How and when to start investing in gold
Investing in gold is one of the oldest and most traditional forms of investing, which is also why gold is one of the most heavily traded commodities over the long term. Many experts have long regarded gold as a safe investment that can protect you against inflation. If you decide to invest in gold, it is important to remember that it is not a short-term investment.
When to start investing in gold may vary depending on your individual circumstances, but in general it is advisable to start investing in gold as part of a long-term investment plan. Ideally, your financial situation should be stable and you should have enough funds that you can invest without needing them over the next several years. It is also important to remember that gold is price-volatile, and investing in it should always be supplemented with other investments so that your investment portfolio is sufficiently diversified.
Advantages and disadvantages of investing in gold
Let us start with the advantages. One of the most significant advantages is that gold is generally considered a relatively safe investment worldwide. This applies not only to professional investors, but also to individuals and households. After all, who does not have at least a pair of gold earrings inherited from their grandmother at home? Gold tends to strengthen at times when, for example, equity markets are falling.
Another advantage of investing in gold is its relatively high degree of independence from other assets such as shares or commodities (oil, gas). Gold has its own value, which is not as strongly affected by economic factors and political turbulence that may affect the other assets mentioned, or even entire areas of human activity. Gold offers a way to diversify your portfolio, allowing you to spread the overall risk of your investments across several assets.
In the case of physical gold, another advantage is the genuine “physical availability” of gold bars. This means there does not have to be any intermediary between the investor and the investment. This removes the threat of an unpredictable event such as a bank collapse, a broker failure or, for example, the insolvency of the investor’s creditors if you invest in gold indirectly.
Like any investment, investing in gold also has certain disadvantages. The first is that gold does not generate any dividends or interest. The investor therefore receives no regularly paid income from this investment.
If you buy gold in physical form, you should expect certain storage costs. These may vary depending on the size of your investment and the type of storage chosen (the number of gold bars, storage at home, for example in a safe, or in a bank, and so on). These costs must be deducted when calculating the overall net return on this investment. This is also linked to the risk of loss or theft of physical gold compared with its “paper” form.
Trading gold through shares
Many companies focused on gold mining and exploration are traded on equity markets. Specific examples include the following companies traded on the New York Stock Exchange (NYSE). In brackets, we provide the share ticker and a brief description.
- Barrick Gold Corporation (GOLD) – a Canadian mining company focused on the extraction of gold, copper and zinc.
- Newmont Corporation (NEM) – one of the world’s largest mining companies, it mines gold, copper, silver, zinc and lead, and operates in North and South America, Australia and Africa.
- Franco-Nevada Corporation (FNV) – a Canadian company specialising in the mining of precious metals and minerals, while also financing mining projects. The company has a portfolio of projects covering gold, silver, platinum and rare palladium. Mining takes place around the world.
Investing in “gold shares” usually follows the development of the gold price, which is logical. However, as with ETFs, it is still necessary to take into account the current “health” of the company (whether it is at risk of collapse, what its trading margins are, and so on). Financial factors may cause the share price to deviate from the gold price. Investors should therefore be cautious and always study the available financial results of the company in which they want to invest in this way.
Trading gold through ETFs
Trading ETFs (Exchange-Traded Funds) linked to this precious metal is a popular way to invest in gold.
“Gold” ETFs are funds, meaning companies traded on an exchange, that invest in gold in one of the following ways:
- Buying and holding shares in other traded companies, typically gold miners.
- Holding purchased physical gold. In this case, the fund has real physical gold in its portfolio.
- Trading gold futures. The fund therefore does not own physical gold, but only derivatives.
ETFs are generally more liquid than physical gold. They can therefore be bought or sold on an exchange without much delay and at relatively low cost. However, keep in mind that in this case you are buying shares, and the price may not always correspond 100% with gold if other influences arise, such as the fund experiencing financial difficulties.
Here are examples of major gold ETFs (the share ticker is always shown in brackets).
- SPDR Gold Trust (GLD) – this is the largest gold ETF in the world, and the fund owns physical gold stored in London, New York and Toronto. It was established in 2004.
- iShares Gold Trust (IAU) – this fund is managed by BlackRock and also owns physical gold. It was established in 2005.
Trading gold through ETPs and ETCs
An ETP (Exchange-Traded Product) is an investment product and, in the case of gold, effectively a “voucher” typically for one troy ounce (1 oz, 31.1 grams) of this precious metal. An ETP allows investors to trade the underlying asset, in this case gold, without having to own it physically. “Paper gold” is therefore traded according to its current market price. An investor can buy or sell an ETP at any time during exchange trading hours.
ETC stands for “Exchange-Traded Commodity”. Compared with an ETP, the issuer of this type of security has actually purchased and stored physical gold, for example in a bank.
Trading gold through futures
Investing in gold through futures is generally considered more suitable for advanced investors.
First, you need to choose the market, or exchange, on which futures contracts linked to gold are traded. Examples include the COMEX exchange in New York in the United States or TOCOM, based in Tokyo, Japan.
You then choose gold futures contracts according to their expiry date and the amount of gold represented by the contract, ideally in line with your investment objectives. Expiry is usually set for the end of a specified month. To trade futures, you need an account with a broker registered on the relevant futures markets. Before you start investing through futures, you should also find out what fees are charged by your chosen exchange and broker.
Trading physical gold
There are several ways to invest in physical gold. Probably the most widespread is buying gold bars. The most commonly purchased bar weighs one troy ounce (around 31.1 grams). Other weights are also available, including smaller bars of 1, 5 or 10 grams, and larger bars of 100 g or 1 kg. Another option is to buy collectible gold items, typically coins often issued by state mints. Alternatives include various gold jewellery items, plaques or other commemorative objects.
The main disadvantage of buying physical gold is the high spread, meaning the large difference between the buying and selling price. This difference is usually in the low single-digit percentage range, which is many times higher than when trading gold ETCs. As a rule, the heavier the bar or the more valuable the coin you buy, the lower the spread tends to be.