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For over a millennia, gold has remained to be a substance of value.
Gold is a great defensive investment. Many people understand the bear market is close – and prefer gold than other defensive stocks. But even so, the question still remains:
How does one get exposed to gold?
There are a variety of methods through which one can gain gold exposure. Some of the methods include actual buying and selling. This accounts for more than 50% of exposure to gold.
Even as you learn the art and science of getting into a gold investment, it is important to mention that this is a subject that will require you to fully understand it in all dimensions. Also, with keen interest, it is a subject that has to be continually reviewed.
Gold trading is different from other investment vehicles.
Every one of the methods discussed below has its own risk. The degree of individual risk varies. No method, in particular, is risk-free.
The only challenge with holding gold is choosing the method that will best work for you. There are some several factors that you will consider when making your choice. This includes but not limited to the accuracy the investment reflects the price of gold, risks and security concerns.
How can we define best in terms of the methods by which we hold gold
The criteria should be simple. The method chosen has to include some certain element. Security being the first. You should look for the safest method. Or a method that has least non-gold price risks.
Also, when evaluating security, you need to look at things like insolvency and the degree of theft. Second in the row is liquidity. You need to go with the method that allows you to invest and encash your gold at any instance.
Finally, the method under consideration has to be efficient. Under this, you need to look for a way to hold gold with the least expenses.
Perhaps you may be wondering why gold trading is not carried out using any other currency. To explain this, you need to understand that there is a foreign currency risk (Just like in mutual funds).It happens when the investor buys gold in another currency and therefore exposed to currency fluctuation, which is a common problem that affects most of the gold traders.
Let’s say you buy your gold coin in Euro and the value of the Euro has decreased, even if the gold price is the same – you’ll get less than 1000$ Euro when you sell your gold.
Currently, the metal price stands at $1300. many investors seek to hold gold as a store of value when market conditions become worse. Some would like to hold it as a hedge against inflation. However, it is important to mention that it can be cumbersome to hold large quantities of gold.
Therefore, if you want to know your options in holding gold, we’ve prepared some good suggestions.
1. Gold Mining Stocks
There are many types of mining companies at public exposure. In the gold mining sector, there are exploration, development and production companies of all sizes.
Typically, the junior companies offer the best investment but has the most risk and to add to that, they are the most volatile.
The method holds one risk in particular. Single – stock investment.
Like said before, it also presents a unique opportunity where the investor could be exposed highly volatile sector. Usually, the upside is normally expected. One may double, triple or even quintuple their investment when it comes to gold stocks. The gold stocks can have much leverage to the gold spot price.
How do you choose the company you want to invest with?
Well, picking one of the company from the many takes a huge step of faith. The best performers usually are companies having a strong production base. In addition to that, the company must have proper reserves, big enough reserves. Lastly, when evaluating the company, they need to have a good management of the inventory supported by the production.
2. Exchange Traded Funds (ETFs)
This will account for over 30% of investment in gold.
Basically, most of the investors are familiar with the GLD, SPDR Gold Trust and such. What normally happens with the ETFs, they allow one to have an investment in gold but never have the physical access. There are 33 ETFs that invest in gold. The GLD is the largest in the group having an expense ratio of 4%.
How does it work?
The items to be traded are bought and sold like a stock. In essence, they are equivalent to the share of the gold with the exclusion of the maintenance fees, management fees, and insurance. Basically, a retail investor has limited chances of exchanging their GLD shares for bullion.
This can only be done if there is mandated authority to the creation and redemption of units and can only be done in 10,000-ounce increments. There are many benefits that come with the ETFs which include ease of trade and high liquidity. They are also available in the standard brokerage accounts.
Let’s not forget:
On the downside of the ETFs, there is constant speculation that the ETF doesn’t have all the gold needed. Just like the stocks, they are very volatile, in an event of a down-run, the prices could evaporate very quickly. The largest gold fund SPDR gold shares have a total expense ratio of 0.4%. this will cost you around 1% in total brokers and market marker commission to buy and sell your shares.
