Today, the gold market is characterized by a wide variety of investment instruments with varying degrees of risk and purpose.
Some investment vehicles are for long-term investment, while others are for short-term speculation or trading. Therefore, investors should consider the following main investment options when deciding to invest in gold:
- investing in physical gold (gold bars and coins, gold certificates, jewelry);
- investing in gold-linked securities (stocks, investment funds, ETFs);
- Investing in gold-related derivatives (futures, options, gold CFDs).
Investing in physical gold
You can also purchase gold certificates, thus entrusting the security of your investment to a gold trading company. In some cases, jewelry can be a good alternative to gold bars and coins. Investments in physical gold are usually considered as long-term investments, the term of which should be at least 5-10 years. It is very important to use only reputable dealers when buying gold, as counterfeit products can be presented on the market.
When investing in physical gold, it is also important to consider the additional costs of storing and transporting it. Experienced investors usually store their gold investments in rented bank vaults or in the vaults of gold trading companies. Many of the most reputable gold trading companies also provide gold storage services to their clients, which can result in significant savings on the cost of shipping and storing gold.
Modern technologies have made it possible to transfer many processes of buying and selling gold to the Internet. For example, BullionVault, one of the world’s largest online gold investment platforms, not only stores its own gold, but also makes it possible to purchase a small fraction of the standard 400 troy ounce Good Delivery Bars (GODBs), allowing it to offer its more than 85,000 customers, perhaps the best price on the investment gold market.
Investment gold bars and coins
In terms of weight, price and liquidity, the best choice would be 100g investment gold bars, which are the most popular among all investors. For greater security, each gold bar is marked with a unique manufacturer’s serial number, certified and packaged in a sealed package. When buying gold bars, it is recommended to choose only certified products from reputable manufacturers.
The most famous companies in this market are those that are recognized all over the world:
- PAMP SA (Switzerland)
- Valcambi SA (Switzerland)
- Perth Mint (Australia)
- Heraeus (Germany)
Another convenient way for small investors to invest in physical gold is through gold coins. The price of gold coins is usually slightly higher than gold bars, but coins are usually more liquid than gold bars and are easier to sell when needed. The most common gold coins are denominations of one troy ounce.
In trade, you can find coins minted in different countries, but the most popular among investors are:
- South African Krugerrand
- British Sovereign
- US Golden Eagle
- Australian Kangaroo
- Canadian Golden Maple Leaf
Since the most popular gold coins are minted by government mints, they have their own denomination. Of course, this denomination is rather symbolic, since the amount of gold contained in a coin is always worth much more than the denomination indicated on it. Some coins also have a numismatic value based not on their pure gold content, but on their additional historical and collectible value. However, people who are not coin collectors should avoid numismatic coins, as only experts in the field can accurately determine the value of such items. It is recommended that you only purchase standard investment gold coins from reputable and properly licensed companies.
Gold certificates
Many major gold mining companies trade in gold certificates. These certificates are associated with specific investment gold items stored in the vaults, so that the client can exchange the certificate for physical gold at any time. The biggest downside to this way of investing in gold is the additional shipping and handling fees that you will have to pay to ship the physical gold. When purchasing a gold certificate, make sure that it is really tied to physical units of gold, and not to other financial instruments!
Gold jewelry
Another way to invest in physical gold is through jewelry. However, in this case, you should not invest in mass-produced jewelry, which is often just gilded, but in single items from well-known manufacturers or with historical value. Obviously, such an investment will be very expensive, and much of the price will be based on the artistic or collectible value of the jewelry, not the amount of pure gold.
It should also be noted that the fine gold content of jewelry is usually much lower than investment gold bars or coins. This is not a significant disadvantage of jewelry, because, firstly, lower purity gold items cost less, and secondly, if the right impurities are used, gold items will be much more wear resistant. However, for those who invest in gold, this means that investing in gold jewelry is much more expensive than just buying investment gold.
