How To Invest In Gold - 5 Best Ways To Invest In Gold For Beginners
Investing in gold can be more value-preserving when the economy is unstable, what is the best way to invest in gold? If you are looking to learn more about gold investing, make sure to read on.
Gold is one of the most traded assets in the world. According to the World Gold Council, gold has an average trading volume of $130 billion. The yellowish metal is value-preserving and hence seen as a“safe-haven” asset. Historically it has been used as a hedge against currency devaluation, inflation, or deflation.
Often, investors include gold in their portfolios as part of their diversification. Gold investment may be in the form of owning physical gold coins, gaining exposure to gold futures, ETF, or other relevant derivatives which track gold prices.
In this article, we discuss how to invest in gold considering various factors of this asset class.
Why is Gold Investment Popular?
Gold has been perceived as a symbol of wealth for years. However, it has numerous uses making it a popular commodity in the trading market. The biggest demand for gold is in jewelry production, followed by direct investment, including coins, bullion (a bar or coin stamped with its value and purity), medals, and standard gold bars. Gold is also a vital industrial metal because it is a good conductor of electricity. It’s also used to make dentistry items and technological gadgets.
The luxe metal is viewed as a “safe haven” to store value during periods of uncertainty, insecurity, economic or political turmoil, wars, and devaluation. This is one of the main reasons why the price of gold increased in 2022.
● Gold is historically a valuable commodity
● Gold is a global currency
● Gold is an excellent tool to hedge against inflation.
● Gold is a valuable addition to a diversified portfolio.
Therefore, gold becomes the object of pursuit whenever the world economy is unstable, and the global situation is turbulent.
What Determines the Price of Gold?
The Forces of Supply and Demand
Like any other commodity, gold trades based on supply and demand, and that interplay ultimately determines what the spot price of gold is at any given point. Economic downturns usually see the price of gold rising as demand from investors increases.
The supply of gold in the world is quite large but is often hard to extract. According to the World Gold Council, there are about 190,000 metric tons of gold being used above the ground with 54,000 metric tons located below the ground that can be mined using modern technology.
The Value of the US Dollar
The price of gold is usually inversely proportional to the dollar's value since gold is denominated in dollars. A stronger dollar tends to lower the price of gold, while a weaker dollar may drive the price higher by increasing demand.
Investment Demand
Gold is viewed as a safe-haven investment and a store of value, so gold and silver offer ample trading opportunities and high liquidity.
How to get into Gold Investment?
Gold unlike company shares, do not pay dividends since it does not generate profits like a company. Generally, gold investors derive their return through buying and selling the asset class.
Well, what are the ways to invest in gold? Before investing in gold, it is imperative that you first understand the "cost of trading gold"
The Cost of Trading Gold
Gold is a liquid asset. However, it has a cost of a transaction, which is the difference between buying and selling prices.
Buying price- the price the other party quotes to buy gold from you.
Selling price - This is the price the other party is willing to sell gold to you.
The cost is the difference between the buying and the selling price.
Currently, a gram of gold at Gold Bullion Australia is selling for $3,001.53 while the buying price is $2,878.17. The transaction cost is, therefore, 4.2%. Therefore you incur a loss of 4.2% every time you purchase gold.
Besides the exchange rate loss, there is also a risk of exchange rate cost. To give you perspective. Gold is priced in US dollars. Therefore, if you buy in Aussie dollars, you need to exchange it for the US dollar. As a result, you incur exchange losses. Besides the exchange and exchange rate costs, you might also incur management and handling fees.
Different Ways have Different Costs
Comparison table for various type of Gold investment
Type | Examples | Cost per trade | Holding cost |
Physical Gold | Coins, Bullion, Bars Gold jewelry with 14k+ content | 1%~5% | None |
Futures | GOLD (NYMEX: GC) | 0.08%~0.15% | swap cost |
CFDs | XAUUSD CFD | 0.25~0.5 spread | Overnight fee |
Gold Stocks | ASX:NCM. Newcrest Mining Limited ASX:EVN. Evolution Mining Limited | 0~0.1% | None |
Gold ETFs | SPDR Gold Shares (NYSEMKT: GLD) VanEck Vectors Gold Miners ETF (ASX: GDX) | 0~0.1% | Management fee |
* These cost will change along the way
Each option of trading gold has its own trade-offs. Like any other investment, there's no standard option for investing in gold. However, researching how gold price works and learning about the pros/cons of each type of gold investment will help you make the right decision.
1. Buy Gold Jewelry, Gold Bullion, bars, and coins
Investing in physical gold is the most direct gold investment. Its market value is tied to the value of pure gold. You must pay the full price when you buy physical gold, including storage, markups, and related transaction fees. Physical gold is easy to buy, but high markups make it a poor option for gold investment. Pure gold is 24 karat (how purity is measured). However, jewelry can have much low purity.
Overall, buying physical gold is not recommended: The handling fee is too expensive, storage is very troublesome, and there is a risk of storage. The cost of other methods is much cheaper.
2. Invest In Gold Based Exchange Traded Funds (ETFs)
Exchange-traded fund (ETF) is an ideal option for investors wishing to have direct exposure without necessarily holding physical gold. According to the US Securities and Exchange Commission, SPDR Gold Shares is the first gold-backed ETF specifically to track the price of gold launched in 2004. There are other types of funds, like Mining-focused ETFs and Vectors Junior Gold Miners ETFs. In addition to gold, some ETFs also have exposure to other metals.
ETFs usually have management fees and transaction fees. The handling fee is about 0~0.1%. Each brokerage is slightly different. The management fee is 0.25%~0.4% per year.
You can research various costs and fees of each ETF to determine what is affordable and appropriate for your portfolio.
