How to Invest in Gold

How to invest in physical gold?

Buying physical gold is probably the most straightforward way to invest in the precious metal.

Some of the most common options for purchasing physical gold are mints and bullion exchanges. Official coins like the American Gold Eagle, the Canadian Gold Maple and the South African Krugerrand are common choices. They are guaranteed to hold 1 ounce of gold, but they may be alloyed with small amounts of other metals like silver and copper to make them more durable for use as legal tender. The Gold Eagle, for example, is 91.67 percent gold, 3 percent silver and 5.33 percent copper. These official gold coins are safe investments as they originate from a trusted source that guarantees their purity.

Investors looking to buy gold can also choose to purchase bars. Ranging in size from 1 gram to 400 ounces, bars offer a lot of flexibility. In particular, those looking to make a larger gold purchase could find bars to be an attractive option compared to multiple single ounce coins. The drawback to buying in bigger bar formats is they can’t be broken down into smaller units when it comes time to sell — investors will instead need to dispose of the whole thing.

One thing to note is that when purchasing physical gold, the sale price will be higher than the metal’s spot price. The difference between the two is called a premium, and these can vary between sellers. Premiums can also fluctuate due to market conditions — this happened during COVID-19, when demand for physical gold was high and dealers had a more difficult time sourcing the metal. In general, premiums tend to be higher on smaller amounts of gold and lower on larger amounts.

Numismatic coins, or collectible coins, are also a popular way of owning gold; however, they are typically for people who are interested in collecting as a hobby rather than investing. These coins derive some value from the metal they are made from, but they have additional value to collectors who understand the collectible market and are seeking rare and noteworthy coins. Numismatics can include coins used as modern currency, as well as older coins, war medallions and even sporting medals. Without certification, their provenance and metallurgical makeup may be undetermined.

One downside to buying physical metal is storage. Investors with a small amount of gold may choose to store it at home, which comes with the obvious risk of theft. Those who store metal at home may want to keep it in a safe or find creative ways to hide it, like under floorboards, inside door jambs or mixed in with pantry items. Investors with larger amounts of physical gold may instead opt for a secure storage facility. These can range from a safe deposit box — though some banks may not allow this — to dedicated storage vaults. While this type of storage offers a high degree of safety, the associated costs can impact long-term profit goals. Pricing typically varies by the value or weight of the gold being stored.

For those looking to mitigate risk and keep costs low, gold certificates can be purchased from banks and other institutions. These notes allow you to buy a certain amount of gold on paper without having to worry about storage. They are transferable and can be exchanged for the physical amount stated at any time. Their risk is dependent on the financial strength of the issuer, as if the company that is selling them goes bankrupt, the certificate would be rendered worthless.

Click here to learn more about investing in physical gold.

How to invest in gold ETFs?

Investors looking to add a position in gold may also want to consider exchange-traded funds (ETFs).

Gold ETFs are largely designed to track the metal’s spot price, but can also track gold futures or a combination of the two. Still others are centered around gold companies. While gold is seen as a largely stable commodity, differing strategies offer greater exposure to volatility, meaning the amount of risk between funds can vary.

Price-focused funds like Blackrock’s iShares Gold Trust (ARCA:IAU) and State Street Global Advisors’ SPDR Gold Shares (ARCA:GLD) have gained prominence in recent years as they offer a relatively simple and cost-effective way for investors to diversify their portfolios and reap the stability that comes with owning gold.

ETFs that track gold stocks are also appealing to some investors, with two popular options including the VanEck Gold Miners ETF (ARCA:GDX), which is largely made up of large mining companies, and the VanEck Junior Gold Miners ETF (ARCA:GDXJ), which has a focus on junior companies in exploration and development stages.

Since ETFs trade like stocks on exchanges, they offer a higher degree of liquidity than physical bullion. However, it’s important to note that even ETFs that follow the price of gold are generally a contract with the issuer and cannot be exchanged for the gold itself; those looking to own physical metal should do so via other avenues.

Investors should also understand that ETFs are a managed investment with fees that can vary from 0.5 percent to over 2 percent — due diligence is key for uncovering the best options. Additionally, because ETFs work more like stocks, if the company managing the fund defaults, some or all of the investment could be lost.

Click here for a list of the five biggest gold ETFs.

How to invest in gold stocks?

Getting gold into an investment portfolio doesn’t just mean chasing the physical metal. Investors can buy shares of companies that are involved in gold exploration, development and production as well.

The gold-mining sector has a broad range of companies that can appeal to different types of investors depending on how much risk they are willing to take on. Stalwarts like Barrick Gold (TSX:ABX,NYSE:GOLD), Newmont (NYSE:NEM,TSX:NGT) and Agnico Eagle Mines (TSX:AEM,NYSE:AEM) have decades of experience in the mining industry, making them relatively safe options. These companies have large market capitalizations and offer dividends in the range of approximately 2 to 4 percent. They also have diversified global operations, which provides greater stability.