Investing in gold-linked securities
Investments in gold can be made not only in physical form. Today, the stock market can offer investors several effective ways to invest in gold. The most accessible options for novice investors are: mutual funds, ETFs and stocks of companies associated with the gold market. Like all investment vehicles, securities have their own advantages and disadvantages that should be considered when considering whether or not to invest in gold in this way.
It should be noted that investing in securities linked to gold is considered by some investment experts to be more effective than investing in physical gold. First of all, because in this case the investor does not bear any costs for storage, transportation and insurance. It also protects against the theft of physical gold. In addition, securities do not have the value-saving properties of physical gold. Therefore, when investing in gold-related securities, it is recommended to always consider and take into account the advantages and disadvantages of these instruments.
Gold investment funds
Investing in securities issued by investment funds is probably one of the easiest ways to invest in gold available to ordinary investors. These investment funds are managed by professional fund managers who invest money according to a predetermined strategy. It is very important for an investor to find out exactly how funds invest in gold.
Some funds only buy physical gold and store it in secure vaults, while others add gold futures or gold mining stocks to their investment portfolios. Gold investment funds are very beneficial for people with small amounts to invest, as they allow them to diversify their gold investments well, even if they do not have a lot of capital.
On the other hand, professional investment fund managers do not work for free and charge a fee for their services, which reduces the overall return of the fund. Remember also that there is no 100% guarantee that the fund you choose will be profitable. It often happens that even professional fund managers face losses of greater or lesser amount. Therefore, be sure to read the prospectus of the fund and check the arrangements of the fund managers regarding management and other remuneration.
ETFs investing in gold
Another way to invest in gold that is available to novice investors is gold ETFs (exchange-traded funds). These funds are very easy to trade as they are bought and sold on the stock exchange just like regular stocks or bonds. ETFs seek to reproduce as closely as possible changes in the value of a selected commodity or commodity index, and therefore typically invest in futures contracts as well as physical commodities themselves. In other words, ETFs that invest in gold allow you to very accurately reproduce the movement of the price of gold on the exchange, without investing in physical gold itself.
Therefore, gold ETFs can offer investors relatively easy access to the gold market, but it is important to remember when choosing this type of fund that ETFs are usually aimed at tracking the price of gold. The expected yield of the gold ETF does not exceed the market average. It should also be mentioned that as of 2018, with the entry into force of the so-called MIFID II directive, European Union investors can no longer buy U.S.-traded ETFs that do not meet the requirements for funds in the European Union. However, while the Directive has significantly limited the choice of European investors, there is still a significant amount of gold ETFs on the market.
The largest gold ETFs traded in Europe are:
- iShares Physical Gold ETC
- Xetra Gold
- Invesco Physical Gold A
- WisdomTree Physical Gold
You can also invest in gold by buying shares of companies operating in this sector. In essence, it is an indirect investment in gold when you invest in securities of mining or gold mining companies. One of the biggest benefits of this way of investing in gold is the additional income from dividends paid out by companies. It is also relatively easy to buy, hold and, if necessary, sell shares.
The largest mining and gold mining companies currently on the market are:
- “Newmont”
- “Barrick”
- AngloGold Ashanti
- “Kinross Gold”
- Oxus
- Trans Siberian
- Hidefield
Of course, there are also many small regional companies operating in the gold market.
On the other hand, investing in gold by buying company shares also has some disadvantages. First, many of the largest mining companies are engaged not only in the extraction of gold, but also in other precious metals or even precious stones. Gold shares may represent only a very small part of the balance sheet of such companies, so in order to invest specifically in gold, you need to be very careful in choosing companies that best reflect changes in the price of gold. To do this, you need to carefully study the activities of companies, their financial statements and buy only shares of organizations that are actively working in the gold market.
It should also be noted that the price of a company’s shares depends not only on the price of gold or other commodities on the stock exchange. The performance of companies, their earnings, the competitive environment, the quality of management and many other factors also have a significant impact on share prices. Companies are also often exposed to risks that are completely unrelated to gold, such as currency fluctuations, worker strikes, political environments, and so on. In essence, buying shares of companies operating in the gold sector is an investment in both shares and gold itself, so when choosing this type of investment, you need to weigh the advantages and disadvantages of both gold and shares.
