When everything else goes wrong, gold becomes one of the best investment alternatives or at least that’s what past history tells us.
In this article, we are going to see how we can invest in gold since the possibilities for investing in this unique precious metal are very wide.
Why invest in gold?
Gold has usually been treated as a safe asset, but it is much more than that, it is a natural element that has a multitude of uses in different fields, ranging from industry to economics.
Historically, gold has had a closely linked role in the monetary field.
From the appearance of the first coins to the 70s (the end of the gold standard and the appearance of fiduciary coins), gold-backed the value of the currency in circulation through its quality of precious metal.
Properties of gold
And this is basically because thanks to its properties, gold is a physical element that has a monetary value (a price) intrinsic.
The properties of gold that cause this effect can be defined in 5:
- its scarcity
- its durability or resistance
- its divisibility
- its homogeneity
- It’s difficult falsification.
Stock To Flow Gold
Gold also has the highest stock-to-flow ratio among raw materials, which is an indicator that has served to give value for centuries to coins of this material or jewelry in itself.
The stock to flow puts in the form of a ratio of two magnitudes
- Stock: quantity stored or existing of a substance
- Flow: annual production ratio of the same
The higher the ratio, the scarcer the raw material.
This ratio is interpreted in the number of years of production needed to create the current level of storage of a raw material.
Due to its high ratio and the aforementioned properties, it has been assigned properties of safe haven value.
Risks of Investing in Gold
The risks of investing in gold are quite limited, rarely in history has gold fallen in a prolonged way for many years.
The risk of investing in gold comes in the form of opportunity cost mainly, since if we invest in this expecting a recession and finally an expansionary cycle arrives, while the whole stock market rises your investment in gold will fall or stay flat.
There is also another risk, which is deflationary, since if a crisis comes, where it is supposed that gold acts better, but it is linked to a very strong deflationary trend, gold may not behave too well, since it does better with inflationary tensions.
In addition, gold has storage costs and does not generate explicit returns like other assets (real estate, stock dividends). Nor does it generate cash flows, so it is difficult to establish prediction models of how much it should be worth.
Advantages of Investing in Gold
Having reached this point and explained the above, we can understand that the advantages of investing in gold come from its quality of safe haven.
This quality comes hand in hand with the stability that an ounce of gold provides in a moment when the economy is not doing well. When all markets are full of uncertainty, having the certainty that an asset has an intrinsic value that puts a floor on the price is a guarantee.
Investing in gold within a portfolio is a good way to increase diversification and reduce portfolio risk.
If we analyze the graph below, we realize this.
In times of increased uncertainty, investors increase the demand for gold, and therefore its price increases.
In the period shown in the graph, the last 5 years, we see a continuous rise in the price of gold, indicative of a new increase in demand, coinciding again with an increase in volatility as a result of the Trade War and especially the coronavirus.
How can you invest in gold?
There are two main ways to invest in gold: buying physical gold or buying products that replicate its behavior or have it as an underlying
Let’s try to see below the two forms with all their different alternatives to take advantage of their advantages.
|Invest in Physical Gold||Invest in Gold through the Stock Exchange|
|Invest in Bars||Invest in ETFs|
|Invest in Paper Gold||Invest in Investment Funds|
|Invest in Gold Coins||Invest in Mining Companies|
|Futures, Options and CFDs|
How to Invest in Physical Gold?
Gold is more accessible to the average investor than other commodities because it can be bought directly from a precious metals dealer or, in some cases, from a bank or brokerage.
Gold bars come in different sizes, from a quarter-ounce wafer to a 400-ounce brick, but coins are more popular among new investors.
Most buyers opt for the most popular gold coins, such as the South African Krugerrand, the American Eagle, and the Canadian Maple Leaf, due to their extreme liquidity.
The most popular type of metal coin is the ingot, which is presented in the form of coins or bars. If you are going to buy ingots online, make sure you buy them from a trusted seller who can provide them as soon as possible. Gold coins should be kept in a safe place.
Jewelry stores allow gold buyers to see it before buying it. Gold is often combined with other precious stones and precious metals to enhance the value and appearance of jewelry.
Jewelry is often passed from one generation to another as family relics, giving them an emotional value greater than their simple monetary value. If you just want to make an investment, jewelry is usually not the best option because the selling price usually exceeds the melting value by a significant amount.
The labor and retail margin, this is the reason. Before buying jewelry, make sure to check the purity of the gold so you don’t get charged 18 karat when you only get a 14 karat item.
Jewelry is usually covered by home insurance policies, which is an advantage in case of loss or theft.
Gold Mining Stocks
Investing in gold through the stock market is a way to own gold through a title that accredits a right over gold and not through its physical possession.
This form of acquisition, which as we will see below has many variants, has a more investment-oriented approach. As with everything, it has pros and cons in each of its different branches.
In the case of gold mining stocks, it is a lateral approach to this investment. That the price of gold affects them positively but the correlation is not perfectly positive.
That is, if gold rises, gold mining companies are generally favored and can rise more or less than the material itself.
In the case of mining companies, you have to differentiate between junior and senior projects
- Junior miners: they focus on the initial activities of the mining cycle (prospection and exploration)
- They have more risk but in case of large discoveries they can be very profitable
- Generally associated with companies that are not included in the HUI Gold Index mining index
- Senior miners: they are consolidated companies in the sector, with mines in operation and concessions for several years.
In the following table you will find a list of the 50 most important gold mining companies in the world that are listed on the stock exchange.
List of mining companies listed on the stock exchange
In the tables we show where these shares could be acquired but we recommend comparing the rates in our article Best Brokers to buy international shares.
