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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?
The Benefits of Gold
Gold has a couple of important benefits for investors, here are the top reasons why investors considering gold in the recent years:
- Inflation Hedge – Gold has historically been a great inflation hedge since its price rises when the cost of living rises. During high-inflation years during the last 50 years, gold prices have soared and the stock market has plummeted. Because gold is valued in those currency units when fiat currency loses its purchasing power due to inflation, it tends to climb in tandem with everything else.
- Recession Hedge – Gold is a strong investment option during a recession because it is known to perform consistently well even during times of economic downturn. Unlike the most risky assets, such as stocks, gold is a tangible item that people often invest in during difficult economic times.
- Diversification – Gold's value does not fluctuate in the same way as equities and bonds, according to historical records. The value of gold appears to be unaffected by stock market peaks and valleys. It's a good method to diversify your investment portfolio. Diversification of your portfolio refers to distributing your investments across several asset classes. This way, if one investment falls in value, the other investments may be able to compensate. It's vital to keep in mind that diversification within the gold asset class should be approached differently.
- Increasing Demand – In previous years, rising affluence in emerging markets boosted gold demand. Gold is deeply ingrained in the cultures of many of these countries. The demand for gold has remained steady in China, where gold bars constitute a traditional means of saving. India is the world's second-largest gold consumer, and it is used for a variety of purposes, including jewelry.
Should I Invest In Gold Now?
This is dependent on your risk tolerance and your expectations for what the markets will do next. As inflation fears grow, investors may flock to gold as a safe haven.
Humans have turned to gold as an investment and a store of wealth for thousands of years. Many investors wonder, “Is gold a good investment?” and “Should I invest in gold?” when the economy is uncertain or the stock market is turbulent. If gold is on your mind today, review your objectives and long-term investment strategy to ensure the precious metal is a good fit for your portfolio.
Gold is recognized for being a portfolio diversifier, but with inflation fears on the rise, investors are increasingly turning to gold as a hedge against rising prices. It's crucial to understand how gold works before you invest. You bear the danger of losing money with any investment, and that risk is amplified if you don't grasp the facts. Here are a few things to bear in mind if you're interested in gold.
If you want to know your options in holding gold, we've prepared some good suggestions.
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 have the most risk and to add to that, they are the most volatile.
You can invest as little or as much as you like in gold mining stocks, and you can rest easy knowing that your investments are safe from physical threats (e.g. theft). With over 300 gold mining businesses listed on the stock exchange, you have a lot of alternatives when it comes to the industries and places you want to invest in.
US Gold production has declined from 256 metric tons in 2004 to 190 metric tons in 2020, based on data from the US Geological Survey. The production levels have been fluctuating over the years, with the production falling from 237 metric tons in 2017 to 190 metric in 2020.
The profitability of gold mining enterprises, on the other hand, is highly dependent on a variety of factors. Over time, the price of gold naturally correlates with the stock price of mining businesses. However, it isn't all. Their profits are also influenced by their management efficiency, cost-cutting strategies, reserves, risk management, and exploration efforts.
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 to Choose a Gold Mining Stock?
Well, picking one of the companies 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 good management of the inventory supported by the production. Here are 4 suggestions based on our article on FXStreet:
- Barrick Gold (NYSE: GOLD) – Barrick is one of the world's oldest gold companies, which should come as no surprise given its ticker symbol. They have mines all over the world, with some of the largest being in the United States, Canada, Argentina, and the Democratic Republic of the Congo. This stock, which has a market cap of approximately 47 billion dollars at the time of writing, is ideal for value investors.
- Newmont Corporation (NYSE: NEM) – Newmont is a gold mining firm that is quite comparable to Barrick and provides another excellent way to invest in gold. It is headquartered in North America, has a market capitalization of slightly over $50 billion, is conservatively managed, and appears to be cheap at the moment. This is a fantastic company for conservative investors who value a company that pays a growing dividend and has recently performed exceptionally well.
- Kinross Gold Corporation (NYSE: KGC) is a gold mining company based in Canada. Kinross is a riskier investment than the last two firms on my list. The gold mining business, on the other hand, has been consolidating, as we have mentioned. As a result, there are only a few major companies left, leaving you with little options if you don't want to take risks (and a lot of you are pursuing risk). Kinross still appears to be a good investment, despite the fact that it is dependent on gold prices rising for the foreseeable future.
- Galiano Gold (NYSE: GAU) is the final company we'll look at. It's a stock with a lot of upside potential but little downside danger. Galiano, formerly Asanko Gold, is a Canadian firm that is currently mining gold at Ghana's Asanko mine. If I had to guess, I'd say they changed their name to reflect their plans to expand their activities.
Exchange-Traded Funds (ETFs)
This will account for over 30% of investment in gold.
Basically, most of the investors are familiar with the SPDR Gold Trust and such. What normally happens with the ETFs, they allow one to have an investment in gold but never have physical access. There are 33 ETFs that invest in gold. The GLD is the largest in the group having an expense ratio of 4%.
