5 Ways to Invest in Gold

When economic conditions become challenging or market instability arises, such as during a presidential election, investors frequently seek refuge in gold. With potential interest rate cuts on the horizon and the stock market nearing record highs, many investors are looking for a reliable asset with a strong history of performance—and gold fits that bill.

5 ways to buy and sell gold

Gold is a popular investment due to its ability to serve as a store of value and a hedge against inflation, even though it doesn’t generate cash flow like traditional securities such as stocks and bonds. Here are five methods to own gold, along with the associated risks for each.

1. Gold bullion

One of the most tangible ways to own gold is by purchasing physical gold in bars or coins. This method offers the satisfaction of physically handling and storing your investment, but it also comes with significant drawbacks. Notably, you’ll need to secure and insure your gold to protect it from theft or loss.

Profit from gold bullion is entirely dependent on the price of gold rising, unlike investing in a gold mining company where profits can increase with production. Gold can be bought through online dealers like APMEX or JM Bullion, local dealers, or even pawn shops.

When buying, be aware of the current spot price (the price per ounce in the market) to ensure a fair deal. Bars often offer better value compared to coins, which might carry additional costs related to their collector’s value rather than just their gold content.

Risks: The primary risk is physical theft if your gold isn’t properly secured. Another challenge is selling physical gold, especially coins, as you may not receive the full market value and might have to sell at a lower price, particularly if you need cash quickly.

2. Gold futures

Gold futures are a popular method for speculating on gold prices, allowing you to potentially profit from price movements without needing to take physical possession of the gold. Futures contracts offer significant leverage, meaning you can control a large amount of gold for a relatively small investment. If the price of gold moves in the direction you anticipate, you can achieve substantial returns quickly.

Risks: The leverage in futures contracts also means that losses can be significant if the market moves against you. You may be required to put up additional funds (called margin) to maintain your position, or risk having your position liquidated by your broker, leading to potential losses. Futures trading is complex and typically suited for experienced investors, requiring a broker that offers futures trading, which is not available with all major brokers.

3. ETFs that own gold

If you prefer a more straightforward approach to gold investment without dealing with physical gold or the complexities of futures trading, exchange-traded funds (ETFs) that track gold can be a great alternative. Major gold ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and abrdn Physical Gold Shares ETF (SGOL). These ETFs aim to replicate the performance of gold minus the fund’s expense ratio, which is relatively low—0.4%, 0.25%, and 0.17% respectively, as of September 2024.

Benefits: Gold ETFs are more liquid than physical gold, allowing you to easily buy or sell shares at market prices on any trading day. This liquidity avoids the high transaction costs associated with selling physical gold and provides a convenient way to invest in gold from home.

Risks: While ETFs provide exposure to gold’s price movements, they still reflect the volatility of gold itself. The ETF’s performance will mirror the price of gold minus the expense ratio, but you avoid the challenges of storing and safeguarding physical gold.

4. Mining stocks

Investing in gold mining stocks offers another way to benefit from rising gold prices. Mining companies can see increased profits as gold prices rise and have the potential to boost production, providing a double benefit.

Risks: Investing in mining stocks requires understanding the mining industry and individual companies. Some mining stocks are high-risk, so it’s advisable to choose established companies with proven track records. Small or unproven miners can be particularly risky. As with all stocks, mining stocks can be volatile, and their performance is influenced by factors beyond gold prices, including operational and management issues.

5. ETFs that own mining stocks

If you prefer not to delve into the specifics of individual gold mining companies, investing in ETFs focused on gold miners might be a good option. These ETFs provide exposure to a range of major gold mining firms, offering diversification within the sector to reduce the impact of any single company’s poor performance.

Some notable gold miner ETFs include VanEck Gold Miners ETF (GDX), VanEck Junior Gold Miners ETF (GDXJ), and iShares MSCI Global Gold Miners ETF (RING). As of September 2024, their expense ratios are 0.51%, 0.52%, and 0.39%, respectively. These funds combine the potential benefits of investing in individual mining stocks with the safety of broader sector diversification.

Risks: While these ETFs help mitigate the risk associated with any single company, they do not shield you from sector-wide issues, such as prolonged low gold prices. Additionally, some ETFs focus on junior miners, which are riskier compared to established mining companies. It’s important to carefully evaluate the fund’s composition to understand the level of risk involved.

Why investors like gold

“Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier,” says Juan Carlos Artigas, Global Head of Research at the World Gold Council.

Gold is valued for several reasons:

Returns: Gold has outperformed stocks and bonds in certain periods, although its long-term performance may not consistently surpass these asset classes.

Liquidity: Gold-based assets like ETFs can be easily converted into cash, providing flexibility in times of need.

Low Correlations: Gold often behaves differently from stocks and bonds, offering potential hedging benefits. When stocks or bonds rise, gold may fall, and vice versa.

Additional Advantages:

• Diversification: Gold’s low correlation with other assets can help reduce overall portfolio volatility.
• Defensive Store of Value: Gold is often seen as a safe haven during economic uncertainty, adding a defensive element to investments.

Despite its benefits, gold investing has drawbacks:

Lack of Cash Flow: Gold doesn’t generate income or cash flow, making it challenging to determine the best time to buy. Unlike stocks, which provide earnings signals, gold requires a buyer willing to pay more in the future.

Dependence on Market Demand: Profit from gold investment depends on market demand rather than inherent value creation. In contrast, investing in businesses, such as gold mining companies, can offer returns through both rising gold prices and increased earnings.

In Conclusion

Gold may not suit every investor, especially those who prefer investments that generate cash flow. Legendary investors like Warren Buffett often advise against gold in favor of cash-flowing businesses. Stocks and funds offer liquidity and are easier to manage, allowing for quick conversion to cash if necessary.

To get started with gold ETFs, you can explore options with leading brokers.