Gold has been a part of our history, it has been highly sought after because of its unique yellow glow, it was highly valued because of it wasn’t easy to find and it does not tarnish easily. Thousands of years have passed but our fondness for this precious metal remain unchanged and has no signs of abating. Currently, Gold is used in various ways like in computers and in Jewelry this is many traders are interested in investing in gold.
Why invest in Gold?
Unlike other assets, gold has maintained its high value even throughout many years. People see it as a safe haven against uncertainty in the market and offer various ways to trade in the market. Investing in gold can be intimidating as it is easily affected by many factors in the market but offers great returns in investment.
In every investment opportunity there is an advantage. Whether spend your time and money investing in gold or in other asset in the market keep in mind that there will always be volatility in the market.
Ways of investing in gold
- Bullion of gold
Many people think of gold bullion as just bars or gold, but they are more than that. Gold bullions are the best way to procure direct ownership to gold. Gold bullion is a form of pure gold (or near pure) in any size or shape that has been given certification for their purity and weight by authorised entities. For protection and security, a serial number is also engraved on each gold bullion.
While many new traders and investors can be fascinated by the concept of investing in gold bullions, but their large sixes, heaving weight contributes to increased costs and less liquidity with respect to exchanges.
Therefore, instead of holding gold bullions in large sizes, it is more preferable to hold small-sized gold bars to facilitate easy selling and buying.
- Gold jewellery
As global wealth and population are on the rise, so is the demand for gold in jewellery. About 50 per cent of gold produced is used in making jewellery, and this number is expected to rise in the coming times. But at the same time, the gold jewellery investors are seen to be very fragile with prices. When prices take only a brisk hike, there is less gold jewellery bought.
Buying gold jewellery in retail involves a considerable markup that increases the cost. To avoid this retail markup, one can buy gold at auctions and sales involving estates. The bane here clearly is the time you have to spend looking for valuable pieces with respect to their prices.
No matter how you interest yourself in buying gold jewellery, you are investing in beautiful art. For investment purposes, gold jewellery does not seem to be a righteous investment.
- Gold coins
For a large part in history, gold coins have been issued by governmental authorities around the globe. Investors and traders invest in gold coins at a premium of 1 to 7 per cent. There are various advantages associated with investing in gold coins:
- The prices of gold coins are listed in publications related to finance. This can give a clear idea to investors about the kind of prices at which the gold coins are being traded.
- There are a large number of brokers and traders in many countries facilitating trades in gold coins. If you are inquiring for an online broker to facilitate trade in gold, we would recommend Brokereo. Brokereo is a regulated broker facilitating investments in a wide range of instruments like commodities, metals, indices, forex, stocks, ETFs and more.
- Since these coins are smaller in sizes and weights, they provide more liquidity and facilitate easy exchanges.
The main disadvantage with trading gold coins is of the storage space and costs of insurance the gold coins entail.
- Options and futures
Futures are not traded in shares, but contacts. Here, gold futures refer to contracts to exchange gold on a particular date, in the future. Futures are mostly used by investors who have been in trade and investment for a long duration and are therefore experienced. The advantage of trading gold futures is that they have low margins and lower commissions as compared to conventional securities.
Options are the other way to trade futures contracts downright. Options give traders the choice to buy futures contracts within a particular time, at a predetermined price.
- Gold mutual funds and exchange-traded funds
Many mutual fund companies include gold bullions and gold investments in their list, but there are only few which focus entirely on investing in gold. There are a lot of benefits of going with gold-focused mutual funds:
- Minimum investment costs
- One can diversify between different companies
- No extensive research of companies is required
- Ease of holding
One alternative way to directly invest in gold is to invest in gold oriented exchange-traded funds or ETFs. Each ETF represents a specific amount of gold. The exchange-traded funds are traded just like stocks through any broker account. Therefore, ETFs become more liquid and cost-effective as compared to direct gold investments through coins and bullions, particularly for new and smaller investors.
- Companies mining gold
The companies involved in gold mining benefit from the increasing prices of gold to a large extent. If one invests in such companies, one ought to reap benefits as and when prices are on a hike. They also tend to carry fewer risks than other gold investments.
These companies which engage in the mining of gold are prideful of their massive and extensive operations. Therefore, the trust and success factor plays a significant role while investing in these companies. Most of the time, these companies can account for profits even when prices of gold are on a downward slope.
Investing in such companies requires thorough research of their workings and operations. It consumes a lot of time, and that is the reason why most investors stay away from it.
Key drivers of the price of gold
The market can become tricky sometimes and investing in gold is no different, you have to know how the market moves and more importantly keep an eye on the factors that drive gold prices.