Investing in derivatives linked to gold
These financial products were first developed to help investors offset adverse market movements against their investment, but nowadays most derivatives are used primarily for short-term stock market speculation. It should be noted that the derivatives discussed below not only have the potential for high returns, but also carry a relatively high level of risk, so they should only be used by very experienced and professional investors.
Gold futures
Gold futures are by far the most popular gold-related derivatives. A futures contract is a legally binding agreement between a buyer and a seller to buy at a pre-agreed time and at an agreed price of an agreed amount of gold for the buyer and an agreed amount for the seller. These transactions are standardized, so the quantity and quality of gold, as well as the duration of the transaction, are precisely determined before they are concluded. Usually, only the value of the transaction changes, since it is not known what the price of gold on the exchange will be at the time of the transaction.
The main purpose of gold futures is to manage the risk of changes in the price of gold on the exchange. Market participants wishing to protect themselves enter into futures contracts for gold, which is contrary to their core business. Thus, if an unfavorable situation develops on the market and losses occur in the main activity, they can be compensated by futures income.
For example, if a jeweler believes that the price of gold will rise in the future, he may invest in a gold futures contract to lock in a certain gold price for the future. If gold prices rise in the future, the jeweler will obviously have to pay more for the gold for his jewelry, but his long positions in the futures market will allow him to make a profit, thereby offsetting the losses incurred as a result of paying more for physical gold. Conversely, if gold prices fall, the jeweler will make a loss in the futures market but pay less for physical gold. In any case, the jeweler insured against changes in the price of gold on the stock exchange.
However, these days, gold futures are most often used for short-term speculation and not to protect one’s investment. Most gold futures never reach expiration because investors close them early. Typically, investors speculating in futures are not even going to buy gold or another commodity supplied by a contract, but liquidate a long position in a contract by opening a short position in the same contract when the time is right. This reflects the profit or loss on the contract.
Gold Options
An option on gold is the right of an investor to buy or sell a predetermined amount of gold on a specific date at a predetermined price. In other words, unlike a gold futures contract, an option is only an investor’s choice, not an obligation to buy or sell gold. Options on gold allow investors to earn money both when the price of gold rises and falls.
For example, if an investor believes that the price of gold will rise in the future, he may enter into a call option on gold. It gives the investor the right to buy a fixed amount of gold at a fixed time at a predetermined price. If in the future, before the expiration of the option, the price of gold rises above the price specified in the option, the investor will profit on the difference between the price of gold on the exchange and the price fixed in the option. However, if the price of gold falls below the agreed upon price at the time the option expires, the investor will suffer a loss. The loss incurred by the investor will be equal to the price paid when entering into a call option on gold.
On the other hand, if an investor believes that the price of gold should fall in the future, he can enter into a put option. It gives the investor the right to sell a fixed amount of gold at a fixed time at a predetermined price. Thus, if the price of gold falls below the price stipulated in the contract before the expiration of the put option, the investor will make a profit. If the price of gold rises above the agreed price at the time of option expiration, the investor will incur losses. As with a call, the investor’s loss will be limited to the price paid when the option was entered into.
Gold CFD Trading
The last way to invest in gold is to trade CFD (Contract For Difference) gold contracts or contracts for difference. In essence, a CFD on gold is a kind of agreement between an investor and a broker of their choice to pay the difference between the price of gold at the time of the conclusion of the contract and the price of gold at the end of the contract.
Thus, when buying CFDs on gold, an investor does not buy gold itself, but simply “bets” with a broker on the difference in gold prices. For example, if an investor believes that the price of gold will rise in the future, he can enter into a CFD with his broker. If the price of gold rises at the end of the trade, the broker will pay the investor the resulting profit, but if the price of gold falls, the broker will make a profit and the investor will lose.
Gold CFDs can also be leveraged so that even with a relatively small deposit, an investor can control fairly large gold positions. Of course, large positions mean not only potentially large profits, but also large losses, so it is recommended for beginners and inexperienced investors to first open a trial “demo” account with a broker and develop their trading skills on it.
