How to Start Investing in Gold: A Beginner’s Guide
Adding gold to your portfolio can help mitigate the impact of inflation. It is also a safe haven during economic turmoil. But before you invest in gold, talk to a financial advisor about how it could fit your investing goals and risk tolerance.
Investors who prefer to avoid the premium and storage fees associated with physical bullion can opt for gold mutual funds or exchange-traded funds that track the price of gold. But keep in mind that these investments can lose value if the price of gold falls.
Physical bullion
As an investment, physical gold bullion packs a lot of value in a relatively small space. However, investors must consider the risks and costs associated with storing it. Individuals can buy physical gold bullion from private mints, precious metal dealers or jewelry stores. Investors should also give thought to reselling their bullion, which may require paying for storage, insurance and transaction fees. This is different than selling a stock in a brokerage account, which can be done in a few days and involves no additional charges beyond bank wire fees and postage for checks.
Gold is an excellent diversifier because its price movements have a low correlation with other common assets. It can counterbalance losses in these other investments, providing stability during times of economic or political uncertainty. It’s also a reliable store of value, which is why it’s been used as currency and an investment for centuries. Gold has never gone to zero and has a proven track record as a safe haven during economic, financial or political crises.
Mutual funds
Gold mutual funds allow you to diversify your investment portfolio and gain exposure to gold prices without the hassle of storing physical bullion. These funds invest in companies that mine, refine and sell gold, or in other assets linked to gold prices, such as derivatives and bonds. They are available in a range of sizes and can be bought through a brokerage account.
Although they offer more liquidity than heavy bullion, these investments come with some limitations. For one, they are not tax-efficient, as you must pay capital gains tax if you sell your units within 3 years. In addition, they often pay a lower yield than stocks and bonds.
Moreover, since they do not generate income or yield, they are unlikely to compound your wealth in the same way that equity and debt do. Furthermore, they are subject to price volatility in times of geopolitical uncertainty. Investing in them can help you hedge against market turmoil, but it is best to limit your exposure to 10% of your total investment.
Exchange-traded funds
Gold ETFs offer an easy and cost-effective way to add gold to your portfolio. These funds are traded on stock exchanges and can be bought and sold like stocks. They typically have lower management fees than traditional mutual funds. However, investors should always check the various fees and charges on a fund’s factsheet before investing.
Some gold ETFs track the price of physical gold, while others invest in gold-mining companies. Some gold ETFs are leveraged, which can make them more volatile. These investments are a popular choice for beginners, as they don’t have to worry about keeping or selling their physical gold.
The best ways to invest in gold depend on your financial goals and risk tolerance. Always determine your investment objectives and calibrate your portfolio accordingly.
Futures and options
Gold is often considered a safe haven during periods of economic turmoil. However, according to RIA industry blogger Jeremy Siegel, investors who run to gold during these times tend to be “overly concerned about catastrophe.” It is important for them to consider their options and invest in the assets that are most appropriate for their situation and investment goals.
Unlike physical bullion, which can be costly to store, futures and options contracts provide a way to participate in price fluctuations without the need for storage or security concerns. However, these investments involve leverage and can lead to large losses if prices move against them.
ETFs offer an efficient way to gain exposure to gold without owning physical metal, but they do not track the price of the precious metal precisely and may have high fees. Investors can also invest in gold mining companies, which track the price of the commodity but have a more complex investment profile that includes factors like company reputation, production costs and reserves.