Sunday, September 27, 2020

How to Invest in Gold in 2020

Gold is one of the oldest and most precious forms of investment known to humanity. Old empires traded with gold and glorious rulers minted gold coins with their own relief on it. The adjective ‘golden’ is used to describe just about everything that is exemplary. As far as investment tools are considered, gold is indeed […]

Gold is one of the oldest and most precious forms of investment known to humanity. Old empires traded with gold and glorious rulers minted gold coins with their own relief on it. The adjective ‘golden’ is used to describe just about everything that is exemplary. As far as investment tools are considered, gold is indeed ‘golden’. So if you are wondering, “how to invest in gold”, your investment instincts are making you ask the right question. And this post is going to help you provide the answers and learn the things you need to know to start investing in gold. 

How to Invest in Gold: Things You Need to Know

There are some ways to shop for gold. Investors should consider the choices available in their market, the circumstances they are making their investment in, along with the nature of professional advice they’re going to require.

Deciding the way to invest in gold involves reviewing the multitude of gold-related investment products available, all of which have different risk and return profiles, liquidity characteristics and costs. Typically, an asset allocation strategy will consider long-term versus medium-term returns, and the way gold investment products perform in positive or indirect correlation with other assets. 

Here are some ways you can invest in gold:

Buying bullion/physical gold (bars and coins)

Small bars and coins accounted for about two-thirds of annual investment gold demand and around one quarter of worldwide gold demand over the past decade. Demand for bars and coins has quadrupled since the beginning of the 2000s, and this is a global trend, not specific to a particular region. New markets, like China, have been established for the first time and old markets, like Europe, have reemerged. 

Gold certificates

Another way to get some direct exposure to gold without physically owning it is getting yourself some gold certificates. If you are wondering what gold certificates are, they are notes issued by a corporation that owns gold. These notes are usually for unallocated gold, meaning there is no specific gold related to the certificate, but the corporation says it’s enough to back all outstanding certificates. You can buy the allocated gold certificates, but they tend to be priced on the higher side. The major problem here is that the certificates are really only as good as the company that backs them, kind of like banks before FDIC insurance was created. This is a big reason why Perth Mint is considered to be one of the best gold certificates in the world. It’s because it’s backed by the Government of Western Australia. That said, if you are comfortable with buying a paper representation of gold, you might want to consider exchange-traded funds as well. 

Buying gold backed ETFs

Physically-backed gold exchange traded funds (ETFs), exchange traded commodities (ETCs) and similar funds account for about one-third of investment gold demand. These funds were first launched in 2003 and as of March 2016, they collectively hold 2,300 tonnes of physical gold on behalf of investors across the world.

Buying into allocated gold accounts

Bullion banks offer their institutional or high net-worth customers allocated gold accounts consisting of gold deposits and resembling currency accounts. The holder of an allocated account automatically becomes the legal owner of a selected quantity of gold. Bullion banks also offer unallocated accounts. In an unallocated account, a customer doesn’t own specific bars or coins, but features a general entitlement to a specific amount of gold. The investor isn’t the legal owner of any physical gold, but can be considered as a creditor of the provider.

Internet Investment Gold (IIG)

Internet Investment Gold (IIG) is quickly becoming a very popular way of accessing the gold market. Internet Investment Gold allows investors to shop for physical gold online, have it stored in professional vaults and take possession of it, should the necessity arise. As such, Internet Investment Gold offers investors a highly convenient method of enjoying the ownership of physical gold. 

Buying Gold derivatives, futures, forwards and options

Investing in derivatives requires more knowledge of monetary securities than other sorts of investing and should not be considered suitable for all investors. 

Derivatives trade over-the-counter (OTC) and on exchanges. Derivatives traded on exchanges are settled in a central clearing house that performs the crucial task of matching buyers and sellers. OTC derivatives are bilateral contracts that have more flexible structures but include additional counterparty risk. 

Buying gold mining stocks

What this basically means is that investors have the option to invest in gold mining companies’ shares. Gold company stocks may correlate with the gold price. However, the expansion and return within the stock depend upon the expected future earnings of the corporate, not just on the worth of gold. 

Jewelry

Even though it is one of the most popular ways of investing in gold, especially in the South Asian markets, it’s one of the least advisable. The markups within the jewelry industry make this a nasty option for investing in gold. Once you’ve bought it, its resale value is probably going to fall drastically. This is based on the assumption that your gold jewelry is at least 10 karat (Pure gold is 24 karat). Extremely expensive jewelry may hold its value, but more because of its rarity and aesthetic appeal than the worth of its gold.

Now that we have gone over the different tools with which you can invest in gold, let’s discuss a little bit about some other factors you should consider before investing in gold.

Factors to consider before investing in gold:

How much should you invest in gold?

Gold tends to be a volatile form of investment, so you should not put an extremely disproportionate amount of your assets into it. For best results, keep it within 10% of your total stock portfolio. The important benefit, for brand spanking new and experienced investors alike, comes from the diversification that gold offers. Once you’ve built your gold position, ensure that you rebalance your portfolio periodically to ensure that your relative exposure to gold doesn’t change drastically.

When should you buy gold?

It’s best to shop for small amounts over time. When gold prices are high, the worth of gold-related stocks rises along with it. This might result in lacklustre returns in the short term, but it doesn’t diminish the benefit over the future of holding gold to diversify your portfolio. By buying a touch at a time, you’ll be able to dollar-cost average into the position.

As with any investment, there is no one-size-fits-all method of determining how you should invest in gold. But armed with the information provided in this post, you are definitely in a better position to make the right choice when it comes to investing in gold and creating a ‘golden’ future for yourself.

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