Going for gold? Here’s how you can invest in the yellow metal

Highlights

  • Experts advise investors to include safe-haven gold in their investment portfolios to lower overall risk.
  • There are several opportunities for investing in gold, including bullion (physical gold), futures, mining companies, and jewellery.
  • Gold investing and trading are two different approaches and should not be confused with one another.

From time immemorial, gold has been used as the world’s currency of choice. Experts advise investors to include safe-haven gold in their investment portfolios to lower overall risk by using it as a hedge against political unrest and inflation.

There are several opportunities for investing in gold, including bullion (physical gold), futures, mining companies, and jewelry.

However, gold investing and trading are two different approaches and should not be confused with one another. An investor takes up the ownership of the asset upfront and profit if gold prices surge.

On the other hand, a trader doesn’t take up the ownership of the asset itself but takes up a position on the underlying price (rise or fall).

Going for Gold ? Here's How You Can Invest In The Yellow Metal

There are different types of gold assets available for you to trade or invest:

Jewellery: Even though easy to acquire, jewellery is not considered a good option for investing in gold. Due to mark-ups in the jewellery industry, investing in jewellery is not considered to be a lucrative option. Also, the resale value of jewellery is known to fall materially after the purchase.

Physical gold: Bullion (gold coins and bars) is the most common way to use and store gold by individuals and banks. However, active investors are deterred by costly safekeeping and insurance requirements in case of physical gold.

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The other important thing to keep in mind while investing in gold bullion is that it’s a direct investment in gold's value. With change in dollar value, the value of investor’s holdings would also proportionally change.

Gold certificates: Another way to own gold without having a direct exposure to it is via gold certificates. These certificates are notes issued by a firm which owns gold. There is no specific gold backing the certificates. These notes are as good as the firm backing them. However, the major disadvantage with these notes is the costs associated with them.

Exchange-traded funds (ETFs): These funds track the movement of shares of publicly traded gold mining refining and production companies. ETFs are widely popular since trading or investing in them provides a much better exposure to a wide range of stocks in a sector, which can help in diversifying a portfolio. These funds are passive investments.

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Future contracts: These are another popular way to hold gold indirectly. However, future contracts are a highly leveraged and risky option for newbies. A futures contract is basically a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardised for quality and quantity to facilitate trading on a futures exchange. These are generally traded on stock exchanges such as ASX.

However, one major disadvantage of future contracts is that they are generally purchased with just a small fraction of the total contract cost. For instance, an investor might only have to put down 10% of the total the gold’s cost controlled by the contract. It increases an investor’s potential gains and losses.

In addition, future contracts come with end dates, implying one can’t just hold on to a losing position in hope of a rebound.

Gold stocks: Owning shares in the companies that deal with the yellow metal can also provide an indirect exposure to gold.There are several firms which also offer regular dividends to their shareholders.

Bottom Line

Gold price is mainly determined by supply and demand. There are several factors that can impact the market price of the yellow metal. Thus, investors and traders should devise proper strategies before investing in any of the above listed options.

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