How to Invest in Gold
Investing in gold should be simple. But, of course, if you don’t have any experience, it’s not. All sorts of questions run through your head, from which type of gold to buy to how much to spend.
Most people see gold investing as a hedge against economic and political uncertainty. While other asset classes fluctuate in value wildly during financial crises and recessions, gold retains its value over time.
This page is a beginner's guide to gold investment. Here, we discuss how to invest in gold in different formats. We begin with how to buy physical gold and then cover other methods of gaining exposure to the metal and protecting your wealth.
Buying Physical Gold
If you are considering investing in gold, owning the physical metal is probably the first idea that pops into your mind. Keeping bars and coins in a safe in your home feels like a natural and prudent way to protect your wealth.
Investment gold products, of a purity of 995/1000 or above, gained increasing popularity from the year 2000 when they were declared exempt from VAT in the UK and EU.s economic and political strife intensified over recent decades, the demand for the yellow metal grew.
There are two types of gold bullion you can buy directly:
Gold bars are produced by a range of independent and government mints from around the world which are members of the London Bullion Market Association, or LBMA. The LBMA sets the market standards for gold production and members mark their products with their name and the weight, purity and serial number of the bar.
Gold bars vary in weight. The smallest minted bars can weigh under 1 gram but the largest 'Good Delivery' bars weigh 400 Ounces, over 12 Kilograms. These are the type of bars you see in central bank vaults.
The percentage premium applied to gold bars rises as the weight decreases. You will pay more per gram above the spot price for a 10g bar than a 1,000g bar. However, you also need to consider divisibility. Larger bars are difficult to break up and sell in smaller pieces.
Gold coins are an alternative to bars and an increasingly important part of the average person’s gold investment plan. These offer a compromise between price and divisibility. Liquidating them at gold buyers is relatively easy.
Standard gold coins weigh one Troy ounce. Examples include the Canadian Maple Leaf, South African Krugerrands, the Gold Britannia, and American Eagles. Some are 99.99% (24-carat) pure fine gold just like bars, however, there are 22-carat versions, too. The latter contains other metals to make the coins stronger but still contain a full Ounce of fine gold.
Buying Assets With Gold Exposure
Of course, buying physical gold isn’t the only option. There are other ways you can invest in the metal without taking physical custody of it. The following are some examples:
Gold Exchange-Traded Funds (ETFs)
Most exchange-traded funds track equities: stocks and shares in companies or market indices. By contrast, gold ETFs track the value of gold.
To function, gold ETF fund managers must first buy physical gold and then store it in a vault. The value of the fund then mimics the spot price for the stored gold on international markets.
ETFs could be a part of your gold investment plan if you are worried about the risk of owning physical gold or keeping it on your property. However, the strategy is not without problems.
Naturally, the quality of gold ETFs depends on the prudence and ethics of the firms that manage them. Managers, for instance, may claim that their fund is “100%-backed by physical gold” but it may not be. If investors decide to redeem their gold and there isn’t enough of the metal to go around, it could undermine the fund entirely.
Gold ETFs can also charge high management fees. You may have to pay upwards of 0.5% of funds invested each year just to maintain the investment. This compares to standard equity market index-tracking funds which often have fees of less than 0.15%.
On a positive note, buying and selling gold ETFs is usually quite easy. Large numbers of buyers and sellers mean that the market clears relatively quickly for any given trade.
Pooled Gold Investments
Pooled investments in gold are the same as gold ETFs except funds don’t trade on the open market. Instead, a fund manager purchases a quantity of gold and then sells tranches of it to investors. Investors then own the gold and hold certificates as proof.
Like ETFs, the success of a pooled gold investment scheme depends on the quality of the firm running it. Under these arrangements, investors don’t take direct ownership of physical gold. Instead, they trust a third party to allocate gold shares according to the quantity of the gold in the vault.
Therefore, if you decide this strategy is right for you, you’ll want to make sure that third parties regularly audit the gold. You’ll also need to check that the company has sufficient security to protect the gold.
Gold Company Mining Shares
Lastly, you might consider purchasing gold company mining shares. Here, you’re not buying any gold, either directly or indirectly. Rather, you are purchasing equities whose value closely correlates with the spot price of gold. That’s because the value of gold mining equities rises as the spot price of gold increases. The more money they can sell it for relative to their costs, the higher their earnings will be.
Buying equities in mining firms is a sensible way to diversify your portfolio. However, it cannot replace physical gold. That’s because it does not perform the same function. Gold retains its value regardless of political or economic circumstances whereas mining companies can easily go out of business or rise and fall with the general stock market.
Invest In Physical Bullion Today
At The Gold Bullion Co., we stock a range of investment-grade gold bars and coins. We don’t provide financial advice, but we can show you how to buy the metal and add it to your portfolio.
If you are interested in buying gold for investment purposes, get in touch with our sales team at 01902 623 259 or learn more on our educational page here.