Outside of established companies, investors willing to take on more risk can look to gold juniors. Juniors are focused on the exploration and development of claims rather than on extraction. They have lower market caps than the major mining companies, and can be found on exchanges like the TSXV in Canada and the ASX in Australia.

Companies like Canadian Gold (TSXV:CGC,OTCQB:STRRF) and Dynasty Gold (TSXV:DYG,OTC Pink:DGDCF) have seen strong share price performances year-to-date based on promising results from drilling.

As their share prices are often under $1 — sometimes well under — juniors can be attractive to investors, especially those with smaller portfolios or those new to investing. However, juniors are high risk. Because their mineral claims are unproven and news can be sparse, they can be quite volatile. Additionally, for every success, there are a dozen more failures.

This means those looking to invest in juniors must do their due diligence. There are many factors to consider when investing in junior gold stocks, such as a company’s team, the jurisdictions it operates in, its finances and its news flow.

Of course, due diligence is important even for larger-scale gold companies. For majors, elements to research include the age of the company’s mining operations, its experience at finding and developing new claims, relevant geopolitical instabilities, the availability of stable labor and how all these things impact the company’s bottom line.

As a final point, many gold companies have exposure to other metals. And while prices for precious metals tend to move in similar ways, that’s often not the case for base metals like copper, aluminum and iron — that means understanding other commodities markets may be important for gold investors. For instance, even though a company may be reaping the rewards of a strong gold market, its profits may be offset because of copper price declines. Still, this isn’t necessarily a bad thing — a pure-play gold miner may suffer more in a bad gold market than a firm that is diversified.

Click here for a list of the 10 biggest gold-mining companies.

How to invest in gold futures?

Futures trading is another popular way to invest in gold, but it’s typically the realm of more experienced traders.

There are two kinds of traders in the gold futures market. The first type is those who are looking to hedge a position — this group includes banks that want to offset monetary fluctuations, miners that are looking to sell higher at a later date and artisans and manufacturers who use gold in their products and are looking to buy the metal cheaper down the road.

Speculators make up the second group of futures traders. Gold isn’t part of their business, but these entities and individuals try to use gold futures to profit from market fluctuations.

Importantly, gold doesn’t actually change hands for the vast majority of futures trades. So how do gold futures work? Essentially, contracts based on the gold spot price are created to resolve on a future date. Traders enter a contract at the current spot price in the hopes that gold will go up before the contract resolves, or may choose to bet on gold falling and short the yellow metal. The difference between what the buyer pays and what they sell for is the profit.

Gold futures contract dates are fixed and occur at the end of every second month, starting in February. Standardized contracts can be purchased in 100, 50 and 10 troy ounce sizes.

When buying a gold futures contract, an investor will engage with a broker who can provide them with leverage to make the trade. To do this, the investor provides the broker with funds equal to a small percentage of the contract they wish to buy, typically between 3 and 12 percent of the total value. The broker then lends the seller the remaining funds to make the trade. For example, say an investor wants to purchase a $100,000 contract on the futures market — in that case, they might provide the brokerage with $5,000 and the broker would provide the remaining sum, $95,000, to complete the transaction.

The buyer can choose to sell at any point up to the closing date of the contract. For this example, we’ll say the buyer has a goal of gaining 10 percent on the total price, meaning $110,000. When their goal is met, the investor would work with the broker again to sell the contract for that price. The seller would walk away with a $10,000 profit minus a fee from the broker, and the broker would recoup its capital. For the trader, the benefit is that for an investment of $5,000, they are able to gain far more profit than if they had simply purchased $5,000 worth of gold.

It may seem attractive to get huge returns through a limited investment, but leveraged trading is also highly risky, and many people who invest in gold futures lose money in the process. Gold fluctuates as a commodity, and where an investor has the potential to earn a profit, they also have the potential for significant losses — potentially many times greater than their original investment. In the example above, a buyer who held a losing contract to a 10 percent loss would have to pay the broker the $5,000 for the loss on the contract, in addition to losing the initial $5,000 investment.

Even though the profits from futures trading may seem great, it is not an advisable starting point for beginners.

Click here to learn more about investing in gold futures.

Why invest in gold?

Gold should be considered an important part of any investment portfolio, as it can provide long-term stability and help ensure steady strength over time. From physical gold to gold ETFs to gold stocks and gold futures, there is an option for every type of investor, whether they are experienced or just getting started in the market.

When it comes time to decide which method to use, it’s important to understand these different strategies and their pros and cons. For example, buying physical gold requires different considerations than buying on paper or investing in company shares. As with any investment, it’s important for investors to know the risks.