How to Invest in Gold

The price of gold is taking off as inflation rises and geo-political tensions take centre stage. We review 4 proven strategies to help you invest in gold, and consider their pros and cons.

Invest in gold and other precious metals without commission with the following CFD brokers and providers:

In this article:

Gold CFD (Contracts for Difference)

A contract for difference (CFD) allows you to speculate on the price of an underlying asset, without owning it. For example, if you expect the price of gold to rise above US$ 1,000 per ounce (imaginary price), you could buy 10 CFDs for US$ 10,000. If the price of gold were to rise by $100, you would net a US$ 1,000 profit (excluding trading fees).

CFDs are popular with retail traders because brokers like FPMarkets.com and AvaTrade.com offer significant leverage. For example, you could open a position worth $10,000 with a low $20 initial deposit through FP Markets, as this broker offers 1:500 leverage. If the price of gold were to rise by $100, as above, you would again make a US$ 1,000 profit on your $20 investment. Please note that the maximum amount of leverage available to you may vary based on your country.

In practice, 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, in particular if you are new to trading or plan on "buying and holding" over long periods of time.

In addition, you may also want to open an account with a broker that offers negative balance protection. Negative balance protection means that you'll never lose more money than you invest. You may be surprised to learn that this can happen when you use excessive amounts of leverage, or short a security whose price moves up (rather than down).

Gold ETF (Exchange Traded Fund)

You could also speculate on the price of gold through an Exchange Traded Fund (ETF). Because ETFs are listed on exchanges, you can buy and sell them in the same way you invest in shares or CFDs.

The SPDR Gold Shares ETF (GLD) 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 0.40% annual management fees to cover its expenses. The iShares Gold Trust (IAU) is the second largest gold ETF and has a low 0.25% annual management fee.

Physically-backed gold ETFs are suitable for long-term investors who expect the price of gold to continue rising. If you're interested in investing in gold through an ETF, we suggest contacting your preferred broker to check whether this product is available through their service.

Shares in gold miners

Alternatively, you could buy shares in gold mining companies, or CFDs on those shares, to benefit from higher gold prices. However, share prices are driven by many factors above and beyond the price of gold. You should carefully assess the companies you plan to invest in on their own merits. A company's management team, the strength of its balance sheet and operations are some of the factors to consider.

Gold bullions (bars or coins)

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.

If you can't afford a 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.

Together, gold bars and coins are known as bullions. You can even buy them online without having to visit a shop. However, you'll need to carefully consider where to store your gold: at home, or in a safe deposit box with a bank for example. You may also want to consider specialised insurance to protect your investment from loss or theft. Together, storage and insurance costs can add up over time.