Gold can be a great addition to our investment portfolio. For those who want to invest in gold, but are wondering how, let us discuss 4 different ways to do it.
- Physical Gold
- Gold ETF (paper gold)
- Gold mining companies
- Silver (as an alternative)
We live in very uncertain times, both on the economic and geopolitical fronts. A weakening economy, very high debt levels, increasing interest rates, inflation, an energy crisis in many developed countries and, on top of everything, a very tense geopolitical situation.
Stocks still trade at very high valuations, especially in the United States. And the performance of both stocks and bonds have been terrible.
In such a scenario, the idea of investing in an asset that can add diversification to our portfolio and perform well even in the event of an economic or financial crisis is very appealing.
For those interested in gold, we will discuss 4 different wats to invest in gold and profit from its potential appreciation.
The simplest way to invest in gold is simply to buy physical gold. There are many precious metals dealers that sell gold, both physical stores and online businesses.
If you choose to invest in physical gold, gold bullion is the best options, either in the form of coins or bars. These coins and bars are produced as investment products. As a result, the price we pay for this gold is just slightly above the price at which the metal trades in international markets.
I would always stay away from either jewelry or collection coins. While they are also made of gold, we would pay very high mark-ups. This means we would get a lot less for our money.
In this post I talk about the best gold coins to invest in. And if you are considering investing a very large amount of money, big gold bars are a good option too. Some websites like The Royal Mint are also available.
Of course, remember that it is possible to buy physical gold and have it stored in a safe place and insured. It is important to minimize the risk of theft.
Gold ETF (paper gold)
Another way to invest in gold is by buying a gold ETF. These funds are managed by asset management companies or banks. They work in a very simple way: they take investors’ money, buy physical gold, store in a vault, and charge investors fees.
The great advantage of investing in gold through an ETF is that we can do it from the comfort of our home. It is as easy and convenient as buying stocks or another ETF.
In exchange for this convenience, we will have to pay some management fees. But they tend to be very moderate.
Because investing in a gold ETF does not give us actual ownership of the metal, it is said that we are buying paper gold. All we are buying is a certificate that says we own a certain amount of gold. For large investors for very significant holdings in an ETF, it may be possible to redeem the physical metal in exchange for the ETF shares.
One of the most popular gold ETFs is the GLD managed by Spider.
If you are interested in this option, in this article I analyze gold ETFs in detail:
Investing in a Gold ETF
Gold mining companies
For those who have the conviction that the price of gold will reach rise dramatically within the next few years, the most profitable trade is probably to invest directly in gold mining companies rather than the metal itself. Gold mining companies mine, produce and refine gold.
Gold mining companies are usually a leveraged way to invest in gold. This is because their share prices tend to replicate the movements in the price of gold but in a much more dramatic way. For example, if gold goes up 10%, it is not uncommon for gold miners to go up 30%.
Obviously, the opposite is also true. When the price of gold goes down, the price of these companies drops a lot more. Consequently, investing in gold mining stocks carries much more risk.
This higher risk can translate into handsome profits if we are right about the increase in the price of gold.
If you would like to learn more about gold mining stocks, check out this post:
Investing in Gold Stocks
Silver (as an alternative to gold)
Some readers may be wondering why I mention silver now. We were going to discuss 4 ways to invest in gold, but one of them does not have anything to do with buying gold. However, it does have a lot to do with benefiting from an increase in the price of gold.
Gold and silver are both precious metals. They are not the only precious metals, as we there are other alternatives such as platinum, palladium, or rhodium. But gold and silver are the only precious metals with monetary characteristics.
What do I mean by that? Gold and silver have been used as money by most civilizations for thousands of years. And in many societies around the world they continue to retain those properties. If people have no trust in national currencies, they revert to gold and silver.
However, it is worth highlighting an important difference between gold and silver. While gold is essentially just a monetary metal, silver is a hybrid between monetary metal and industrial metal. This is due to silver’s multiple industrial applications.
The dual profile silver has as both a monetary and industrial metal can be good or bad, depending on the macroeconomic and monetary situation of the moment.
But regardless of that, when the demand for gold as a safe haven increases (monetary demand), the demand for silver also goes up. Consequently, the correlation between the price of gold and silver is very high.
Silver has two major advantages over gold. First, while the price of silver follows the movements of the price of gold, it tends to magnify them, in a similar fashion to what happens with gold miners. As a result, if we think gold prices are going up, silver prices are likely to go up even more.
Second, silver is the cheapest precious metal out there. This means that if precious metals prices rose dramatically, investors would probably prefer to buy the cheaper alternative. This can be another factor driving silver prices increases.
For these reasons, silver may be a better alternative to gold if we believe there will be a bull market. But remember that investing in silver is also riskier, since down movements tend to be magnified.
If you are wondering how to invest in silver, the very same options are available: physical silver, silver ETFs, and silver mining companies. In this post link I talk about the best silver coins to invest in.
As you can see, there are different ways to invest in gold and benefit from a bull market in the yellow metal. None of these alternatives is necessarily better than the rest. We must simply understand that each one of them has advantages and disadvantages. And, most importantly, different risk levels and profit potential.
For those investors who think a collapse of the monetary system is coming, physical metal is likely to be the only option to consider. While for those who simply want to comfortably benefit from an increase in the price of gold, an ETF may be the most convenient.
Finally, for those who believe we will see dramatic price appreciation, and have the ability to take on more risk, gold mining companies and silver offer the most upside potential.
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