The right investment strategy will strike a fair balance between risk level and profitability. Given the many changes brought on by COVID-19, finding a strategy that minimizes risk and maximizes profits can seem more challenging than ever. Luckily there are a few investments that have performed well throughout history, the most well-known being gold.
That being said learning how to invest in gold may not be at the top of your to-do list. This investment strategy can seem advanced, time-consuming, and even antiquated. However, with the right amount of research gold can be a great addition to your investment portfolio, particularly in these times. Keep reading to learn about the best ways to invest in gold, and how you can get started today.
Why Is Gold Valuable?
Gold is valuable largely because of its historic attachment to the value of our currency. In ancient times, gold was used for coins and jewelry because of its malleability. As paper currencies were developed, the notes were designed to correspond with a specific amount of gold. While this is no longer the case, gold’s historic importance in our financial system keeps this commodity valuable.
According to The Motley Fool, about half of the world’s current demand for gold comes from jewelry. With another 40 percent being the demand for physical gold investments, such as coins and gold bars. Both investors and financial institutions purchase physical gold for these purposes, and most recently exchange-traded funds that buy gold on behalf of investors. The leftover demand for gold typically comes from the technology and medical industries.
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Is Gold A Good Investment?
Gold is a good investment for those looking to diversify their existing portfolios. The performance of gold is often the opposite of traditional investments like stocks and bonds. When these assets perform negatively, the value of gold generally increases. This trend has led many investors to think of gold as a safe investment, while further highlighting its importance in a diverse portfolio. A great example of this trend can be seen by looking at the value of gold throughout 2021 — when gold reached its highest price in the last seven years.
Many new investors shy away from gold, as it doesn’t generate consistent cash flow in the way real estate or stocks might. What many people don’t know is that gold is actually highly liquid; meaning, it can be bought and sold relatively quickly due to the high demand. When it comes to other alternative investments, like collectibles or rare art, this benefit can make gold a highly attractive opportunity.
Why Investors Like Gold
Investors are often drawn to gold as a way to diversify, and as a way to safeguard their existing portfolios. As mentioned above, gold typically performs opposite of stocks or bonds. This makes gold an attractive opportunity for those looking to mitigate risk. Here are a few other reason why investors choose gold:
Liquidity: Despite being a tangible asset, gold is still highly liquid. Typically, it can be easily converted to cash.
Value Stores: Gold allows investors to hold value in a physical asset. The tangible nature of gold can be attractive as investors diversify.
Returns: Gold is proven to have high returns historically. While it does not always outperform other investment classes, it still boasts attractive returns overall.
Safeguards Because gold does not perform similarly to stocks or bonds, it typically increases in value during periods of economic downturn. This further allows investors to use gold to reduce portfolio risk.
How To Invest In Gold: The 7 Best Ways
The first thing most people think of when investing in gold is jewelry, or perhaps gold coins. In reality, there are numerous ways to buy and sell gold. Here are the 7 best ways to invest in gold to consider:
Gold ETFs & Mutual Funds
Gold Futures Contracts
Gold Mining Companies & Stocks
Streaming & Royalty Companies
1. Gold Bullions
Gold bullion refers to any form of pure gold, with the most common example being gold bars. Gold bars must be certified for weight and purity, and will typically have a serial number attached for security reasons. Gold bars can vary in size, and it doesn’t take much to be considered valuable. There are a few drawbacks to purchasing gold bullions, as you will typically want a secure location and insurance to secure the investment. Additionally, gold bullions can be a difficult asset to buy and sell as you have to identify buyers ready to purchase in whatever sized bar you have the asset in. That being said, many investors find this method to be highly rewarding and one of the best ways to invest in gold.
2. Gold Coins
You may be familiar with the popularity of gold coins from infomercials and other advertisements. This form of buying and selling gold is well-known, and often more convenient than gold bars due to their smaller size. Investors can purchase gold coins from collectors or private dealers, and eventually sell for a profit. Dealers are located in most cities making gold coins easy to come by. For ease of purchase, gold coins are one of the best ways to invest in gold for beginners.
Occasionally, you may run into gold coins that are marked up due to their collector’s value. The collector’s value can make them more expensive than the actual base value of the gold. Most casual investors will avoid these and focus on more widely circulated coins unless they are interested in becoming collectors as well. A few common examples are the U.S. eagle and the Canadian maple leaf.
3. Gold Jewelry
Gold jewelry is probably the most frequently bought and sold form of gold investment, though you may not even think of it as such. In actuality, gold jewelry is highly beginner-friendly because it is so easy to acquire. According to Investopedia, about 49 percent of global gold production is used to make jewelry. Generally, any piece of jewelry at 14k or higher is considered an investment in gold. While it is relatively simple to obtain, there are some drawbacks to consider. In some cases, gold has a questionable resale value. This means it may be difficult to identify a buyer and sell your jewelry for a profit.
