How to Invest in Gold
Gold is rising as inflation persists and geo-political tensions take centre stage. We've reviewed 3 proven strategies to help you invest in gold, and discussed their pros and cons.
In this article:
1. Gold CFDs
A contract for difference (CFD) allows you to speculate on the price of gold, without having to buy gold bars or coins. If you expect the price of gold to rise, buy CFDs on gold today, with a view to sell them in the future once the price has risen. Conversely, you can also sell CFDs on gold today, if you expect the price of gold to fall in the future.
CFDs are also popular with traders because they make it possible to use a significant amount of leverage. For example, you could open a position 500 times greater than your initial deposit by borrowing the difference from a broker like FPMarkets.com. Others, like Equiti.com even offer dynamic leverage up to 1:200.
Pros: CFDs allow you to make money whether the price is rising or falling (as long as prices move in your favour). CFDs also allow you to use leverage, which can be helpful if your initial deposit is small in size.
Cons: leverage is a double-edged sword that can increase your potential gains and losses. If prices move against you, your broker will ask you to make further deposits and may close your position completely if you cannot meet a margin call. This is why we recommend using little to no leverage, especially if you are new to trading or are looking to "buy and hold" over long periods of time.
2. Gold ETFs
An Exchange Traded Fund, abbreviated as ETF, is an investment fund that's traded on a stock exchange. You can buy and sell units in an ETF in the same way you buy and sell shares, through a traditional broker or a handful of CFD brokers.
The SPDR Gold Shares ETF, which trades under the GLD ticker, is the largest gold ETF with over US$ 65 billion in assets under management. This ETF is physically backed by gold bars held in vaults, and charges a small annual management fee to cover its expenses. Its price replicates the price of physical gold traded on international markets.
Alternatively, you could buy shares in individual gold miners or diversify your investments through an ETF that tracks a basket of gold mining stocks. This could work well in a bull market, as gold miners tend to appreciate more in price than gold itself. However, they are exposed to additional risks. See our guide to the best Gold ETFs for more information.
Pros: investing in a gold ETF like GLD is easier than buying physical gold. It's also significantly easier to sell if you change your mind. In addition, you won't need to worry about safe storage or even insurance against theft or loss.
Cons: when you invest in a gold ETF, you aren't buying physical gold. You're merely buying a claim on a gold bar held in storage by a third party. In turn, this exposes you to counterparty risk in the event of bankruptcy. Your "paper" gold investment could be worth nothing, or a lot less than you think.
3. Physical gold
Last but not least, you've probably herd of the gold bars held by central banks. These gold bricks weigh a standard 400 oz or 12.4 kg. However, gold bars come in many different sizes and shapes, from just 1 gram to 1 kilogram. This means there's a price point for almost everyone.
If you can't afford an entire gold bar, you could purchase gold coins instead. Examples include the American Golden Eagle, the Australian Gold Nugget and the British Sovereign. Some of these coins, called numismatic coins, are more expensive than others because they have rarity value as collectibles.
Pros: physical gold is a safe store of value, that's resistant to water and high temperatures. It's best suited for long-term "buy and hold" investors.
- Gold coins can sell for a substantial premium over the price of gold. Whenever possible, avoid paying over the odds.
- Carefully consider who you are buying physical gold from. It is possible to independently verify the purity of your gold after purchase, however, doing so may impair its resale value (in the case of the fire assay method for example).
- You'll also need to find a safe storage solution for your gold. If possible, rent a safe storage box with a bank or a third party provider for peace of mind. You may also want to consider specialised insurance to protect your investment from loss or theft.
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