Are you wondering how to invest in gold? As one of the oldest commodities in the world, gold is a precious asset for investors. It offers minimal risk and works as a hedge against inflation. There are many ways to invest in gold. You can buy physical gold, gold ETFs, or gold futures. Understanding how these differ from each other is essential.

If you are interested in investing in gold, here’s a guide that can help you out.

How Does Gold Generate a Return?

Unlike other assets such as stocks, gold does not generate income while you hold it. Instead, you can earn a return based on an increase in the price of gold. Once the price increases to a sufficient amount, you can sell it and make a profit.

That said, gold is mostly added to investment portfolios as it can safeguard investors against declining markets. This is primarily because the price of gold is negatively correlated to assets like stocks and bonds.

How Stable Is Gold As an Investment?

Gold is a highly stable investment. In 2020 alone, the price of gold appreciated from -3.73% in 2019 to 45.73%. It makes for a very lucrative long-term investment. This is evident if we examine gold’s historical performance. Here are some quick insights for you to consider:

• From 1990 to 2020, gold’s price has risen by 360%.
• From 1970 to 2020, gold’s price increased from $35.43 to $1906.06.
• In the last 15 years alone, the price of gold increased by 330%.

Some of the factors that influence the price of gold and cause it to appreciate include:

• Increase in inflation
• Depreciation in dollar value
• Low interest rates
• Stock market crashes

Inflation and depreciation in dollar value reduce the purchasing power of fiat currency, which makes gold more expensive to buy and increases its value.

Stock market crashes also increase the price of gold because investors tend to flock toward safer investments when this happens. As the demand for gold increases, its price goes up.

Since 2020 witnessed all of the above at some point or the other, it is evident why the price of gold increased. Goldman-Sachs has predicted this trend to continue for 2021, as well, and investors are likely to continue investing in gold this year.

What Type of Gold-based Securities Should You Consider?

Deciding how to invest in gold can be confusing for new investors. Here are some ways you can get started:

1.     Buy Physical Gold

The simplest way to invest in gold is to buy gold jewelry, gold coins, or gold bullions. Gold bullions are bars of gold, and they trade near the price of gold in the market.

Unlike gold jewelry, gold bullion does not possess any artistic value. You also have to pay a premium of 3% to 10% over the average price. Investors that opt for gold bullion can use a safety deposit box or a vault to store it.

Physical gold can be bought in a jewelry store or a gold storefront. You should test the gold to make sure it is real. We also recommend checking whether you are being charged a fair premium. If you feel you are being overcharged or cannot trust the authenticity of the gold, it is better to walk away.

2.     Invest in Gold Futures

Gold futures are standardized contracts that allow you to buy or sell gold at a specific time in the future at an agreed-upon price. Futures contracts are primarily used to control inflation risk and help you take advantage of potential market movements. Once the contract reaches its expiry date, it is settled in cash.

If you want to invest in gold this way, you will need to open a brokerage account. We also recommend talking to an investment manager to find out how to invest in gold futures.

3.     Buy Gold ETFs

Gold futures can be confusing. You have to keep track of price movements and pay attention to other variables that influence your rate of return. If you find this to be a hassle, you can invest in gold ETFs instead.

Short for exchange-traded funds, an ETF is a security that allows you to invest in a collection of assets/securities. These can be anything from stocks, gold, or foreign currency. There is a little bit of everything involved. Investing in gold ETFs exposes your investment portfolio to gold without requiring you to buy physical gold or gold futures. In 2020, it was reported that gold ETFs carried 3,365.6 tons of physical gold around the world.

Some of the most popular gold ETFs include:

• SPDR Gold Trust
• iShares Gold Trust
• SPDR Gold MiniShares Trust
• Aberdeen Standard Physical Gold Shares ETF
• GraniteShares Gold Trust

4.     Invest in a Gold Mining Company

You can also invest in gold by buying shares of gold mining companies. Investing in these companies offers limited exposure to gold. The stocks of these companies can rise and fall proportionately to the price of gold.

However, the return on these stocks doesn’t just depend on the value of the gold. It also depends on the estimated future earnings of the gold mining company. Many gold mining companies bear operating risks, which can influence the value of their stocks. These stocks may trade at a lower price if the company runs into financial troubles or operating issues.

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Wrapping It Up

Adding gold to your investment portfolio can protect you against stock market volatility and inflation. As a commodity, gold offers a great deal of financial security to newbie investors.

Buying physical gold can often be expensive. If you are looking for something considerably cheaper and simple, you can consider buying gold ETFs instead. You should also seek advice from an investment manager about investing in gold. Doing so can help you make the right decision and secure your financial future.

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