How to Invest in Gold

It’s always been the received wisdom that investors looking for a safe haven for their money should always consider gold. So, when the markets are volatile, this is indeed where many people instinctively head.

As we’ll see, there are a number of ways of investing in gold, and plenty of reasons why people continue to do this. But first, let’s examine just why gold is seen as a sound investment.

Used as a commodity it has several factors in its favour. The first of these is that there is a limited amount of it in the world. As of 2020, if all of the gold mined or discovered in the world so far was made into a cube, each side would be around 22 metres in length. Considering that it has been in use since the 5^th century BC this gives an idea of its rarity as a precious metal.

And, unlike many other commodities, the material itself has many uses from being made into coins and jewellery to being used in electronic components due to its conductivity and resistance to erosion.

A Brief History of Gold as a Commodity

Originally, gold was primarily used as a material to make coins and other items of currency. But when paper money was first introduced its role changed.

In theory, notes could be exchanged for gold of an equivalent value which was held in store by various country’s treasuries. In the US much of these gold reserves were famously held under great security in Fort Knox.

This matching of currency to gold led to a system called the gold standard which was introduced late in the 19^th century. But, as time went on and fluctuations in currency and gold prices became more extreme, it became increasingly difficult to link the two. Eventually, in 1971, the gold standard was officially abandoned.

Since then there have been periods of growth and decline in gold’s value but, overall, it continues to show long term growth, and between 2018 and 2020 it outpaced even the Nasdaq total return of 54% by five whole percentage points.

How to Invest

There are a number of ways to invest in gold, although, generally speaking, it’s best done through a recognised and recommended broker who will be fully aware of all of the relevant gold trading regulations.

1. Physical Gold

Unlike other commodities like oil and grain, gold is one that can be bought in its physical form without the need for extensive storage facilities. This may be as jewellery, coins and even bars of gold bullion. To make a profit, investors are totally reliant on its value rising.

One aspect to consider is the question of security. If you own it in a physical form, it can be stolen. Another significant drawback is that, when you need to sell, there is no guarantee that you’ll find a buyer prepared to buy it at the official value.

2. Gold Futures

The gold futures market is a way to speculate on where you think the value of gold will be heading at a specified point in the future. The principle is simple. You agree to buy a certain amount of gold for a specified price on a fixed date in the future. If the gold’s value is higher than your predicted price you can then sell on your contract at the higher price, making a profit.

The risk is that its value might be less, meaning you’ll make a loss. Futures trading also allows great leverage, something that you really need to understand before committing to it.

3. Exchange Traded Funds

A good alternative to both of the above is to invest in Exchange Rated Funds that are linked to the price of gold bullion. They involve relatively few fees to pay and it’s also reasonably easy to convert your investment into cash when the time is right. It’s a process that’s carried out through a broker who will do all the hard work for you.

It’s also possible to invest in ETFs which follow the stock prices of different gold mining companies whose fortunes may not be directly linked to the price of gold but also to their performance overall.

4. Gold-Related Stocks

Similarly, you could choose to buy stocks and shares in companies related to gold in different ways. As well as mining companies, these could also include jewellers or traders in precious metals. Because the share value is related to the success of the business in question, ones that are well run can offer growth even at times when gold prices are falling.

The Pros and Cons of Investing in Gold

As with all kinds of investing, there are certain advantages and disadvantages to gold. One of the key benefits is that when stock markets fall, gold may not. This makes it a relatively safe inclusion in an investment portfolio. Over certain periods of time, it has also been seen to out-perform stocks and shares. But, as with all investing, there is also a risk of losing money too.

The main disadvantage is the anyone who wants to make a profit with the gold itself will need to find a buyer prepared to pay more for it than they originally did.

But, as long as you’re aware of these facts and don’t put all your money into gold, then most people would agree that it’s a good element to include in any balanced investment portfolio.