3. Gold Coins
This is another popular investment with one distinct advantage:
You don’t depend on anyone besides yourself.
In case of buying physical gold – you don’t need the bank, or any other institute, to extract your money. You shouldn’t afraid your ETF wouldn’t pay you your money or your gold mining stock company will fail. Especially if the market situation is worse and we are one step from overall crisis – physical gold is the best option, no doubt.
Pay attention to the following numbers:
Going with the record, this year alone, the US Mint has sold 450,000+ gold coins. This is under the American Eagle Coins. This is far by much from the records last year. If you are seriously considering this, then you need to purchase your investment through a chain of wholesalers or the precious metal dealers.
Keep in mind:
If you consider buying physical gold, you have to get prepared for that: you should find the right location to store the gold and make sure it would be as safe as possible.
If you think about gold coins, don’t miss Jack Wickens great article about the most popular gold bullions for investment.
They are much like mutual funds and the ETFs. Closed-end funds provide the investor with market shares relating to a basket of holdings. However, the major distinction from the mutual funds and the ETFs is that they cannot raise any new capital after their incarnation. This in return limits the number of available shares. Though the demand and the supply some times generate unwarranted volatility.
In most cases, the Closed-End funds can leverage their assets to produce higher yields. They typically trade a discounted rate to the underlying asset. However, this will largely depend on the market. Another distinction from the ETFs and mutual funds is that their fees are typically higher with 1% or 2%.
Take a look at the statistics by the MorningStar’s Johnson of the Sprott Gold Bullion Fund. The fund has a 3 year compounded return of 1.8%. going with the 5-year return, the rate increases by 2.6% to hit 4.4%. The fund as according to the company’s data has an expense ratio of 1.09%.
Investing in gold becomes even more interesting adding this vehicle to the basket. Futures are interesting.
Here’s how it goes:
What normally happens is that one is betting on a contract to buy specific quantities of commodities or financial instruments. However, this happens at a specified price and the delivery is at a specified future time.
Before you even go further, they are not for casual investors. They usually give the investor the exclusive rights to buy a predetermined amount of gold. It is also important to note that they are not a base on the present values and many consider it as a pure base of speculation. An investor can buy them through brokers and it requires a cash deposit which is only a fraction of the value of the total contract.
When buying the future contracts, like aforementioned, one has to set aside a small fraction of the cost. This may range from 5%-15%. Let’s say the gold goes up by the same percentage 5%-15%. You will be forced to double your margin, in our case to 10%-30%. Also, it is worth mentioning that they hold the potential for a nice reward in the future.
What about the advantages?
One advantage of the futures is that they present a unique way to invest. They are cheap to trade and has high liquidity. This makes them a good investment in the short term. Another reason why you should consider trading with the future is that you will never have to worry about theft and other gold scams. This is so because you’ll be trading a paper derivative which is usually a tie to gold.
They have great leverage which makes them one of the best ways to invest in gold. One contract of the future holds 100 ounces and rating that with the current stock prices, that would amount to $130,000. just to save for all the collateral, you may need roughly $7000.
this is still away from that most of the investors are exploring in investing in gold. It is an easy way through which you can get exposure to gold trading. They are easy to come by and as a matter of fact, they are self-explanatory.
According to World Gold Council, they are the most popular way to hold gold. Jewelry gold composition and the content will usually lie between 24K for pure gold and 10K. If you find such, it means that your jewelry contains 10 parts of gold and 14 made of other metals. In actual percentage, that will come to about 41.7% gold.
However, it is important knowing that the karat amounts may affect the price and the durability of each piece. The item is usually weighed in gram and the higher the grams the more expensive it gets.
The Smart Investor content is intended to be used and must be used for informational purposes only. We are not an investment advisor and you should NOT rely on this information to make investment decisions.