3. Trade Gold Futures
Gold future refers to the future contract that takes a future gold price as the trading target. Investors don’t trade the actual gold. The profit and loss of investing in gold futures depend on the gap between the gold price at the time of entering and exiting the market.
If the position is not closed halfway, we must continue renewing the futures contract after expiration. it is necessary to switch positions to a new month every 2 months. In other words, there will be a transaction cost.
Many people trade international gold futures, and there are two common commodities, namely
Gold futures (GC) on the New York Mercantile Exchange (NYMEX), 1 point is worth 100 US dollars,
Micro gold futures (codenamed MGC) of the Chicago Board of Trade (CME), 1 point is worth 10 US dollars,
Based on the current gold price index of more than 1800 points, A GC contract is $180,000, and an MGC contract is $18,000. The transaction cost is about 0.008~0.015% for GC and about 0.08%~0.15% for MGC.
If you want to hold for a long time, it will be more suitable to use gold ETF, and futures or CFDs will be more suitable for short-term trading.
4. Trade Gold Contracts For Difference (CFDs)
Gold CFD and Gold Futures are similar. The common feature is that they use margin trading. These are two common instruments that are favoured by short-term gold speculators due to the additional leverage feature of the product
A CFD contract for gold is an agreement between a buyer and a seller to exchange a specified amount of gold at a date in the future. The value of the contract fluctuates as the price moves up and down, adjusting the seller and buyer accounts accordingly. Gold CFDs are a kind of derivative that enables traders to track the gold price movements and use leverage (i.e., credit) to magnify the profits and losses.
CFDs resemble futures but with some notable differences:
- A CFD has no expiry date – it's possible to allow the position to run as long as desired
- CFDs can be very much smaller than futures or options – one single unit is possible in a CFD
-The universe of CFDs can encompass any underlying asset which has a changeable price – even cryptocurrencies
- CFDs are not traded through an exchange but over the counter (OTC) with a CFD broker
The cost of CFD is the bid-ask spread and overnight charges, At present, taking Mitrade as an example, The bid-ask spread is about 0.02%~0.04%, and the cost of buying and selling is extremely low. The overnight interest is about 0.00685% a day
Gold CFDs will suit traders who wish to speculate on the price of gold without owning any of the underlying assets. Gold CFDs also permits the use of leverage resulting in lower capital outlay to speculate on the prices of gold.
5. Invest in Gold mining companies
Gold mining companies is an alternative way to gain gold exposure. The revenue of these companies is related to gold price movement.
There are still risks to owning gold mining stocks. Sometimes the company underperforms, the workers go on strike, and disasters like a mine collapse or gas leak can occur. These factors can cost lives and halt production, ultimately driving prices down.
Is It Still Worth Investing in Gold?
Gold is the world's most actively traded commodity, meaning there's liquidity to ease trading. The price is also volatile – it changes rapidly- and trading is about being on the right side of price changes. So, yes, there is a potential for profitable trading in gold.
Trading gold in short term can be exciting and rewarding, but also risky and stressful. You need to have discipline, patience and a good money management system to succeed.
Trade XAUUSD-Gold online with Mitrade!
Savvy Investment in Gold
There are many different opinions through the gold investment world. Here are the common opinions from the internet:
1. Own some physical gold and silver
Gold functioned as money for 5000 years, and it was only in year 1971 that the gold standard stopped being used. With such a long established history, some opinions are to own some physical gold as an insurance to a crash of the modern world monetary systems.
2. Dont invest solely in indirect ownership over the long term
Certain paper products do not guarantee that you actually own the gold and often include cash settlement clauses that will pay you out in cash instead of physical metals. A harsh monetary crisis or war may cause an investment loss.
3. Ensure the asset is directly owned by yourself.
If you buy physical gold, the location of your gold storage should be within a jurisdiction that has strong property rights so that you reduce your risk of your asset being pledged, hedged, or leased out.
4. Gold coins may be more liquid
Some have the opinion that owning gold coins is a better option comparing to owning an entire gold bar due to the ease in usage. One should also factor in the cost of fabrication during purchase.
5. Build up stocks over time
Gold is a traditional store of value and monetary insurance that will help you build up savings over time. In hard times of war and famine, when currencies lost value, gold, and silver were used to purchase homes and provide food for weeks.
6. Avoid using credit
As with all types of long-term investments, the capital used for accumulating or investing in gold should not be in credit.
7. Invest only with your spare capital that you may not need for five years
For some investors, gold are usually accumulated for the purpose of long-term investment such as five years or more. By putting all your eggs in a basket, you may potentially miss out on short-term investment opportunities that may be more rewarding.
8. Set short and long-term objectives
Consider setting your trading or investment objectives and review them often. Avoid any hasty decisions that might compromise your overall strategy.
9. Invest only what you can afford
Individuals with lesser spare capital usually consider the use of dollar-cost averaging to build up their gold investment portfolio by accumulating small amounts over a period to smooth out their entry price.
10. Allocate a portion of your investment Portfolio
A diverse portfolio helps to reduce risk of sharp fluctuations due to extreme price movement in a single asset class. Gold provides for an interesting add to one’s investment portfolio.
Bottom Line
We introduce 5 popular ways to invest in gold. Traditional investors usually prefer investing in physical assets like gold coins, bars, or bullion. Experienced investors prefer a more liquid and low-cost way to invest, like mutual funds and exchange-traded funds that invest in the shares of mining companies. Advanced investors may trade gold futures or CFDs.
Whatever form of gold investment you choose, you can rest assured that gold investment has been around for thousands of years and is unlikely to disappear anytime soon. So, do your research, invest responsibly, and invest wisely!
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* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.
