The best way to invest in gold for you depends on your investment goals, risk profile, and personal preferences. Coins and bars are perfect if you want to own physical gold and enjoy the sense of security that comes with that. The downside? You will need more capital upfront, as well as storage and insurance costs.
If you’re looking for less risk and more liquidity, invest in gold funds or ETFs. They offer the advantage of relatively low cost and a diversified portfolio that is professionally managed. Either way, remember to do your research and understand the risks involved before moving any money around.
Gold has been around since the dawn of civilization, and its value continues to skyrocket, making it an excellent way to diversify your portfolio and gain some financial security.
After reaching an all-time high of $2,074 in 2020, the precious metal has stayed strong, reaching a demand of 4,741 tonnes in 2022, the highest in the past decade, according to the World Gold Council.
That said, here’s everything you need to know before investing in gold to make sure you make the most out of your investment.
Gold is seen as a ‘safe haven’ precious metal due to its strong performance during times of economic uncertainty.
There are different ways to invest in gold, including buying coins and bars, ETFs, mutual funds, futures contracts and options.
The downside of investing in gold is that it can be subject to market volatility. It's important to assess the risks involved before making any investments.
Gold as an investment – Explained
Gold is a precious metal with a long history of being used as an investment. It has been seen as a reliable store of wealth for many centuries, and its value remains strong even during economic recessions. Nowadays, the precious metal is traded through exchanges but can also be bought in the form of coins, bars, or jewellery.
According to the World Gold Council, the total amount of gold mined accounts for about 208,874 tonnes. This number continues to grow each year as more and more gold is extracted from mines across the world. The mining process involves extracting the raw metal from the earth and then refining it into a highly desirable product.
Since the mining process is costly, it's usually funded by banks and governments, making pure gold less accessible to everyday investors. This means the easiest way to invest in gold is through ETFs (Exchange Traded Funds) or stocks. Large investors, however, can also buy gold directly from dealers.
What drives the price of gold?
For starters, the price of gold is determined by a combination of three main factors: demand, supply, and interest rates. Gold has limited supplies, which makes it more valuable compared to other commodities.
The demand for gold is also driven by investors who are looking to invest in a safe haven asset. This means that when the stock market and other investments are unstable, gold prices tend to rise as people seek for more reliable ways to preserve their wealth.
Interest rates also affect gold prices since they influence how much money is circulating in the economy. When interest rates are low, it tends to create more demand for gold because people can afford the precious metal.
Tip: While researching gold, also consider the interplay between gold and the US dollar, as they tend to have an inverse relationship. The green buck tends to strengthen when gold prices fall and vice versa.
Is it safe to invest in gold?
While there is no guarantee of returns, gold is typically considered a low-risk investment. Compared to other investments like stocks and bonds, gold has less volatility, and its value doesn't depend on the performance of any company or government. This makes it an attractive option for those looking for an investment with minimal risk.
How much should you invest in gold?
For beginner investors, it's best to start with a small portion of your overall investment portfolio. To determine how much you'd invest in gold, you need to decide how much of your portfolio you'd like to allocate to commodities in general. Afterwards, you should decide how much of the commodities portion of your portfolio should be allocated to gold specifically.
The exact figure you need to start investing would depend on how you choose to invest. If you're buying physical gold, such as coins and bars, then the cost would depend on the weight of your purchase, which is usually high. ETFs or stocks, on the other hand, are generally more affordable for beginner investors.
Why invest in gold?
Here are some of the key benefits of investing in gold.
Inflation hedging
Inflation is the gradual devaluation of the currency, and gold investments can be a great way to hedge against it. Since gold has limited supplies and strong demand, its value tends to remain relatively stable despite changes in the economy, without being significantly affected by inflation.
Safe haven
Gold is often seen as a safe haven asset, meaning it remains stable during economic and geopolitical volatility. Compared to other assets that fluctuate with the country's economic outlook, such as stocks or bonds, gold is not affected by the country's monetary policy or money supply.
This qualifies it as a safe haven and explains why its demand surges during times of political uncertainty. For example, when tensions in Ukraine escalated in 2023, gold demand surged, taking prices to a near-record high.
Diversification
Diversifying your investments helps to reduce risk, and gold can provide an ideal way to do this. By adding some gold investments to your portfolio, you can protect yourself from diversified market fluctuations.
Gold also tends to move differently than other assets like stocks or bonds, so adding it provides another layer of diversification that could help balance out any losses in the event of a bear market.
Tax advantages
In the United Kingdom, the Royal Mint's gold bullion coins are exempt from capital gains. However, gold bullions obtained from other sources will be subject to taxation (depending on your tax bracket) whenever they’re sold.
Note that you would have to pay capital gains tax if you choose to invest in gold CFDs instead of physical gold. This is because CFDs, like gold futures, are considered financial derivatives.
Recessions are characterised by economic downturns where buying and selling activities slow down significantly. During these times, gold is often seen as a safe-haven asset due to its fixed supply and demand characteristics that keep the price relatively stable. Some investors also seek out gold as an inflation hedge, meaning they buy it in anticipation of market prices increasing with the devaluation of currency over time.
