For hundreds of years, gold has been considered as a hedge against inflation. During uncertain periods in history, when inflation and political crises or wars have destroyed the value of our currency, gold has maintained its value.
There was a time when gold was not just a type of commodity but currency itself. What we use today as bank notes and coins has its roots in gold. Today, however, gold plays the role of a precious metal that is often traded as an investment or used as jewelry.
In this article, we explore the concept of gold as an investment and the different ways in which you can invest in it.
Four ways to invest in gold
1. Buy gold coins or bullion – This is the most straightforward way of investing in gold. You can walk over to a bank or gold retailer and purchase gold coins, bullion or even bars depending on how big you want your investment to be.
Pro: By owning gold in its physical form, you are not subject to the ups and downs of the financial markets.
Con: When you’re investing in gold in this manner, you also need to purchase a secure physical location to store your gold. These often have hidden costs of maintenance and insurance that could really add up.
2. Gold Mutual funds – Similar to debt or equity mutual funds, gold mutual funds invest in gold mining, manufacturing or retailing companies. Your money goes into a large pool and you get a portion of the earnings made by the fund.
Pro: If you want exposure to gold without actually buying it, this is a great way to invest.
Con: Mutual funds have transaction costs and commission fees that could reduce your eventual earnings from this investment.
[Related: Where to buy gold in the UAE]
3. Exchange traded funds (ETFs) – An even more interesting way to invest in gold is through ETFs. An ETF is a fund that tracks the movement in gold prices and is traded like a regular stock on the stock exchange. An ETF actually owns gold and divides ownership of the gold into shares and sells them on the stock market.
Pro: Unlike buying physical gold, you do not need large amounts of capital to purchase an ETF. Moreover, there is no risk of theft or storage costs. Gold ETFs can be sold easily on the stock market and are very transparent.
Con: Similar to mutual funds, there are management fees and additional charges. The earnings you make will be slightly less than the actual increase in the price of gold.
4. Gold Options & Futures – This is more complicated than the other three alternatives. Options and futures are among a large group of investment instruments known as derivatives. In the derivatives market, you speculate on what future gold prices would be. Based on this, you enter into an agreement with another party to purchase/sell at a specific date for a fixed price. As of the specified date, if the price of gold moves in the direction in which you forecast, you make money and if not, you lose money.
Pro: When you enter into an option or futures contract, the initial capital outlay will be smaller and carries lower transaction costs.
Con: Derivative instruments are complex in nature and can be difficult to understand even for experienced investors. At its core, investing in derivatives requires you to reasonably predict the future and we all know how difficult that is!
As such, investing in gold can be a perfect way to diversify your investment portfolio because it is not strongly correlated to other investments such as stocks and bonds. As always, remember to buy low and sell high!