Investors normally shift their investment focus to gold as a refuge of sorts, when the markets are negatively affected by conflicts, like the current one between Ukraine and Russia, or hard economic times hit. Gold, which has a proven record of making gains is highly sought after by investors looking for a safe asset, given the fact that the stock market is trading at record lows and inflation is on an upward trajectory.
Gold is viewed as a great alternative to conventional assets, like bonds and stocks due to some of its unique attributes – these make it appealing to investors. Even though gold as an asset does not produce any cash flow, it is considered to be a great store of value. As actions by the Federal Reserve meant to stimulate economic growth, like low-interest rates, and government spending work to push inflation higher and higher, some see gold as a hedge against inflation.
Clever Ways of Investing in Gold
Read on for a list of clever ways of owning gold as well as the associated risks.
Investing In Gold Bullion
Buying gold in the form of gold coins and/or bars is considered to be one of the most emotionally satisfying ways of investing in this precious metal. While you will be able to physically handle your investment, this form of ownership also comes with a few drawbacks. The most significant drawback comes in the fact that physical gold needs to be insured and protected.
Ever since the IRS passed the Taxpayer Protection Act of 1997 the government has allowed investors to hold physical gold and other precious metals in their individual retirement accounts. This physical gold IRAs have proven to be popular, but there are things investors should know before investing.
The IRS has specific tax rules and regulations for gold held in an IRA, that is why it is critical to partner with a precious metals company that specializes in these unique accounts so that you don’t incur any extra tax penalties when setting them up.
Investors are fully reliant on the increase in gold’s price to make a profit on their investment. This is different from say investing in a business, like a gold mining company, which can boost investment in its operations by earning higher profits through the increase of gold production.
There are different ways of investing in gold bullion. You can buy it from a local collector or dealer, or online through JM Bullion or APMEX. Gold may also be sold at a pawn shop. To make sure that you buy gold at a fair price, be sure to note the per ounce price in the market at the very moment you are buying – also referred to as the spot price. Since you may be required to pay an extra premium for the collector value of coins, on top of the gold content, you may prefer to invest in bars instead.
If you don’t protect your physical gold properly, you run the risk of having it stolen from you – the greatest risk of owning physical gold. Another risk comes when you are looking to sell off your gold. You may find it hard to find a buyer willing to pay the full market value, especially when you are looking to sell coins in a hurry. As such, you might be forced to sell your investment for substantially less than it is worth in the open market.
Investing In Gold Futures
If you want to speculate on the increase or decrease of the price of gold, gold futures are the way to go. And even though speculators are not driven by the physical ownership of gold, you could even take physical delivery of gold if you wanted.
The huge amount of leverage available to you is the biggest advantage of investing in gold using futures. Simply put, for a relatively small amount of money, you can own a lot of cash. As such, you can earn a huge return on your investment in a short amount of time, if the futures move in the direction you anticipated.
However, the leverage for investors goes both ways. You might be forced to put down huge sums of money to keep the position – referred to as a margin – if the movement of gold does not favor your position; otherwise, the broker will close the position, leaving you with a loss. In conclusion, while you can make huge gains in the futures market, you can also make huge losses just as easily and quickly.
Investing In Gold Coins
Even though quarter and half-ounce coins are available, the most common gold coins are 1 or 2 ounces in weight. The most widely available types of gold coins include American Gold Eagles, Canadian Maple Leafs, and South African Krugerrands. Worn or damaged and blank gold coins are also sold by some dealers.
However, the price of gold coins may not align perfectly with the amount of gold in them. You will have to pay a premium for collectible and frequently traded coins that are in high demand. For instance, in mid-September 2020 a 1ounce American Gold Eagle coin retailed for just over 2,000USD. In comparison to a similar amount of gold bullion, that price represents a 5 percent markup.
While local pawn shops and collectors may be able to give you a better deal on gold coins, you must choose a licensed and reputable dealer when looking to purchase gold coins.
Investing In Gold Jewelry
You can buy gold in the form of jewelry – this can be damaged pre-owned jewelry or new jewelry you intend to wear. However, investing in pure gold is less risky than investing in gold jewelry.
For starters, not all pre-owned jewelry is sold by reputable dealers, so you have to be very careful when buying such items. The authenticity of your gold investments will matter a lot to anyone you try to sell the items to in the future – and as such should matter to you as well. You must get as much documentation on the items as possible, and always buy from reputable sellers.
Furthermore, depending on the company that designed the items, you will also be charged some level of markup. This may range between 20 percent and upwards of three times the value of gold used.
You must ascertain the purity or percentage of gold used in jewelry items. Karats are used to calculate the purity of gold, with 24 karats representing pure gold. The melt value (raw value of the components of your jewelry items when molten to pure gold) of your jewelry items reduces with a decrease in purity.
Investing In Gold Exchange-Traded Funds (EFTs)
Investors can invest in EFTs that track gold prices, by buying their shares – note that the investor needs to factor in any expenses of the funds. Gold bullion and hard cash are some of the main assets held by Gold EFTs.
Investing In Gold Mutual Funds
Investing in the shares of mutual funds that own stocks of companies that operate in the field of mining gold is another way that investors can get indirect exposure to gold. Various types of precious metals, including gold bullion, may be held by gold mutual funds.
Is Gold Investing for You?
Gold may offer you respite if you are concerned about calamities and inflation. Gold has been known to hold its value quite well over the long term, even though it is as volatile as stocks in the short term.
You may choose to invest in futures and options contracts, mutual funds, gold stocks, gold EFTs or physical gold, depending on your risk appetite and preference. However, it is recommended that you allocate just 10 percent of your portfolio to gold, regardless of the form of gold investment you choose.
There are risks involved in all investments, including gold. However, the typical gold market is brutal, and mastering it takes some time. For most investors looking to diversify their portfolio by investing in gold, mutual funds and gold ETFs are the safest way.
You can use gold as a hedge against inflation, a store of value during times of uncertainty, or a means of diversifying your investments. You can invest in gold in several ways including indirectly through buying into mutual funds, ETFs, or certain stocks, or directly by buying physical gold.