4. Gold ETFs & Mutual Funds
Gold exchange-traded funds (ETFs) and mutual funds are accounts that purchase gold on an investor’s behalf. The shares that make up these funds each represent a fixed amount of gold and can be bought and sold like stocks. This is one of the best ways to invest in gold as ETFs and mutual funds allow investors to work with gold, without dealing with the costs of physical ownership (like security or gold insurance). There are fees associated with buying and selling gold through ETFs or mutual funds, but they are often much lower when compared to the management of other assets.
Note that ETFs and mutual funds dealing with gold often invest in other commodities as well, meaning you will rarely find a firm that deals strictly with gold. This can be beneficial if your goal is to diversify, though it may require learning about other markets as well as gold. Be prepared to research different funds when considering ETFs or mutual funds for your gold investment.
5. Gold Futures
Simply put, gold futures are contracts to buy and sell gold at a certain point in time. Each contract represents a certain amount of gold, and depending on the specifications can pay out in either a dollar amount or the physical gold. Gold futures can be very large, making this a strategy best suited to investors with the capital to purchase high-valued contracts.
There are also options on gold futures to consider. This provides investors the option to purchase a futures contract for a preset price at a certain point in time. Options can help buyers leverage their initial investment, though they are required to pay the underlying value of the gold to fully own the option. Both gold futures and options are considered to be volatile — making them more difficult to break into and manage when compared to other forms of gold investments.
6. Gold Mining Companies & Stocks
Investing in gold mining companies is an interesting way to combine gold investments with traditional stocks. By purchasing shares in a company that works with gold, investors can access the profits of gold without buying or selling it themselves. This form of investing can also provide lower risks, as there are other business factors at play that can help protect investors from flat or declining gold prices. That being said, investors conduct significant research when searching for the right company to invest in. There are risks associated with the mining industry that can interfere with overall profits or even bring up ethical concerns. Always do your research when selecting a gold mining company to invest in.
7. Streaming & Royalty Companies
Streaming and royalty companies are another way to invest in gold through stocks. These companies will provide cash upfront to mining companies for the right to buy gold (or other commodities) in the future. Think of them as financing companies who receive their profits in gold. This form of investment also requires inventors to learn more about the risks of gold mining and the companies associated. The level of research required to successfully invest in streaming and royalty companies can be a barrier to entry for some.
Gold Investment Tips For Beginners
With so many options to choose from, it can be overwhelming to consider how to start investing in gold. Beginner investors should take stock of their initial capital, desired returns, and preferred level of risk before getting started. Most gold does not require an active time commitment to be profitable, but some options do require more upfront research than others to get started (such as futures or stocks). Consider how much prep work you are willing and able to do before getting started, remembering that you should also mind your due diligence when making an investment decision.
After reviewing the options listed above you may still have a few questions on investing in gold. This is perfectly normal — despite gold’s popularity deciding where to invest can still be a challenge. The following tips on gold investing should help beginner investors get started:
How Much Gold Is A Good Investment? There is not a set amount of gold that makes a good investment, instead the right amount will depend entirely on you. Since most investors turn to gold to diversify their existing portfolios, a good rule of thumb is to keep about ten percent of their assets in gold investments. This allows you to minimize risk while still enabling you to profit from gold investments. Review your portfolio periodically to ensure you maintain a percentage that you are comfortable with.
When Should You Invest In Gold? Gold is different from other investment types for a few reasons, but mainly in how it is acquired. While some assets can be purchased at one time, like a house or commercial property, gold should be purchased in increments. Investors will typically choose to purchase small amounts of gold or gold stocks over time, to counteract price fluctuations. Choosing when to make your initial investment will depend entirely on the method of gold you want to work with. Monitor the value of gold and the price of various stocks for a good idea of when to get started.
Buying Physical Gold
The numerous benefits of gold make it a promising investment opportunity. However, there are a few things you should know before trying to buy physical gold. The first, and more important, is to identify a reputable gold seller. There are countless scams out there about buying and selling gold. Not only do you want to avoid falling for a trap, you also want to ensure you avoid making to large or too small of an investment on account of the seller. Review online resources to find trustworthy sellers and ask about fees and other costs associated with their work.
Many of today’s most popular investments do not require any special storage, but gold is an exception here. Physical gold requires safe storage. Consider renting a safety deposit box or adding a safe to your home. These costs are important to take into account when making an investment in gold but they are completely necessary if you buy the physical asset. Depending on where you store your investment, consider purchasing insurance for your asset. This can help boost the overall security of your investment.
Diversification is the marker of a strong investment portfolio, as this simultaneously reduces risk and increases profit potential. The effects of coronavirus on the economy have made this seem more important than ever for investors of all experience levels. One of the best ways to achieve a diverse portfolio is through gold, as its historic performance has demonstrated its strength and profitability. The various types of gold investments listed above can serve as a starting point for beginners interested in learning how to invest in gold. Whether you choose to start with gold coins or mining stocks, researching new investment opportunities is your first step in creating a well-balanced financial portfolio.
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The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.