Listed mining companies
|Barrick Gold Corp||GOLD|
|Agnico Eagle Mines Ltd||AEM|
|Wheaton Precious Metals Corp||WPM|
|Newcrest Mining Ltd||NCM|
|Gold Fields Ltd||GFI|
|Royal Gold Inc||RGLD|
|Zijin Mining Group Co Ltd||2899|
|Anglogold Ashanti Ltd||AU|
|Northern Star Resources Ltd||NST|
|Endeavour Mining Plc||EDV|
|Kinross Gold Corp||KGC|
|Yamana Gold Inc||AUY|
|Pan American Silver Corp||PAAS|
|Ssr Mining Inc||SSRM|
|Evolution Mining Ltd||EVN|
|Alamos Gold Inc||AGI|
|Hecla Mining Co||HL|
|Zhaojin Mining Industry Co Ltd||1818|
|Centerra Gold Inc||CG|
|First Majestic Silver Corp||AG|
|Harmony Gold Mining Co Ltd||HMY|
|Osisko Gold Royalties Ltd||OR|
|Cia De Minas Buenaventura Saa||BVN|
|Perseus Mining Ltd||PRU|
|K92 Mining Inc||KNT|
|Equinox Gold Corp||EQX|
|Wesdome Gold Mines Ltd||WDO|
|Sandstorm Gold Ltd||SAND|
|Dundee Precious Metals Inc||DPM|
|Coeur Mining Inc||CDE|
|Fortuna Silver Mines Inc||FSM|
|Capricorn Metals Ltd||CMM|
|West African Resources Ltd||WAF|
|Silver Lake Resources Ltd||SLR|
|New Gold Inc||NGD|
|Regis Resources Ltd||RRL|
|Torex Gold Resources Inc||TXG|
|Gold Road Resources Ltd||GOR|
|Endeavour Silver Corp||EXK|
|Aya Gold & Silver Inc||AYA|
|Ramelius Resources Ltd||RMS|
|Victoria Gold Corp||VGCX|
|Gogold Resources Inc||GGD|
|Silvercorp Metals Inc||SVM|
|St Barbara Ltd||SBM|
|Karora Resources Inc||KRR|
What is the best ETF to invest in gold?
Gold ETFs are exchange-traded funds that try to replicate the behavior of gold. Although the fund has the legal obligation to have all the derivative contracts issued backed by gold, the holder of the ETF is the owner of that derivative contract (ETF) that replicates the price of gold and not a proportion of the gold reserve. In this way, the investor, the holder of the derivative, is exposed to the returns of gold.
If we want to know more about ETFs, I recommend this article:- best ETFs to grow your wealth.
The best ETFs to invest in gold are:
|Invesco Physical Gold||8PSG||IE00B579F325|
|iShares Physical Gold||PPFB||IE00B4ND3602|
|WisdomTree Core Physical Gold||WGLD||DE000A3GNQ18|
|Xtrackers Physical Gold ETC||XGLD||GB00B5840F36|
|WisdomTree Physical Gold||PHAU||JE00B1VS3770|
Gold Investment Funds
The advantages of investing in gold through this form are the professional management of the fund, focusing on generating value for the participant. The disadvantages are the associated costs with the management of the fund, higher than in ETFs, which can hamper profitability.
Here I leave you a table where I show you the options of investment funds that have exposure to the gold market:
|Dws Invest Gold And Prec||LU0273159177||1,61%|
|Franklin Gold Prec Mtls A||LU0496367763||1,83%|
|BGF World Gold||LU0171306680||2,56%|
|Invesco Gold Special||LU0503253931||2,46%|
|Jupiter Gold Silver||IE00BYVJR916||1,60%|
|Cpr Invest Global Gold Mines||LU1989765471||2,07%|
|Ninety One Global Strategy Fund – Global Gold||LU0345780281||1,91%|
|Schroder International Selection Fund Global Gold||LU1223083087||1,87%|
|LO Funds – World Gold Expertise||LU0357534782||2,90%|
* There are no indexed funds to gold
Gold Futures and Options
Gold options or gold futures are two alternatives for more advanced investors who don’t want to put in a lot of money.
Gold futures are standardized contracts that give the right, but not the obligation, to buy or sell an asset at a certain price for a certain period of time.
Options are flexible and can be used whether the price of gold is expected to rise or fall. If you are wrong, the most dangerous thing about buying options is the premium you have paid to join. Options for buying and selling gold futures can be bought and sold through a futures broker.
CFDs on Gold
This is the product chosen by traders in this asset, in addition to futures. Remember that this type of asset replicates the underlying and allows you to leverage.
I show you a comparison of brokers that allow it and the average spread they have for CFDs on gold.
Is investing in gold profitable?
If we look at a chart since the fluctuation of gold was allowed, we can observe that it has been a profitable asset to protect our money.
Source: Macrotrends.netBut really the value that gold has is as a portfolio decoupler as can be seen in the following image.
Source: JP Morgan Guide To MarketsAlternatives to investing in gold
As has been demonstrated, investing in gold has proven to be a solid idea, especially over the last 50 years.
However, it is also recommended to diversify your investment portfolio with other precious metals. Silver, platinum, and palladium are some great options to complement your investments in gold.
In short, investing in gold has been a historical way to safeguard the value of our patrimony. And now tell us, do you have exposure to gold? In what kind of assets? I read you in the comments.
Can they confiscate my physical gold?
There is a theoretical possibility that the government could confiscate all physical gold. This is an unlikely case, but it should not be overlooked: this is exactly what happened in the United States in the 1930s. In this case, investors had to hand over their gold to government agencies at a fixed government sale price, even under threat of prosecution for non-compliance.
How Much Gold Do I Buy?
Many experts recommend a gold quota of approximately 10% of their assets. In the case of physical gold, it is clear that an investment can only be long-term. For short-term strategies, positions in a securities account are undoubtedly the best option.