How To Invest in Gold: A Complete Guide

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Gold is known for offering investors a safe investment, unlike volatile cryptocurrencies – which sounds especially appealing in uncertain times. In today’s article, we will look at how to invest in gold, what are the types of investments in gold and what are the advantages

For over a thousand years, gold has been considered an investment and a way to ensure financial security. The financial market has developed significantly in recent decades. Investors now view gold not only as a physical asset but also as an investment to diversify their portfolios. In a gold investment plan, investors can look for low transaction costs and taxation, investment size and flexibility, and high returns without a lack of liquidity.

The precious metal is currently hovering near a record high of approximately EUR 1,750 per ounce. So why is Joker telling you about gold now when it’s anything but cheap? Because it would be good for every investor to have it in their portfolio. Every serious investor focuses on about 4 different assets. Stocks are for growth, bonds are for ballast, cash is for choice (i.e., the ability to buy things when they’re cheap), and finally, there’s gold. It is easiest to think of gold as a portfolio hedge. Diversify your portfolio in a different way than stocks or bonds. It is a tool that works well even in bad times.


Why Invest in Gold?

Gold offers several significant advantages for investors. The main reasons why investors choose gold are the following:

1. Insurance Against Inflation

Gold has historically been an excellent hedge against inflation, as its price rises as the cost of living rises. During the high inflation years of the last 50 years, gold prices rose while the stock market fell. Since gold is valued in these monetary units, when FIAT currency loses its purchasing power due to inflation, it tends to rise along with everything else. Historic government stimulus spending during the country’s shutdown, combined with the war in Ukraine and lingering supply chain problems stemming from the resurgence of COVID-19, make it unlikely that economies will recover in the short term. All this bodes well for gold.

In addition, gold is considered a good store of value, so people may choose to buy gold when they feel that their local currency (EUR) is losing value.


2. Diversification of the Investment Portfolio

The price of gold moves along its own curve. And the key to portfolio diversification is finding investments that are not closely related to each other. Gold has historically been negatively correlated with stocks and other financial instruments, as history consistently shows:

  • The late 1970s were great for gold but a bust for stocks
  • The 1980s and 1990s were great for stocks but bad for gold
  • In 2008, stocks fell significantly as consumers switched to gold

By diversifying your investment portfolio, spread your investments across several asset classes. If one investment falls in value, other investments can replace it. It is important to note that diversification within the gold class should be approached differently.


3. Increased Demand

In the last few years, we have witnessed the demand for gold from developing countries whose GDP is growing at an astronomical rate. In China, where gold bars are a traditional form of savings, demand for gold has remained stable. India is the second largest consumer of gold in the world – gold is used there for many purposes, including jewelry.


4. Limited Supply

A large part of the gold supply in the market since the 90s of the last century comes from the sale of gold from the treasuries of the world’s central banks, which slowed down significantly in 2008. At the same time, the production of new gold from the mines began to decline since 2000. According to data from the BullionVault portal, annual gold production decreased from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. Since then, gold production has risen for a decade, peaking at 3,300 metric tons in 2018 and 2019 before falling to 3,000 metric tons in 2021 — potentially indicating downward pressure on global gold supplies. It is worth noting that the production of a new mine can last from 5 to 10 years. In general, a decrease in the supply of gold increases its price.


How to Invest in Gold?

1. Purchase of Physical Gold (Gold Bars, Gold Coins)

You can gain exposure to gold by buying physical gold through coins or bars. Gold bullion is traded close to the price of gold and can refer to gold bars or coins containing 22—or 24-carat pure gold. When you buy physical gold, you don’t need a bank or any other institution to get your money. You don’t have to worry about your ETF not paying off or your gold mining company going under. Especially in uncertain economic times, physical gold is the best option.

Coins and bars are available in 22- and 24-carat packs, which are generally tamper-evident. Gold coins are available in different denominations, from 1 gram to 50 grams, and in different shapes.