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.
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 the overall crisis – physical gold is the best option, no doubt.
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 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.
What Are the Most Popular Bullion Coins?
Coins made of gold or silver can become popular for a variety of reasons. It shouldn't matter to you as an investor whether they do it because of their appearance or their heritage. Choosing popular bullion coins, on the other hand, is always a good choice. This is due to the fact that they are the most liquid and thus the easiest to sell if you require immediate cash.
Based on overall sales, these are the top five most popular bullion coins in the world:
- American Eagle: The United States Mint produces these coins, which are available in a variety of sizes. This is by far the most popular bullion coin in the world, and it is considered the symbol of American cash.
- Canadian Maple Leaf: The Royal Canadian Mint sells the Canadian Maple Leaf, which features a maple leaf on one end and Queen Elizabeth II on the other. This is the most popular coin on the planet, second only to the American Eagle.
- The American Buffalo: After the Eagle, the American Buffalo is the most well-known gold coin in the United States. It was first issued in 1913 and is still a highly liquid coin.
- South African Krugerrand: The Krugerrand, named after South Africa's first president, comes in a variety of sizes. It is no longer produced and is a little more scarce than the other possibilities. It is, however, still regularly sold, and online dealers can easily find it.
- Austrian Philharmonic: This is a relatively new coin, having been introduced in 1989. Each coin is guaranteed by the Austrian mint and comes in a variety of sizes.
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 case you would like to invest through your retirement fund, it's definitely possible through Gold IRA rollover, for example. A Gold IRA Rollover occurs when a retirement account is transferred to a Self-Directed IRA that holds physical precious metals at an IRS-approved depository for the owner.
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 based 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.
Don’t forget: 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.
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.
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How to Invest in Gold - FAQs
Hard to know – but probably not. Gold has always been classified as a valuable metal due to its scarcity. Its value has risen steadily since it was originally used as money in circa 700BC. The trend has been consistent from 1900 and 2021. A more recent striking example is the period from 1998 to 2008, when gold's value tripled, rising from $287.45 to $865 per ounce.
It was trending at a stunning $1800+ per ounce in August 2021. It indicates that the value of gold continues to rise. Buying gold is a safer way of diversifying your portfolio if you're seeking for a secure investment to hedge against potential financial threats.
When there is economic uncertainty, such as a financial crisis, it is the best moment to buy gold. Gold is a better hedge against rising prices and against a financial crisis than it is against inflation. When other sorts of investments, such as stocks, bonds, and real estate, underperform, the price of gold tends to climb as most investors rush to acquire gold as a hedge against losses in other types of investments.
To determine whether to add additional gold to your portfolio, keep an eye out for bad political and economic messaging concerning debt, credit, unemployment, and currency in the world's main economies, such as the United States, the Eurozone, and China.
It’s undeniable, investing in gold is a lucrative investment. History favors this precious metal. For instance, in 2008, the value of gold per ounce was $865. In contrast, in 2021, it was trending at around $1800+. This means you could have more than doubled your value per ounce in about a decade.
However, the much you can make investing in gold depends on bazillions of factors. You must factor in your financial ability and risk tolerance versus averseness. Besides, your experience in speculating economic cycles is a huge determining factor. Also, having an in-depth understanding of what type of gold to invest in – physical or stock gold – plays a tremendous role in your portfolio strategy and returns. As an investor, you must understand your investment strategy to make a desirable return from it.
Buying physical gold or gold stocks, have their pros and cons. For instance, gold stocks are speculative. They trade like ordinary stocks. Their prices fluctuate depending on the external demand. Meaning they follow prevailing market trends. However, they can perform notably well than physical gold even when gold bullion prices dip.
Physical gold, in contrast, thrives well during economic crises. The gold rush to cushion investors against the prevailing market crisis makes them lucrative. And since you hold them in physical form, the inherent value doesn’t fluctuate even if the underlying price does. However, be wary. If you are not storing gold bullions by yourself, you will incur cumulative storage costs. Furthermore, they attract custodian costs such as gold IRA and insurance.
Both gold and silver are reputable in the market. However, gold investment is way safer. Its value has been stable than silver. This makes it a lucrative choice for a long-term investment. Silver, in contrast, is a weaker metal in terms of value, but due to its high industrial demand, there are more speculative players in its market. Therefore, silver is notably volatile and, as such, you should consider it a speculative portfolio. If you are looking for a long-term investment that will hold in value, you could consider investing in gold.
Gold, in particular, has had a respectable reputation for centuries. Its value is likely to continue increasing for many years to come. As a result, this makes it a secure investment.
The counterpart bitcoin is a new form of digital currency. With a restricted quantity of 21millions, the currency value seems to be lucrative. But it is also extremely volatile. Bitcoin is good for speculative movements, and you profit from its price movements in the short term. For a long-term investment with less volatility, you should go for gold.