When economic times get tough or financial events like the blowup of the Silicon Valley Bank roil the markets, investors often turn to gold as a safe haven. With inflation high and stock trading at record highs, some investors are looking for a safe asset with a proven track record of profits, and that’s gold.
Investors love gold for many reasons, and it has properties that make the commodity a good counterbalance to traditional securities like stocks and bonds. They view gold as a store of value, even though it is an asset that does not generate cash flow, while others also view gold as a hedge against inflation.
Here are five different ways to own gold, and a look at some of the risks associated with each way.
1. Gold bullion
One of the most emotionally satisfying ways to own gold is to buy it in bars or coins, like at Costco. You’ll have the satisfaction of looking at it and touching it, but there are also serious downsides to owning more than just a little bit. One of the biggest drawbacks is the need to protect and insure physical gold.
To make a profit, buyers of physical gold are completely dependent on the price increase of the commodity. This is in contrast to owners of a business (such as a gold mining company), where the company can produce more gold and therefore more profit, thus increasing investment in that business.
You can purchase gold bullion in several ways: through an online dealer such as APMEX or JM Bullion, or even a local dealer or collector. A pawn shop can also sell gold.
Pay attention to the spot price of gold – the price per ounce currently on the market – as you buy so you can get a fair deal. You may want to trade bars rather than coins because you are likely paying a price for the collectible value of a coin rather than just its gold content. (These may not all be made of gold, but here are 9 of the world’s most valuable coins.)
Risks: The biggest risk is that someone can physically take the gold from you if you do not protect your assets. The second biggest risk occurs if you need to sell your gold. It can be difficult to receive the full market value of your assets, especially if they are coins and you need the money quickly. So you may have to settle for selling your assets for much less than they would otherwise fetch in a national market.
2. Gold futures
Gold futures are a good way to speculate on the price of rising (or falling) gold, and you could even take physical delivery of gold if you wanted to, although physical delivery is not what motivates speculators.
The biggest advantage of using futures to invest in gold is the enormous amount of leverage you can use. In other words, you can own a lot of gold futures for a relatively small amount of money. If gold futures move in the direction you think, you can make a lot of money very quickly.
Risks: Leverage for investors in futures contracts cuts both ways. If gold moves against you, you are forced to put up significant amounts of money (called margin) to hold the contract, otherwise the broker will close the position and you will suffer a loss. So while you can make a lot of money in the futures market, you can lose it just as quickly.
In general, the futures market is for experienced investors and you need a broker that allows futures trading, and not all major brokers offer this service.
3. ETFs that own gold
If you don’t want the hassle of owning physical gold or dealing with the fast pace and margin requirements of the futures market, a good alternative is to buy an exchange-traded fund (ETF) that tracks the commodity.
Three of the largest ETFs are SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Physical Gold Shares ETF (SGOL). The goal of ETFs like these is to match the price performance of gold minus the ETF’s annual expense ratio. The expense ratios for the above funds are just 0.4 percent, 0.25 percent and 0.17 percent, respectively, as of January 2024.
The other major advantage of owning an ETF over bullion is that it is more easily exchangeable for cash at the market price. You can trade the fund at the current price any day the market is open, just like you would sell a stock, and avoid the huge transaction costs associated with selling physical gold. So gold ETFs are more liquid than physical gold, and you can trade them from the comfort of your home.
Risks: ETFs give you exposure to the price of gold, so if it rises or falls the fund should perform similarly, again minus the costs of the fund itself. Like stocks, gold can be volatile at times, but with these ETFs you can avoid the biggest risks of owning the physical commodity: protecting your gold and getting the full value of your holdings.
4. Mining supplies
Another way to profit from rising gold prices is to own the mining companies that produce the stuff.
This can be the best alternative for investors, because they can benefit from gold in two ways. First, when the price of gold rises, so do miners’ profits. Second, the miner has the ability to increase production over time, which provides a double effect.
Risks: Anytime you invest in individual stocks, you need to understand the business. There are some hugely risky miners out there, so be careful when selecting a proven player in the sector. It is probably best to avoid small miners and those who do not yet have a producing mine. Finally, mining stocks, like all stocks, can be volatile.
5. ETFs that own mining stocks
Don’t want to delve much deeper into individual gold companies? Then buying an ETF can make sense. Gold Miners ETFs give you exposure to the largest gold miners in the market. Because these funds are diversified across the sector, you won’t be much affected by the underperformance of a single miner.
The larger funds in this sector include VanEck Gold Miners ETF (GDX), VanEck Junior Gold Miners ETF (GDXJ) and iShares MSCI Global Gold Miners ETF (RING). The expense ratios for these funds are 0.51 percent, 0.52 percent and 0.39 percent respectively as of January 2024. These funds offer the benefits of owning individual miners with the safety of diversification.
Risks: While the diversified ETF protects you from any company that performs poorly, it won’t protect you from something that affects the entire sector, such as persistently low gold prices. And be careful when selecting your fund: not all funds are created equal. Some funds have established miners, while others have junior miners, who are riskier.
Why investors love gold
“Gold has a proven track record of returns, liquidity and low correlations, making it a highly effective diversifier,” said Juan Carlos Artigas, global head of research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain periods, although it doesn’t always beat them, and its track record shows much lower returns over time.
- Liquidity: If you buy certain types of gold-based assets, such as ETFs, you can easily convert them into cash.
- Low correlations: Gold often performs differently than stocks and bonds, meaning that when they rise, gold can fall or vice versa. Gold can therefore be used as a hedge.
In addition, gold offers other potential benefits:
- Diversification: Because gold is generally not highly correlated with other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat into gold when they perceive threats to the economy, making gold a defensive investment.
These are some of the main advantages of gold, but the investment – like all investments – is not without risks and disadvantages.
Although gold sometimes performs well, it is not always clear when to buy it. Because gold itself does not generate cash flow, it is difficult to determine when it is cheap. That’s not the case with stocks, where there are clearer signals based on corporate earnings.
Furthermore, because gold does not generate cash flow, investors must rely on someone else paying more for the metal than they do in order to make a profit on gold. In contrast, business owners – such as a gold miner – can benefit not only from the rising price of gold, but also from the company increasing its revenues. So there are several ways to invest and win with gold.
In short
Investing in gold isn’t for everyone, and some investors are sticking to placing their bets on cash-flowing companies rather than trusting that someone else will pay more for the shiny metal. That’s one reason why legendary investors like Warren Buffett warn against investing in gold and instead advocate buying cash-flow companies. Plus, it’s easy to own stocks or funds, and they’re highly liquid, so you can quickly convert your position into cash if you need to.
It’s easy to start buying a fund. These are the best brokers for ETFs.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