Gold coins: Gold or silver coins can be popular for a variety of reasons. It shouldn’t matter to you as an investor whether they do it for their looks or their heritage. On the other hand, choosing popular bars is always a good choice. The reason for this is that they are the most liquid and, therefore, the easiest to sell if you need cash immediately.

If you are serious about buying physical gold, you should buy your investment through a chain of wholesalers or gold dealers. You also need to prepare: you need to find the right place to store the gold and ensure its safety.

Advantages of investing in physical gold:

  • good liquidity
  • gold coins and bars are easier to sell compared to jewelry and have lower margins based on the amount of gold used

2. ETF Funds

Simply put, these funds are equivalent to the traditional purchase of physical gold, but without having to worry about its stock. It requires investors to open accounts and hold gold units in dematerialized form, just like mutual funds. Practically, it is stock market trading and is similar in nature to stock trading. Essentially, ETF assets are the equivalent of a share of gold minus maintenance, management, and insurance costs. The retail investor has limited options to exchange his GLD shares for gold. Brokerage fees are paid every time you trade, with no entry or exit fees. If you invest through a fund house, you may be charged an annual fee for holding a gold ETF, which is a management fee. The cost range is generally between 0.35% and 1% per year on all assets.

The downside of ETFs can be the constant speculation that the ETF doesn’t have all the gold it needs. Like stocks, they are highly volatile; in the event of a downturn, prices can evaporate very quickly.

Advantages of ETFs:

  • Low risk because they are fully secured by 24-karat physical gold.
  • No storage and insurance costs.
  • Liquidity makes ETFs perfect for all investors with medium or short-term investment plans.

3. Futures

Investing in gold with futures contracts becomes even more interesting. A gold futures contract allows you to buy and sell gold at a later date. A gold contract is settled on the maturity date, but the value is determined at the time of the transaction.

Investors should maintain coverage until settlement to avoid volatility risk. The range can be from 4% to 10%, depending on the expected volatility of the amount. Since gold futures are traded on exchanges, their credibility is high. You can expect physical delivery of 24-karat gold at the end of the contract.

Before getting into futures, it is important to know that they are not intended for casual investors. They usually give the investor the exclusive right to buy a predetermined amount of gold. It is also important to note that they are not based on current values ​​and are considered by many to be pure speculation. An investor can buy them through a broker, requiring a cash deposit that is only a fraction of the value of the entire contract.

Advantages of futures contracts:

  • A great product for investors targeting future gold prices.
  • High credibility, because futures contracts for gold are traded on stock exchanges.
  • Trading with them is cheap and has high liquidity.

`4. Shares of Mining Companies

In relation to gold, of course, we must not forget the gold mines themselves. There are many types of publicly traded mining companies. There are exploration, development, and production companies of all sizes in the gold mining sector. Typically, younger companies offer the best investments but have the highest risk and are also the most volatile. You can invest as little or as much as you like in gold mining stocks and rest easy knowing that your investments are safe from physical threats (e.g., theft).

The profitability of these companies largely depends on various factors. The price of gold is naturally correlated with the stock price of mining companies over time. However, their profits are also affected by management efficiency, cost-cutting strategies, reserves, risk management, and research efforts.

How to choose the right stock?

There are certainly many unknowns in the decision-making process, but that is part of the nature of investing. The most successful are usually mining companies with a strong production base and those with adequate reserves. Finally, when evaluating companies, they must have good inventory management that is supported by production.

Advantages of investing in shares of mining companies:

  • Low costs.
  • A wide variety of different companies with different functions and potential.
  • Investing in young companies can make good money quickly.

Conclusion

Investing in gold is very simple. Which option you choose really depends on your reason for investing. Most investors invest in gold mainly when they expect a recession, geopolitical uncertainty, inflation, or currency depreciation. In short, they use gold as insurance against a market downturn. Gold should be an important part of any serious investor’s diversified investment portfolio, as its price rises when events cause paper investments such as stocks and bonds to fall in value. Although the price of gold can be volatile in the short term, it has always maintained or increased its value in the long term.


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