What are the drawbacks of investing in gold?
Here are the key disadvantages of investing in gold.
Price falls
The price of gold is subject to fluctuations like any other commodity, so investors face risks with their investments. Gold prices tend to increase when there are economic or geopolitical uncertainties, but can also rise and fall due to factors such as supply and demand.
One way to stay on top of these changes is to keep an eye on the news and to keep track of market movements.
No yield
Unlike dividend stocks or bonds, gold does not produce any income for investors. This means that investors have to rely on the sale of their investments to generate returns. So it’s important to consider how much return you wish to make before investing in gold, and whether other types of investments may be more suited towards achieving this goal.
If you're looking for steady income, you may want to consider other fixed-income investments like bonds or dividend stocks.
Costs
When buying physical gold, there are some costs associated with it, such as storage and insurance. To ensure its safety, physical gold must be stored in a secure location, such as a safe deposit box or home vault. Additionally, as the gold is subject to theft or damage, investors may need to purchase insurance policies to protect their investments from such risks.
Fewer ways to diversify
Investments like stocks or bonds can be diversified across industries and regions. Gold investments, on the other hand, are more limited in terms of diversification.
Investors looking to diversify their gold investments may want to consider buying different types of gold coins or bars, investing in ETFs that track the price of gold, or purchasing shares in mining companies.
How can you invest in gold?
Here’s a rundown of all the ways you can invest in gold.
Buy gold directly
Gold coins and bars are one of the simplest ways to invest in gold. You can buy these from jewellery retailers, bullion dealers, or online shops. One benefit here is that you get full ownership of the physical metal and can sell it at any time.
However, there are some drawbacks to consider. The cost of purchase can be high, and you need to factor in storage and insurance costs when buying physical gold.
Gold Bullion
Gold Coins
An allocated gold account is a type of account where the customer has exclusive rights to a specific quantity of physical gold that is held in storage in a professional bullion vault.
An unallocated gold account holds an amount of gold that belongs to multiple customers. This is a more cost-effective solution than an allocated account, as customers do not have to pay for the storage. However, customers will not be able to access or view their physical gold in this type of account.
Gold futures and options
If you're looking to benefit from gold’s price increase without actually having to buy physical gold, you may want to consider trading derivatives such as gold futures and options.
Gold futures are agreements between two parties where one agrees to buy or sell an asset at a predetermined price and date in the future. With gold futures, investors are able to speculate on the direction of the market without actually having to own any physical gold.
Gold options, meanwhile, represent the right (but not obligation) to buy or sell a particular quantity of gold or other precious metals at an agreed-upon price. The easiest way to access these investments is through a brokerage account.
Gold and commodity funds
Investors can also buy gold through mutual funds or exchange-traded funds (ETFs). Funds like these are collections of investments that follow a specific strategy. Gold funds, for example, include stocks and bonds related to gold production or services.
Investing in gold funds is less risky than investing directly in physical gold and can be simpler since the fund is managed by professionals. However, there are fees associated with these types of investments, and the fees will vary depending on the fund.
Shares in gold mining companies
You can also buy shares of gold mining companies as another way to invest in gold. Gold mining companies are companies that focus on finding, extracting and processing gold. By investing in these stocks, investors can benefit from the company’s success as well as from increases in gold prices.
However, it’s important to remember that there are risks associated with investing in mining companies. These include fluctuations in commodity prices, commodity cost inflation pressures, operational issues, and more.
Digital gold is a relatively new way to invest in gold. Backed by physical gold, it’s a form of digital currency that can be used for various transactions. It’s accessible for purchase through a network of vendors collaborating with banks, brokerage firms, and fintech enterprises. Its core advantage is that it's easy to trade and, unlike gold options, it can be exchanged for solid gold.
Bonus: Selling Gold
If you want to sell your gold, the steps to take will depend on the type of gold and how you obtained it. If you own a physical form of gold, such as coins or bars, then you will likely need to use a local pawn shop or precious metals store. ETFs and options contracts are easier to sell, as these are traded on exchanges and can be sold through your brokerage account.
Should I consider investing in other precious metals?
There are other precious metals besides gold that can be a good investment option. Silver, platinum, and palladium all have their own unique properties and can offer diversification to your portfolio. Their prices tend to be less liquid than gold and silver, but they have higher growth potential due to their industrial uses.
Gold | Silver | Platinum | Palladium | |
---|---|---|---|---|
5-year return | 52% | 50% | 4.5% | 27% |
1-year return | 6% | 13% | 1% | -36% |
Volatility | Moderate | High | Higher | Highest |
Main application | In jewellery and as an investment. | Both a precious metal and an industrial commodity, used in electronics and medical applications. | Primarily used in automotive and industrial applications. | Used mainly for catalytic converters. |
*As of July 2023
Should you invest in gold?
Gold can be a good investment and is often used by investors as part of a diversified portfolio. Due to its tangible form and inherent value, it can provide an additional layer of security for your investments. The precious metal’s price has grown by 48% in the past 5 years, falling short of the S&P’s return of over 60%.
Nonetheless, gold can be subject to market volatility during crucial political and economic events, so it's important to do your research and assess the risks before investing.