- Gold is a defensive investment because investors frequently turn to it when they sense dangers to the economy.
Furthermore, since gold doesn’t generate cash flow, investors must rely on someone else paying more for the metal than they did in order to profit from gold. Owners of a firm, such as a gold miner, might profit from both the rising price of gold and the enterprise’s growing profits, in contrast. Thus, there are numerous ways to invest in and profit from gold.
Conclusion
Not everyone should invest in gold, and some investors prefer to stay with making bets on companies with steady cash flow rather than hoping that someone else will pay more for the flashy metal. For this reason, renowned investors like Warren Buffett advise against buying gold and instead recommend investing in cash-generating companies.
Additionally, stocks and ETFs are simple to hold and very liquid, allowing you to rapidly convert your position to cash if necessary.
If you’re an expat living in Dubai, where gold is most affordable compared to other nations, one example of how to invest in gold is that. And if you are an overseas worker living in Dubai, this may be your best opportunity to invest in some of the most expensive, tradeable jewelry ever created.
Again, this may be your ideal opportunity to invest, but make sure you’ve done your homework and examined it well because as an OFW, you’ve invested everything you have in the hopes that it will pay off in the near future.
