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Nobody can deny the significance of gold in the international monetary system, although paper money almost takes the position of this precious metal to become a vehicle for exchanges across the globe. The ever-increasing financial industry has opened more avenues for institutions and individuals to pick gold as a “safe” investment product, especially in economic upheavals. So, what are the best ways to allocate your budget to this asset?
There are multiple traditional ways to splash out on gold, comprising investments in physical gold, ETFs, mutual funds and single stocks. Also, technological changes authorise individuals to trade on gold derivatives.
How to Invest in Physical Gold
One conventional way to put your cash in gold is through physical coins, bullion bars and jewellery. This kind of investment seems taxing for those with limited wealth and impatience to wait for the asset’s appreciation. Moreover, investors who are more attuned to trading financial products online find it inappropriate to own gold products.
Such a precious metal now can be bought at banks or reputable retail websites (e.g. JM Bullion and APMEX) which can offer a compelling discount provided you buy gold bars in large quantities. Further, you can either engage in online auctions on eBay or make a purchase from Gold-to-Go ATMs in Dubai or Las Vegas. Apart from the right spot price at which you should go to the market, you should pay attention to potentially incurred costs related to insurance and storage.
- Gold Bullion Bars
Gold bullion, commonly known as gold bars, is highly pure gold in the regular shape of bars. Normally, the Good Delivery bar extensively used by banks and dealers in the wholesale market standardly weighs 400 troy ounces (oz). However, 100 oz and one kilo are two measurement units universally employed for investment and trading. As of May 2021, the spot price of gold bullion is around US$1,880 per oz. This renders the investment in gold bullion exorbitant, not to mention that it’s not allowed to be split into fractional shares as stocks or ETFs.
Therefore, you should consider substantial capital funding to commence with the asset. Additionally, its high price requires insurance and storage propositions to avoid the worst-case scenarios such as stealing. Accordingly, you can pick a legitimate dealer who can insure your asset during the delivery and then choose to preserve it in a safe deposit box or a reputable bank’s large vault.
The London Bullion Market Association (LBMA) also recommended investors to select gold bars with a minimum purity of 99.5% (995) because alloy gold can easily melt during delivery. Beyond that, you should check whether those bars come with the name of manufacturer and weight or not. Such information is regularly stamped on the facet of bars. Several well-known mints include Royal Mint (UK), Perth Mint (Australia) and more.
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- Gold Coins
Gold coins are classified into two main categories: bullion coins and numismatic coins. The former is exclusively made from highly refined gold and must comply with one of the criteria regulated by issuing countries; for example, the United States only recognises those which are stamped by the U.S Mint to identify the face value as bullion coins. Meanwhile, those produced by private mints must be called “rounds” and receive no governmental backing, which reduces the attractiveness and ubiquity of those “coins”.
Compared to plain gold bars, bullion coins have lower gold content which is particularly mixed with other metals (silver or copper) to make coins more rigid. But those coins are valued over gold bricks because of their relatively modest size, production, preservation and distribution. To illustrate, the American Eagle which weighs 1.0909 troy oz and contains 91.67% of gold costs US$2,700, much higher than the same-weight bullion bar. Some common bullion coins include Canadian Gold Maple Leaf, Australian Gold Kangaroo and U.K Gold Britannia.
Numismatic coins are those traded between collectors. Although many investors consider them to have no investment potential, those collectable coins may reach thousands of dollars in price, much more expensive than bullion ones due to their scarcity, historical value and condition. Therefore, investing in those assets is not encouraged, from an investment angle.
- Gold Jewellery
Many investors regard gold jewellery as a double-benefit investment which both allows them to enter the gold market with smaller capital amounts and make them more attractive when wearing gold accessories. Jewellery’s gold purity is denominated in caratages (or “carats”). 24 carats amounts to 100% pure gold accordingly.
Unsurprisingly, jewellery items such as earrings or wedding rings have extremely high premiums which are possibly two or three times greater than their gold content’s raw value. This is because their prices are associated with design, craftsmanship, production, advertisement and even reimbursement when the gold’s value goes up beyond their expectation.
