How to invest in gold
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BLUEPRINT
Updated 8:24 p.m. UTC July 5, 2023
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Key points
- Gold has long held its value as both an investment and a commodity.
- Investors often buy gold during periods of economic or financial market uncertainty.
- Gold tends to lag behind the stock market’s performance.
The gold market offers plenty of opportunities for investors.
Unlike governments that print fiat currencies like the U.S. dollar or British pound, or companies that issue stocks, the world has a limited supply of physical gold.
American Hartford Gold
Not only is gold highly desired for its beauty, but it’s also a useful metal. Its rare properties are sought in industrial and technology industries.
The price of gold has increased from around $20 per ounce in 1919 to around $1,850 per ounce today. Even after adjusting for inflation, gold prices have increased by more than 440%.
Global demand for gold is extremely high, creating favorable long-term pricing dynamics.
According to the World Gold Council, global gold demand increased by 18% to 4,741 tons in 2022, the highest level in more than a decade. The WGC data shows that the demand for gold as an investment last year was up 10%. The driver behind the demand: global inflation.
U.S. inflation hit 40-year highs in 2022, and many people turned to gold and cryptocurrencies as potential inflation hedges. But while gold prices were essentially flat in 2022, the price of Bitcoin, a cryptocurrency dubbed digital gold, dropped 64% last year.
Beyond incremental purchases, jewelry sales and central bank accumulations, analysts expect the collapse in crypto values to lend additional support to the gold market in 2023.
5 ways to invest in gold
Given gold’s remarkable price trajectory and increasing global demand, it’s no wonder this lustrous asset has captured investors’ attention. There are several ways to invest in gold, from buying the metal itself to investing in stocks or funds with gold exposure to trading in gold futures.
1. Gold bullion
Gold can seem more accessible because you can buy it in a physical form: the precious metal itself or as coins or bars.
Gold bars come in many sizes, ranging from usually around 1 gram, the weight of a metal paperclip, to 1 kilogram, the weight of a cantaloupe. On the other hand, gold coins can start at a tenth of an ounce and can be as large as 1 ounce.
You can buy gold bullion coins directly from the U.S. government in weights of one, one-half, one-quarter and one-tenth of an ounce. The U.S. Mint, part of the Department of the Treasury, produces American Eagle gold bullion coins that are 91.67% gold.
There are also plenty of private companies that produce gold bullion coins. If you buy gold bullion, you should buy it from a trusted source or a reputable, well-established metals or coins dealer, such as APMEX, SD Bullion and JM Bullion.
If you’re buying physical gold, you’ll need a place to store it. That can mean storing it at home, in a safe deposit box at a bank, or with a private firm. Generally, the most secure option is using a private firm, known as a depository. Depositories usually come with online access, so you can sell your metals more easily, adding an element of liquidity. But you’ll have to factor in that choosing a private depository comes with the cost of paying a storage rate.
2. Gold stocks
Gold mining stocks and gold streaming or royalty stocks are other ways to gain exposure to gold. The higher the price of gold climbs, the more profitable these gold stocks become. That’s because gold mining stocks behave more like gold than stocks regarding returns.
Some of the largest and most popular gold mining stocks include Newmont (NEM), Barrick Gold Corp. (GOLD) and Franco-Nevada Corp. (FNV). While gold stocks and spot prices are highly correlated, you should remember that gold stocks have historically been more volatile than gold spot prices.
In other words, gold mining stocks are more of a proxy for gold ownership in an investment portfolio.
3. Gold ETFs
If you’re looking to take a more diversified approach, gold stocks can instead buy one of several popular gold exchange-traded funds.
Gold ETFs invest in a diversified basket of gold-related assets, such as gold mining stocks, physical gold bullion or futures contracts. SPDR Gold Shares (GLD), the oldest ETF of its kind, and iShares Gold Trust (IAU) only have gold as part of their portfolio holdings.
You can also purchase gold mining ETFs, such as VanEck Vectors Gold Miners ETF (GDX) and iShares MSCI Global Gold Miners ETF (RING).
Leveraged gold ETFs, such as ProShares Ultra Gold (UGL) and WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE), are highly-volatile funds that invest in futures contracts to provide you with a magnified daily or monthly return on gold prices.
Leveraged gold ETFs may be structured to generate two to three times the returns of gold spot prices, increasing upside potential and downside risk for you.
American Bullion
4. Gold mutual funds
As with gold ETFs, you can buy mutual funds that invest in the metal itself or shares of precious metal mining companies. Often, this is a lower-cost alternative and more liquid (meaning you can exit your position more easily).
