How to Invest in Gold and Why You Might

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Luisa Rollenhagen

Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.

The concept of investing in gold seems rather archaic — like you’re a pirate hoarding your stash on an island in the Caribbean. But gold has been a popular asset for centuries, and that’s not just because it’s so shiny. Because it’s a natural resource that is relatively plentiful but is difficult to extract, gold has been in demand as a money asset since it was discovered, and is still considered a valuable addition to a diversified portfolio.

How to invest in gold

Part of gold's appeal comes from its physicality: you can touch it and hold it. You can't really hold a share of a company's stock, not in your hands at least. Way back in the day, ancient civilizations traded in gold because its malleability allows it to be easily turned into coins or jewelery.

Although it’s historically been a volatile market, gold has also proven to be a durable investment. Here are some tips on how to get started:

Option 1 - buy physical gold

Investors interested in getting into gold can buy bullion (nuggets), gold coins, jewelry, or even bars — just keep in mind that they’re pretty heavy, and you’re going to have to pay for a place to store it, as well as insure it. One problem with jewelry is that it usually comes with a high markup relative to how much gold it actually contains, and its resale value can be lower than what you originally paid for it, so it’s usually not as appealing as buying gold in its purer forms.

Gold bullion, coins, and bars may come with a markup as well, depending on what dealer you’re buying them from (you can also buy them from a bank). The closer to the source you can buy from, the less extras you’ll be paying. Government mints are also a good source for gold coins, with some of the most popular coins being Gold Eagle (US), Gold Maple Leaf (Canada), or Gold Kruggerrand (South Africa).

Option 2 - buy gold ETFs

Since gold is an asset that’s traded on stock markets, you can actually buy gold ETFs, which might be a more appealing option for investors who don’t want to have to deal with safely storing several grams worth of gold in their sock drawers. Each share of the ETF represents one-tenth of an ounce of gold, so if gold is currently $1,200 an ounce, the gold ETF will trade at $120 per share. It’s important to remember that owning a gold ETF doesn’t mean you actually own gold directly; the ETF holds the gold on your behalf, and you then benefit from the gold’s valuation on the market. ETFs are also low-cost by design, so investing in ETFs as opposed to physical gold is usually more accessible for investors turned off by the high purchasing price of gold and the associated fees.

Buying gold ETFs is like buying any other kind of stock or security: you’ll need to have an account with a brokerage or an investment platform through which to carry out the trade. There are several gold ETFs such as the SPDR Gold Share and the iShares Gold Trust, which are so-called physically-backed ETFs, meaning that the funds are actually backed by physical gold instead of using derivatives that follow an index.

Option 3 - buy gold certificates

In lieu of physical gold, you’re given a certificate of ownership by a company that owns gold. You receive a certificate representing ownership of a specific amount of gold. This helps avoiding storage and transfer issues. But you’ll still have to go through a dealer, just like you do with physical gold.

Option 4 - buy gold mining stock

Instead of directly buying gold or gold ETFs, you could invest in the companies mining the gold. The reason investors might choose to do this is that it offers more potential for growth than physical gold. One gram of gold is going to remain a gram — whether ten, fifty, or a hundred years go by. A company, however, has the potential for growth — and so does its stock price. You can also own gold mining stock by investing in a mutual fund that includes this kind of stock.

However, choosing this option means you’ll have to deal with the risks involved in buying stock, and stocks are notoriously volatile. Your investment will be vulnerable to the management of the company, and if you’re interested in sustainable investments, then mining stock might not be the right pick for you.

Option 5 - buy stock from royalty and streaming companies

Royalty and streaming companies operate within the mining industry, serving as financiers for mining companies that are looking for economic support for exploration and production projects. They then receive royalties on anything the project produces. Investors tend to prefer these companies to straight up mining companies, since they don’t have to deal with the logistical risks of running a mining company and can therefore avoid a lot of economic pitfalls.

Why invest in gold

What’s the deal with the shiny metal anyway? There are so many exciting investment opportunities by now, why would people still go back to something as archaic as gold? Well, one of the main reasons why gold is still a popular asset is because of diversification. By having a range of investments that cover different areas, you’re less likely to lose all of your money if one sector happens to take a nosedive.

Gold has historically performed well during times of market turmoil, since it’s a commodity that tends to maintain its value even when other commodities like paper currency decrease.

It’s also seen as a good investment to have during times of geopolitical instability (hence gold’s common moniker as the “crisis commodity”). Plus, gold is seen as a good hedge against inflation, since its price tends to rise alongside rising costs of living.

Gold proponents also suggest that, as emerging markets across the world are producing more investors, the demand for gold will supposedly continue to grow. They say that, since it takes a while for gold supplies to be replenished and it’s a finite resource, demand will — again, supposedly — continue to outpace supply.

Should you invest in gold?

That depends on you and your circumstances. The price of gold rose pretty steadily in the late 2000s and outperformed the S&P 500, so it's understandable that investors are keen to hop aboard the gilded train.

But it’s also really important to remember that past performances do not guarantee future results. The price of gold is volatile and can change very quickly and dramatically. So be aware that investing in gold always carries with it a potential for loss. That's why many investors believe it should form only a small part of your portfolio (some recommend between 3%-5% — or up to 10% if you’re happy to take on more risk).

Last Updated June 5, 2019

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