One indirect means to conduct gold-based transactions is buying the stocks of gold miners or producers through a brokerage account. Several big names in this sector that accompany the greatest momentum, the excellent prospect and the best value entail:
- Franco Nevada Corp. (NYSE:FNV): This Canada-headquartered royalty and streaming company does not operate or own any gold and precious metal mines. Instead, it signs streaming contracts in compliance with financing mining companies and in turn receives the rights to purchase a certain share of precious metals harnessed in the future.
- Newcrest Mining Ltd. (NYSE:NCM): The Australia-headquartered company focuses on the exploration and management of gold and copper mines in various regions.
- Newmont Corp. (NYSE:NEM): The Colorado-based company describes itself as the world’s leading gold producer whose operations spread to different jurisdictions including North and South America, Africa and Australia.
- Barrick Gold (NYSE:GOLD): This Toronto-headquartered mining giant specialises in exploiting top-notch mining assets and managing large-scale mines across the world.
Gold-related stocks are susceptible to the gold price but also depend on the performance and profitability of their issuing companies. Cameron Alexander, a director of metals demand at Refinitive, also said that like other equities, their values are profoundly influenced by stock market movements, whether bullish or bearish. Besides, other external factors including macroeconomic indicators, political events or possible calamities may take heavy tolls on those shares.
Gold ETFs and Mutual Funds
The use of exchange-traded funds (ETFs) and mutual funds is commonplace among gold investors because those funds enable clients to increase their exposure to a more diverse portfolio and concurrently provide their investment with higher liquidity than physical gold.
Depending on core business values, those funds differently approach the gold market. Such ETFs as VanEck Vectors Gold Miners ETF (GDX) look at a stock basket that involves gold producers and miners. Meanwhile, other ETFs like iShares Gold Trust (IAU) and SPDR Gold Trust (GLD) aim at following the daily price of gold bullion. Actively managed by professional investors, gold mutual funds such as Fidelity Select Gold Portfolio Fund (FSAGX) or Gabelli Gold Fund (GLDAX) invest in common stocks of companies involved in mining and refining gold or minting gold bullion but come with high commissions.
The value of investing in gold ETFs or mutual funds relies on what is pre-negotiated in agreements with those funds, plus certain service charges. Like gold single stocks, their prices are modified in alignment with the value of the underlying asset.
Lately, speculative investing has gained in popularity as investors are often given a certain degree of leverage to enhance their buying power. Opening an account with online brokerages, you may enter in futures contracts, options or contracts for difference (CFDs). A future empowers signers to deal in gold at the predetermined price in the future date, irrespective of market conditions. On the other hand, an option provides you with an opportunity to trade the asset before a particular date or when the price hits a particular level. Unlike futures, option holders can choose not to buy or sell gold.
CFDs trading prevails among the trading community as it permits traders to engage in the gold market without their ownership of the precious metal. Thereby, they will trade gold against the US dollar (USD) on the OTC system and brokers can get spreads or commissions accordingly.
Why is Gold a Good Investment?
Firstly, gold is a finite natural resource and its reserve keeps depleting over the year. The scarcity causes the price of gold to rise in the long term, making gold a profitable investment.
In addition, gold has exceptionally been a tremendous hedge to protect the investor’s pocket from inflation and other unexpected events. When the coronavirus disaster started intruding and exposing the global economy to uncertainties, gold dramatically rallied more than ever before. Financial experts saw its value reach the peak of around US$2,100 per troy oz in August 2020, after a constant growth since 2018.
Russ Koesterich, a portfolio manager at BlackRock Global Allocation Fund, regarded this precious metal as a “safe haven” that you should consider to insulate your investment portfolio. At the height of the pandemic in 2020, not many positive signals were sent and real interest rates dropped below zero to financially support companies of all kinds and scales. Many investors raised more doubts about the bright prospects of the stock market, so they decided to include gold in their portfolios. Historically, the financial market also witnessed such surges in the gold’s value when the world was in similar circumstances.
Various investors seemingly lost their initial attention to gold and started to speculate back on other financial products when there was an upturn in economic activities. However, gold still proves its safety when new Covid-19 waves appear in many regions. Not only does it diversify your portfolio, but the metal also has a negative correlation with stocks during the time of stress. Therefore, gold is a good investment, especially in world turbulence.
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