Gold holds a unique position in the financial ecosystem as an asset class that continues to be recognized as a store of value and used as an inflation hedge.
The COVID-related sovereign debt binge and sustained lower interest rate environments have created a subset of global macro investors allocating capital towards gold and betting on higher inflation.
Heightened geopolitical volatility also adds to the appeal of safe-haven assets such as gold.
Investors that are seeking to begin investing in gold can express such an opinion in the following ways:
- Buying Physical Gold
- Investing in Physical Gold ETFs
- Gold Mining Equities
- Gold Futures
- Other Gold ETFs
5 Ways to Invest in Gold
Physical gold ownership represents the cleanest way of getting exposure to the price movement of gold by buying and storing the underlying commodity.
- Establishing a physical gold position is relatively easy to accomplish for retail investors as they can buy gold bullion from dealers and store them securely as a hedge against inflation and market volatility.
- Bullion dealers often markup prices and may not offer the best executable price when liquidating physical gold. Further, it is essential to have secure storage facilities to prevent theft.
Akin to owning physical gold and storing it, ETFs specialize in buying and storing physical gold. Sprott’s Physical Gold Trust is a great example of such a fund holding physical gold and issuing units against those holdings.
- ETFs holding physical gold and not futures provide price exposure directly as they own the underlying commodity and will participate in gold price appreciation.
- Physical gold ETFs have a cost of carry embedded into such products as there are various storage and operational costs involved in operating such funds.
Equities of gold producers often move in lockstep with the spot gold price as producers can take advantage of higher prices leading to better margins and profitability.
- Gold producers can take advantage of bull markets in the underlying as they are best positioned to generate higher revenues and increased cash flow prospects from their gold reserves and increased production levels.
- Despite what conventional wisdom would suggest, gold producers may be locked into long term hedging programs capping the prices they’d receive for a certain period minimizing their ability to participate meaningfully in any price appreciation.
Gold futures are leveraged products that can be settled financially before expiry or be taken into a physical settlement at a specified location. Each contract size is 100 troy ounces and a $10 tick size for one lot.
- Gold futures are an extremely liquid, direct way to own gold with leverage. Such products work with initial margin deposit and subsequent maintenance of established margins set by the exchange. Upon expiry of the front month contract, the investor has the option to take physical delivery or roll the contract.
- Gold futures contain risk and should be used by sophisticated investors as losses can exceed initial investments in volatile price moves.
There are a ton of other types of Gold ETFs that provide exposure to managed gold futures or a diversified basket of gold producing companies.
Invesco DB Gold Fund is a good example of an ETF that deploys gold futures to replicate returns of spot gold and VanEck Gold Miners’ ETF GDX represents several gold producers.
- By investing in an ETF, investors can achieve diversification as ETFs are a great way for investors that don’t want to over-allocate to a particular position and can own several different producers on a diversified basis in the case of a gold miners’ ETF index.
- Gold ETFs holding gold futures will lose out every time the fund rolls the contracts, thereby not enabling investors to participate fully in the price appreciation of the underlying price of spot gold.
1. Owning Physical Gold
Buying physical gold is certainly the most direct way to get exposure to the spot gold price and its appreciation, but it involves making arrangements for secure storage.
It is also important to find bullion dealers that offer reasonable prices while trading these physical gold positions and liquidating them for cash.
Did You Know?
The largest gold nugget called the “Welcome Stranger” was discovered in Moliagul, Australia weighing as much as 2,520 ounces.
2. Buying Physical Gold ETFs
Physical Gold ETFs are great tools to own physical gold with limited operational involvement in storing and maintaining physical stock of the commodity.
Such funds often have world-class infrastructure that can operate at scale and minimize costs for investors.
However, such investments will have an embedded cost of carry and will only produce returns if the price of gold appreciates.
Such an investment represents a safe haven position and will benefit in periods of chaos and market volatility.
3. Investing in Gold Producer Stocks
While owning physical gold is the best way to get commodity exposure, investing in stocks of gold producing companies can be a great alternative as such equities benefit from price appreciation and can increase dividends to investors which are absent when holding physical commodities.
