Of all the forms of investing in gold, the riskiest is trading futures or options contracts, a form of speculative investment. Futures and options are derivatives, meaning that their value is based entirely on the price of an underlying asset. Derivatives markets are efficient ways to gain exposure to gold and are generally the most profitable, as well as providing the highest degree of leverage. However, for the average investor, derivatives markets are inaccessible.
Instead, a typical investor can gain exposure to gold through mutual funds that buy gold or by using gold ETFs that are traded as stocks on stock exchanges. The SPDR Gold Trust ETF (GLD) is popularly used; the trust's investment goal is for its shares to reflect the price performance of gold bars. The idea that jewelry is an investment is historic but naive. There is too much room between the price of most jewels and their gold value to be considered a real investment.
Instead, the average gold investor should consider gold-oriented mutual funds and ETFs, as these securities generally provide the easiest and safest way to invest in gold. Gold exchange-traded funds (ETFs) and mutual funds are accounts that buy gold on behalf of an investor. Each of the shares that make up these funds represents a fixed amount of gold and can be bought and sold as shares. This is one of the best ways to invest in gold, as ETFs and mutual funds allow investors to work with gold, without having to deal with physical property costs (such as securities or gold insurance).
There are fees associated with buying and selling gold through ETFs or mutual funds, but they are often much lower compared to managing other assets. Without a doubt, the most practical way to invest in gold is to buy physical gold. In Canada, major Canadian banks are the main bullion retailers, although you can buy gold bars and coins directly from the Royal Canadian Mint online store. Investing in gold stocks, ETFs, or mutual fund is often the best way to expose yourself to gold in your portfolio.
In ancient times, the malleability and brilliance of gold led to its use in ancient jewelry and coins. It was also difficult to get gold out of the earth, and the harder it is to get something, the more it is valued. The industry with the highest demand, by far, is jewelry, which accounts for about 50% of the demand for gold. Another 40% comes from direct physical investment in gold, including that used to create coins, bars, medals and gold bars.
The bar is a gold bar or coin stamped with the amount of gold it contains and the purity of the gold. It is different from numismatic coins, collectibles that are traded based on the demand for the specific type of currency rather than its gold content. Gold is often considered a “safe haven” investment. If paper money were to suddenly lose its value, the world would have to turn to something of value to facilitate trade.
This is one of the reasons why investors tend to push up the price of gold when financial markets are volatile. The demand for jewelry is quite constant, although economic recessions obviously lead to some temporary reductions in demand for this industry. However, investor demand, including central banks, tends to inversely track the economy and investor sentiment. When investors are worried about the economy, they often buy gold and, depending on the increase in demand, raise its price.
You can track the ups and downs of gold on the website of the World Gold Council, an industry trade group backed by some of the world's largest gold miners. Margins in the jewelry industry make this a bad option for investing in gold. Once you have purchased it, it is likely that its resale value will fall substantially. This also assumes that you are talking about gold jewelry of at least 10 carats.
Pure gold is 24 carats. Another way to gain direct exposure to gold without physically owning it, gold certificates are promissory notes issued by a company that owns gold. Usually, these banknotes are for unallocated gold, meaning there is no specific gold associated with the certificate, but the company says it has enough to support all outstanding certificates. You can buy assigned gold certificates, but the costs are higher.
The big problem here is that the certificates are actually only as good as the company behind them, something like the banks before the FDIC insurance was created. This is why one of the most desired options for gold certificates is the Perth Mint, which is backed by the Western Australian government. That said, if you're simply going to buy a paper representation of gold, you might want to consider exchange-traded funds instead. Another way to own gold indirectly, futures contracts are a highly leveraged and risky option that is not appropriate for beginners.
Even experienced investors should think twice here. Essentially, a futures contract is an agreement between a buyer and a seller to exchange a specific amount of gold on a specific future date and price. As gold prices rise and fall, the value of the contract fluctuates and the seller and buyer's accounts adjust accordingly. Futures contracts are usually traded on exchanges, so you should talk to your broker to see if they support them.
Potential investors need to pay close attention to a company's mining costs, existing mining portfolio, and opportunities for expansion of existing and new assets when deciding which gold mining stocks to buy. When capital markets are in crisis, gold often performs relatively well, as investors seek secure investments. While it may seem like a good way to gain indirect exposure to gold, owning the shares of companies that mine and sell gold, such as Barrick Gold (ABX) or Kinross Gold (KGC), may not give the investor the exposure to the precious metal they wanted. Many investors seek to keep gold as a store of value and as a hedge against inflation, but it can be difficult and cumbersome to keep large amounts of physical gold.
The information presented is not intended to be used as the sole basis for any investment decision, nor should it be construed as advice designed to meet the investment needs of a particular investor. Investing in physical gold can be a challenge for investors more accustomed to trading stocks and bonds online. Perhaps the best option for most investors looking to own physical gold is to buy gold bars directly from the U. Investing in gold isn't for everyone, and some investors just bet on cash-flowing businesses instead of relying on someone else to pay more for the shiny metal.
That's one of the reasons why legendary investors, such as Warren Buffett, warn against investing in gold and instead advocating. Therefore, most gold companies hedge their exposures to gold price risk in derivatives markets, and holding shares in these companies gives the investor primarily exposure to that company's operating profit margins. Investment decisions should be based on an assessment of your own personal financial situation, needs, risk tolerance and investment objectives. Even so, futures are still the cheapest way (fees and interest charges) to buy or sell gold by investing large sums.
If you're concerned about inflation and other calamities, gold can offer you a safe haven to invest. The biggest advantage of using futures to invest in gold is the immense amount of leverage you can use. This form of investment can also lead to lower risks, as there are other trading factors at play that can help protect investors from flat or falling gold prices. For example, with the largest gold ETF, SPDR Gold Shares, you will be charged 0.40% of the value of your investment each year.