How to Invest in Gold

Investors always try to diversify their investments and lower their risk. They especially look for so-called safe haven investments that perform better when the rest of the market down.

Gold as a commodity

Like any other commodity, the price of gold is determined by supply and demand. The most of the world’s gold comes from the hard rock mining, but it can also be produced using placer mining methods or as a by-product from copper mining. China, Australia, and Russia are the largest producers of gold in the world.
 
When it comes to demand, gold’s main use is for jewelry production. But, it’s also used in the aerospace industry, medicine, dentistry, and electronics.
Governments and central banks are buyers of gold. Currently, the U.S. is the largest gold holder, while Germany comes second and the International Monetary Fund is in the third place. Private investors are also interested in buying gold and they treat the purchase of gold as an investment.

Why are private investors investing in gold?

Instead of holding a cash position, investors may buy gold when they expect a recession, geopolitical uncertainty, inflation or a depreciation of a currency. Sometimes they hold it as an insurance from the market decline. You can’t always forecast unwanted events, so it makes sense to hold assets that do well as protection from a market decline.

In the last 40 years, gold recorded significant gains from 1978 to 1980 and from 1999 to 2011. It struggled during the 90s and after 2011. Fears of inflation and recession led gold to its 1980 highs, while several events caused gold to trade higher after 1999. The September 11 attacks and the war in Iraq held the price higher until 2003. Insurance buying was behind gold’s move higher going into the 2007 recession. It continued its uptrend as the market traded lower, with economic uncertainty as its main theme. Problems in Europe, weaker U.S. dollar, concerns over economic recovery kept the gold price high until 2011.

Gold is not always performing well. It has struggled during the 90s due to growing U.S. GDP, interest rate hikes in 1995, and a tight fiscal policy. After 2011, the strength of the US dollar and the US economy hurt gold. The stock market broke out of a downtrend and turned in the uptrend and investors were not as interested in owning gold as an insurance.

1. Buy physical gold

If you want to get exposure to gold, one way to do it is by purchasing gold jewelry, coins or bullion. Gold bullion trades very close to the price of gold and it can refer to gold bullion bars or gold bullion coins.

Bullion doesn’t have any artistic value, which makes it different from jewelry or numismatic coins. To buy gold bullion you have to pay a premium over the gold price which can be in a range from 3 to 10 percent. You will also have to use a vault or a bank deposit box to store it.

You can buy physical gold online, in a jewelry store, or another gold storefront. Before you purchase, make sure the price is fair, the gold is real and tested, and that you aren’t paying a higher premium for collectors coins if you’re just looking for pure gold. Be prepared to walk away if these standards cannot be met, especially if an online store or storefront feels shady. One trusted online store with a 4.9 rating on google storeis Silver Gold Bull, who not only allow you to buy gold, but will also store it, and buy it back should you chose to sell it for a profit.

2. Buy gold futures

Futures contracts are standardized contracts that trade on organized exchanges. They allow a holder to buy or sell an underlying at a specified time in future and at the price from the futures contract.
Gold futures contract at Chicago Mercantile Exchange covers 100 troy ounces. To trade it, you need todeposit an initial margin, which is a minimal amount necessary to open a position. Every day your position is going to be marked-to-market. This means that if the price goes in your direction, you’ll make a profit, but if it goes against you, you’ll lose money.
 
If your account drops below maintenance margin, you will have to transfer money to your account to meet the amount of initial margin. Futures contracts are leveraged instruments. You need to only need your account balance to be equal to the initial margin, which is lower than the value of the whole contract.
 
Most brokers do not have the delivery option, so the contract is settled in cash when it expiresThe expiry is also standardized feature of the gold futures contract and investors can choose their time horizon while keeping standard expiration in mindLater expiry contracts prices can be higher than the spot price and earlier expiry futures. When this is the case, we say that the market is in a contango.
 
On the other hand, when the spot price or the price of early expiring contracts are higher than the price of later expiring futures contracts, we are in a backwardation. If you are buying gold when the market is in a contango, you will also have to pay a premium for later expiry contracts.

3. Invest in gold ETFs

If you are not a fan of investing in gold futures, you can try gold ETFs. Instead of owning futures contract and paying attention to maintenance margin, you can buy shares of ETFs and get an exposure to gold.

If you’ve never invested in ETFs before and want to start, check out Benzinga’s Best Online Brokers for ETF Investing to get started. Once you pick a brokerage, you just have to open an account and pick your preferred gold ETF.

The most popular gold ETF is SPDR Gold Shares (NYSE: GLD) and it costs 0.40 percent annually to own it. The ETF follows gold bullion price.

4. Invest in gold mining companies

An investment in gold mining companies offers exposure to gold, but the exposure is sometimes limitedThese companies carry operating risks, which can break a correlation to the gold price.

Gold miners are at risk of a default and their shares can trade lower in case of an operating problem with the company regardless of the price of gold.

ganesh

Hello Everyone this is Ganesh, a passionate finance blogger and experienced business and finance expert. From last 5 years I have been attending various projects, conferences and also worked on top financial sectors. I have gained knowledge on these sectors and will be sharing all my experiences in this blog. Please keep visiting my blog for more updates. Thank You

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