written by: Joel
Gold is back in the headlines. In a year when almost every asset is down, gold is up 18% year-to-date, outperforming every other major commodity.
Throughout history, gold has been a popular investment. And recently investors have flocked to gold in an effort to hedge against the economic crisis.
But does it make sense to invest in gold? While there are many benefits to investing in gold, your overall financial goals should be considered. This article will discuss a few of the benefits of investing in gold and explore the different ways you can do so.
First, a caveat. This article addresses long-term holding of gold, not short-term trading. Day traders seek to profit from short-term price movements in assets including gold, buying and selling within seconds, minutes, or hours. It’s a practice that’s best-suited for those with considerable market experience.
Why Invest in Gold?
Gold is the most well-known precious metal — in fact, it used to be circulated as money. In the middle of the 6th century BC, gold coins were first struck in western Anatolia near Turkey. Even into the 20th century, the US dollar and most other western currencies were backed by gold.
Today, however, investors hold gold for a variety of reasons.
Hedge Against Inflation
Historically, the price of gold has risen as the cost of living increases. This means that holding gold can be a way to hedge against inflation: it’s a way to preserve your purchasing power. Inflation erodes the value of your cash. And it shows up as higher prices.
For example, $100 won’t buy the same amount of groceries today as it did 15 years ago, but if you bought $100 worth of gold 15 years ago it would still buy close to $100 worth of goods today.
Some hedge fund managers are bullish on gold because they expect the trillions of dollars in government stimulus payments to devalue the dollar and create significant inflation.
Investing in gold for this reason is a form of insurance against the potential decline of stocks, bonds, real estate, and the U.S. dollar.
Diversify Your Portfolio
Diversifying investments is one way to protect the overall value of your portfolio. Having all your investments in a single area (like stocks) makes you prone to problems in that one area.
Gold is a particularly good asset to diversify with because it has tended to be counter-cyclical. For example, it’s price rose both during the 2008 financial crisis as well as the 2020 COVID-19 pandemic and economic downturn.
Limited Supply
Gold is a precious metal; it cannot be created, it has to be mined or recycled. More gold may be discovered, but there is not a great deal of change in the amount of new gold added to the market each year. The relative rarity of gold is one of the key drivers of its value.
Three Ways to Invest in Gold
When it comes to investing in gold, most people think of buying gold coins, bars, or jewelry. But there are multiple ways to enter the gold market. The right one for you will depend on your risk tolerance and how involved you want to be in managing your investment.
Here are the top ways to invest in gold.
Gold ETFs and CEFs
There are ETFs (exchange-traded funds), CEFs (closed-end funds) that are fully backed by gold bullion.
One of the most cost-efficient and easiest ways to buy physical gold is through the Sprott Physical Gold Trust (PHYS) which is a CEF (closed-end fund).
- You can buy shares via any brokerage account.
- The Sprott trust is fully allocated to gold: when you buy PHYS you own the underlying gold.
- PHYS Shares are currently trading at little over $14. At that price anyone can own some gold.
Popular gold ETFs include:
- SPDR Gold MiniShares Trust (GLDM)
- GraniteShares Gold Trust (BAR)
- iShares Gold Trust (IAU)
When you buy a share of a gold bullion ETF, in most cases, you do not own the actual gold: you profit from the movement in gold’s price, which the ETF mirrors.
There are some exceptions, such as the The Perth Mint Physical Gold ETF (AAAU), which gives you ownership of the gold.
Gold Mining Stocks
You can also invest in the companies that mine gold. The idea here is when the cost of gold goes up, the value of mining companies will also rise.
But mining company stocks don’t always track with the price of gold. Their value may be impacted by ecological disasters, trade agreements, or even management changes like a new CEO.
Popular gold mining stocks include: Barrick Gold Corp (GOLD), Franco-Nevada (FNV), and Kirkland Lake Gold, Inc (KL).
Coins and Bars
Physical bullion — coins and bars — is the most well-known type of gold investment. It is also one of the simplest.
- You can purchase physical gold for delivery to your home by ordering from a trusted provider like Apmex.com.
- You can also buy gold from a service that will store it for you, like BullionVault.com. This is more cost-effective than buying individual coins and small bars.
Spot Price and Premium
When you buy coins or bars there are two prices to be aware of: the “spot price” and the “premium.” The spot price is the current price of one troy ounce of gold. For example, at the time of this writing, the spot price of gold is $1,818.60. It will fluctuate throughout the day. (To see the current spot price, go to Apmex.com and look at the top horizontal bar.)
The “premium” is the markup that you pay on top of the spot price. Since the coronavirus pandemic, premiums on one-ounce coins have gone up. It’s now typical to pay 7-9% in a premium per gold coin.
To save money, avoid “collectible” coins and “proof” coins and check to see if the premium you are paying is within the average range.
Summary
Investing in gold is a common strategy for investors looking to diversify their portfolios or hedge against inflation.
Consider your goals first. Then choose the most cost-effective strategy.
Editor’s note: The 18% YTD increase in gold’s price is based on The Wall St. Journal’s tracking of the continuous front-month futures contract as accessed on July 13, 2020.
