How To Invest In Gold: Directly & Indirectly
Basics of Investing In Gold
Gold is used for currency, jewelry, and industrial applications. Because of its versatility, durability, and universal demand, gold is a unique commodity that has historically offered a reliable store of value. These qualities make gold a financial asset that can be used as an investment.
Investments in gold can be either direct or indirect. Investments related to gold can be made through gold bars, gold coins, futures, mutual funds, stocks, exchange-traded funds (ETFs), or options on eligible stocks or ETFs.
Important: Gold has a reputation for stability in times of uncertainty, which may explain why the demand for the precious metal often increases in volatile markets and during uncertain political and economic conditions. Some investors use gold as a diversification tool or as a hedge against inflation.
Investing in Gold Directly
To invest in gold directly, investors can hold it in physical form, which can be done through the purchase of gold bullion bars or gold coins. Some investors buy and hold gold jewelry. Although not a direct investment, investors can gain direct exposure to the value of gold through the purchase.
- Bullion bars: Typically comes in bars ranging in size from a few grams to 400 troy ounces.
- Gold coins: More convenient than the larger bars, gold coins can be bought in smaller sizes from private dealers, usually at a 1-5% premium to the current price.
- Jewelry: A popular form of holding gold, jewelry purchased at retail value is typically bought and sold at a premium and can thus be more expensive than gold bars and coins. Also, note that jewelry is a much less liquid form of investment in gold and investors should consider avoiding it if they want to be able to sell quickly at a fair market price.
- Futures: Purchased in contracts, gold futures require the investor to buy or sell a certain amount of gold on a specified expiration date, which creates exposure to gold. The position could be closed before expiration or rolled over to a new contract. Similar to other commodity futures, investors rarely intend on taking ownership of the asset.
Warning: Although gold can be a reliable store of value, it is not necessarily a suitable investment for all investors’ portfolios. For example, the price of gold can have a number of factors, including supply and demand for gold, money supply, inflation, and Treasury yields acting upon it. Thus, the price of gold is not predictable, especially in the short term. The type of investors that typically gain exposure to gold through futures and options are those who are willing to take on the added risk of short-term price fluctuation. Some investors use gold and other commodities for diversification and hedging strategies.
Investing in Gold Indirectly
- Gold miner stocks: If an investor wanted to build their portfolio, they could choose to buy stocks of gold mining companies.
- Gold ETFs: An investor can buy shares of an ETF designed to track the price of gold, less fund expenses. Gold ETFs may hold gold bullion and some cash.
- Gold mutual funds: Investors can gain indirect exposure to gold by purchasing shares of a mutual fund invested in stocks of companies associated with the mining of gold. Gold mutual funds may hold gold bullion or other types of precious metals.
- Options: Provides the owner of the option the right, but not the obligation, to buy (call option) or sell (put option) an asset that is linked to gold, such as an ETF.
Researching Gold Investments
There are multiple resources for researching gold investments but investors should be wary of the depending on the research sourced from parties who are trying to sell gold investments. To research gold investments, investors are wise to seek out independent and objective investing websites, specifically gold and precious metals news outlets.
Tip: Investors may research various sector funds that invest in gold, gold mining stocks, or the precious metals category. For a specific idea, Seeking Alpha’s ETF screener can be used to search for commodities funds in the subclass of precious metals.
Gold can be used as a diversification asset, as a store of value during uncertain times, or as a hedge against inflation. Investing in gold can be done directly through the purchase of physical gold or indirectly through the purchase of certain stocks, ETFs or mutual funds.