Gold acts as an inflationary hedge and such producers will benefit immensely as they can extract greater revenue from the same output.
However, necessary due diligence is needed to ensure that such companies have appropriate licences and are compliant with all regulations to engage in gold mining.
4. Gold Futures
Gold futures are instruments representing 100 troy ounces per contract that are traded nearly 24×7 with a reasonable amount of liquidity.
Margin accounts are necessary to trade futures and since these products employ leverage, it is important to size positions appropriately to avoid taking larger-than-necessary positions.
Positions are marked to market and it is necessary to meet maintenance margin requirements; otherwise, the broker will issue margin calls/liquidate positions until margin requirements are satisfied.
Finally, gold futures can be settled financially or be taken into expiry to settle physically at the exchange’s specified delivery point.
5. Other Gold ETFs
With the proliferation of various exchange-traded products, there are a large number of ETFs that provide exposure to gold through futures or represent an index of gold miners and producers.
Both methods can provide exposure to the underlying commodity but will have their nuances and may not move in lockstep with the spot price of gold.
Gold futures need to be rolled as these products are settled financially meaning that the cost of the roll is incorporated into the fees of the ETF.
On the other hand, gold mining companies are driven by factors such as operational efficiency, grade of gold produced and mining permits or regulatory environment.
As a result, while there are numerous ways to express a long gold view using exchange-traded funds, it is important to have a firm grasp on what the product can and cannot do to tether expectations to reality and optimize return on investment.
Potential Risks of Investing in Gold
Investors aiming to get exposure to gold can encounter a variety of risks depending on the instrument of choice to express their view.
These risks vary depending on the vehicle used to invest in gold.
Below are a few of the risk considerations that should be kept in mind while investing in gold.
When holding physical gold in bars or bullion form, it becomes extremely important to have a secure storage facility to prevent any chances of theft.
Such expenses should be factored into the cost of acquisition and kept in mind while calculating the return on investment.
Gold spot price is driven by supply and demand fundamentals, global macro events and random market volatility in the short term.
Such price fluctuations can impact the day-to–day P&L of holding such an investment and investors need to be comfortable with the volatility associated with investing in commodities.
Investing in equities of gold miners entails a certain market exposure and any commodity producer is closely linked with the economic business cycle affecting their stock price.
It is important to understand this risk factor while investing in commodity miners and how to hedge such market exposure in case the investor anticipates headwinds.
Acquiring Physical Gold
An investor wishing to own physical gold needs to be certain of the quality of the commodity being bought and must procure the metal from an authentic verified source.
Such investments are priced similarly with different precious metal dealers and any bullion dealer offering a significant discount might be too good to be true.
As such, investors should exercise caution while having a healthy sense of skepticism.
Is Gold a Good Investment?
Gold has several properties making it a good hedge against inflation and providing investors with a source of safety in risk-off market scenarios.
Further, despite limited real-world applications, gold has stood the test of time emerging as the pre-eminent store of value.
Overall, investors should allocate a small percentage of their portfolio towards precious metals to de-risk their holdings against market sell-offs and a surge in inflation expectations.
Frequently Asked Questions
- How do I buy gold stocks?
There are several well-known and reputed gold commodity producers that are publicly listed. Such companies can be bought with the help of an investment broker or through an online trading platform. Investors can get diversified exposure to the gold mining space by buying specific ETFs such as GDX, thereby eliminating any company-specific risk.
- Is investing in gold an inflation hedge?
Gold and other precious metals are considered a stable source of value and will gain in nominal price terms as inflation erodes the purchasing power of fiat currency. Further, gold is extremely desirable as a store of value, thereby enhancing its value and it has stood the test of time
- What is the best way to invest in gold?
Allocating capital towards Gold can be a conscious portfolio decision. Investors looking to include the shiny metal into their holdings can invest in gold by buying physical gold, investing in physical gold ETFs, gold mining equities, gold futures or other gold ETFs. The best way to invest will depend on the investor’s unique goals and objectives.