Most metal investment funds hold mining company stocks, although some purchase actual physical metals.
Popular gold mutual funds include the First Eagle Gold Fund (SGGDX), heavily weighted toward gold stocks like Newmont and Barrick Gold, and the Invesco Gold and Special Minerals Fund (OPGSX), weighting toward gold mining companies.
5. Gold futures and options
If you’re interested in a more sophisticated investing option, consider gaining exposure to gold via futures and options contracts.
Options and futures contracts are traded on exchanges and give the contract buyer the right or obligation to purchase a standardized quantity of gold at a predetermined price on or before a future delivery date.
These contracts are a popular way for you to speculate on physical gold without the hassle of storing the gold, which can involve insurance or paying a specialized company for storage. With options, you can easily sell your futures and options contracts at any time before expiration.
Commodity futures contracts obligate the contract holders to buy or sell the underlying commodity, whereas options simply give the holder the right to buy or sell. But option contract buyers must pay a premium for this flexibility, which typically gives them a more expensive upfront cost than futures contracts.
Advantages of investing in gold
While gold can be part of a diversified portfolio, it doesn’t serve the same purpose as some other investments. Its main advantage isn’t as a wealth generator but as a way to offset market volatility. Gold is generally a good store of value and can provide a hedge against inflation. It’s also a way to balance your portfolio with an asset that isn’t closely correlated with other investments.
Disadvantages of investing in gold
Unlike stocks and bonds, gold doesn’t pay dividends or interest. Physical gold also has costs associated with storage and insurance, which can eat into potential profits. Moreover, the performance of gold isn’t always stellar. While it may shine during periods of market unrest, gold often lags behind other commodities in a stable, robust economy.
| SHOULD YOU INVEST IN GOLD? | |
|---|---|
Pros
| Cons
|
Potential hedge against economic uncertainty
| The stock market typically outperforms gold
|
Potential inflationary hedge
| No dividends
|
Diversification
| It’s often a fear-based decision
|
Should you invest in gold?
Gold can be part of a balanced portfolio. For diversification, you should consider holding some gold in long-term investment portfolios.
Gold has a low or even negative correlation to stocks and bonds, making it valuable for diversification. In other words, gold can partially offset stock market losses. For instance, while the S&P 500 lost 19.4% last year (its worst year since 2008), gold managed to hang on to a 0.4% gain.
The outlook for gold in 2023 remains bullish, as the Federal Reserve continues to tighten its monetary policy in its ongoing battle against inflation, pressuring the U.S. economy.
If inflation proves stickier than anticipated, prompting the Fed to continue raising rates above market expectations, recession risk will rise and gold will likely benefit as both an inflation hedge and safe haven asset.
But gold does carry shortcomings as an investment. Gold prices have significantly lagged behind the stock market over the long term.
The Dow Jones Industrial Average has generated a more than 140% return since February 2013, whereas gold has eked out around a 13% return.
Gold also does not generate any cash flow or pay any interest or dividends, and its price is based purely on supply and demand.
Stocks, on the other hand, represent companies that can expand and grow profits over time, potentially increasing the value of the investment. Many stocks also pay dividends that can be reinvested, compounding returns.
Frequently asked questions (FAQs)
Investors like gold because its low historical correlation to stock and bond prices can help them diversify their portfolios. In addition, gold has a long history of retaining value and is often a source of stability during volatile periods in financial markets.
There’s also a sentiment to buy gold when there is market weakness. But historically, these periods of extremely bearish stock market sentiment have been the best time to buy stocks rather than sell them and seek safety in gold.
What drives the price of gold is a compilation of several components: demand for gold, the value of the U.S. dollar, and the amount of gold held in central bank reserves, among other factors.
Benchmark gold prices are determined twice daily via an auction between participating London Bullion Market Association banks.
The LBMA is the leading organization for maintaining benchmark spot prices for gold. Benchmark gold prices are determined twice daily via an auction at 10:30 a.m. and 3:00 p.m., London time.
The value of gold as an investment depends on your financial goals and market conditions. Historically, gold has been a reliable store of value and a hedge against inflation, economic uncertainty and currency depreciation. But, unlike stocks and bonds, gold doesn’t pay dividends or interest, and its price is primarily driven by supply and demand. Thus, while gold can be a good component of a diversified portfolio, you should carefully consider its performance and suitability for your investment strategy.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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