- Price of the U.S. dollar: The value of gold is usually inversely proportional to the value of the United States dollar. The more powerful the price of the dollar is, the lower the value of gold will be in the market. When the dollar is at a weaker end, the prices of gold are on the rise. This is the logic behind gold being traded against inflationary situations.
- Production of gold: South Africa, China, United States, Russia, Peru, and Australia are the major gold mining countries. The supply of gold from these countries will create an impact in the prices of gold. When supply is low, the prices will be at risee, and vice-versa.
- Gold reserves of central banks: Many central banks tend to accumulate paper currencies in the form of reserves of gold. This is done because they want to expand and diversify their reserves beyond the paper currencies. And with gold, prices are on the rise. Many nations around the globe have reserves majorly consisting of gold. The top three gold buying governments would be Russia, Turkey, and Kazakhstan.
- Protection of money and wealth: When the economy is at unrest or downfall, many people turn to invest in gold due to the consistency in its value. Gold and silver are seen as safe ports in a storm. When the returns on shares, bonds, mutual funds, etc. fall, the value of gold can still rise. Gold can be reasonably used to protect one’s investments against inflation. Gold is also seen as a safe haven during political unrest in many countries.
- Industrial demand: In 2019, the demand for gold jewellery was about half of the total production of gold, and this demand is expected to increase in the coming years. China, India, and the United States are seen to be the largest demanders of gold jewellery. Other demand also accounts for industrial use of gold in manufacturing and electronics. The massive demand for industrial purposes and for gold jewellery can impact the prices of gold. As the demand increases, the price of gold increases too.
- Demand in gold investments: Gold also acquires demand on investment forte in terms of exchange-traded funds or shares.
The gold-silver ratio
The gold-silver ratio depicts the value of silver to the equal weight and value of the gold. The gold-silver ratio is often called the “mint ratio”. To put it in layman words, the gold-silver ratio analyses the amount of silver (in value of ounces) that are required to buy one ounce of gold. This ration moves at extremes at times and is predicted through the market forces of gold and silver. But in the past, this ratio has also been set by governmental authorities in different countries to procure stability in financial terms.
Investors and traders who are able to analyse the movement of the gold-silver ratio can reap benefits in the trade even when the prices of both the metals are at a decline.
The strategy of the gold-silver ratio can be executed in exchange-traded funds, futures contracts, options, and gold and silver bullions and coins.
Long term investment in gold
To analyse gold as a long term investment, we must connoisseur the time period we call long term. If we consider forty to fifty years as long term, the stocks tend to outplay gold. But if we are looking at a period of fifteen years or so, the gold is sure to outdo stocks and bonds.
Gold is considered as a safety net when everything’s falling apart for the investor. The prices of gold do not move the conventional prices in the market. This way, it can be considered a risky investment in the long term. In the past, the prices of gold had not risen when the market was on a peak. Investors mostly go for investing in gold when the whole market scenario is on the decline.
Additionally, gold is not considered to be an income yielding security. Investments on gold carry the cost of insurance and storage space. This can result in large amounts in the long term investing in gold. Over the longer, both bonds and stocks tended to surpass gold investments. But in a shorter span, gold is meant to lead.
Disadvantages of investing in gold
- A lot of experts are of the opinion that gold jewellery is not ideal for investment purposes. When buying gold jewellery, one has to endure a lot of costs like wastage and making charges. While seeing the gold again, the jeweller won’t consider making or wastage charges.
- Gold ETFs tend to be more costly than buying actual gold due to the management fees that are charged. One also has to pay brokerage charges which increase the prices of each ETF.
- Investing in gold coins and bars has the disadvantage of procuring a lesser amount when you sell out of it. At the same time, no bank buys back the once sold gold bar or coin.
- Investing in gold does not lead to any fixed or steady income, unlike bonds, shares, or mutual funds which pay dividends. You will make gains only if prices rise.
- The difficult storage of gold is another major disadvantage. One has to ensure gold is secured and safe from theft and other such issues. When kept in a bank locker, it isn’t easy to reach out to your gold as and when you need to. Also, it involves a lot of maintenance charges every year.
There are a lot of ways one can invest in gold. It depends on the trading style of the trader or investor to decide how to go about investing in gold. Investors wishing to have a direct subjection to gold can go for bullions or coins.
For more passionate and assertive investors, gold futures or options can do better.
The idea of buying gold jewellery for investments is rather cumbersome, and may not be considered a real investment.
One must take into consideration different factors that impact the prices of gold in the market.
Also, gold should be used as one instrument for the investor to diversify the portfolio in metals, but not a significant chunk of investment should go round about investing in gold.