I’ve got gold on my brain at the moment – with all the gold medals being won in the Paralympic Games – so I thought it would be timely to write about how to invest in gold.
Investing in gold is much easier than it used to be and, if you’ve not invested in gold before, it is much easier than you think.
There are many different ways that you can invest in gold.
This article highlights just a few of them, which I consider to be the easiest for ordinary private investors to understand and to implement.
Buy Physical Gold
The first method is to buy actual, physical gold.
When we think of physical gold, we naturally think of gold bullion bars, like we see in movies with bank robbers, don’t we?
But for private investors, not only are physical gold bars ridiculously expensive and out of the reach of most of us, they are also impractical to own, insure etc.
So, for private investors, investing in physical gold usually involves buying gold coins such as Krugerrands or Britannias.
These are one-ounce gold coins and so with gold recently priced in the range of $1,600 – $1,800 per ounce, these do not come cheap.
However, they are relatively easy to store – much easier than gold bars, for example – but you will still need to insure them and keep them in a safe place.
Buy Gold Mutual Funds
As the name suggests, these are pooled investment funds, often called unit trusts or Open-Ended Investment Companies (OEICs).
Essentially, investors buy units of the fund, which act like shares but are not quite the same.
The money invested in the fund is used by the fund manager to purchase financial assets such as shares, bonds and other investments on your behalf.
Each fund follows a defined investment strategy, so it is possible to find mutual funds that invest in gold.
Some will invest in physical gold similar to that already described.
The advantage here is that you don’t need to concern yourself with storing and insuring it as all those issues are dealt with by the mutual fund management company on your behalf.
Not only that, but you can expect them to be able to do this cheaper than you or I could, simply because of the volumes that they are dealing in.
Some mutual funds invest in gold mining stocks and shares instead of physical gold, using the fund to build a portfolio of different gold miners to spread your risk.
The big downside of mutual funds is that you are paying the fund management company and the fund manager in particular to manage your investments for you.
This means costs, in the form of initial fees when you first buy, annual fees and additional performance fees if the fund has a good year.
Buy Gold ETFs
ETFs are Exchange Traded Funds and are a fairly recent newcomer to the investment scene.
These act like shares but instead of being small pieces of a company, they are small pieces of a fund, so they are more like mutual funds than shares.
Although you invest your money into them in a similar way to a mutual fund, ETFs work differently in practice.
The main idea of an ETF is to track something else such as a stock market index or the movement in price of a commodity, such as gold.
It is no surprise then that there are a number of gold ETFs that you can buy, to track the gold price or the value of a gold mining index.
The main advantage over a mutual fund is that the annual running costs are usually lower but you are still paying someone else to make your investment decisions for you.
That said, they are a great way to track the underlying price of a commodity, such as gold, without having to own, store, insure the gold itself.
Buy Gold Stocks & Shares
These are perhaps the easiest to understand in that they work just like every other company share that you can buy on a stock market.
To call them gold shares or gold stocks is a bit of a misnomer though, because they are actually shares in gold miners i.e. gold mining companies.
Because you are investing in shares of a gold mining company, the price of the shares is sensitive to many more factors than the gold price itself.
While the price of gold reacts to the relative balance between the demand and supply of gold in the market, the share price of a particular gold mining company will not necessarily rise when the price of gold rises and vice versa.
That’s because gold mining companies are affected by other factors such as their cost of production, whether their production is rising or falling from year to year, political risks in the country where they are operating, etc.
Of course, these factors can work in your favor if you research your companies well and invest at the right time.
Gold stocks and shares thus afford you a method of benefiting from a company’s rising production or exploration success as well as a rising gold price.
In essence, this means that you can get much bigger returns with individual company gold shares than you can with gold ETFs, mutual funds or gold coins.
However, the risks are obviously greater too.
With many gold shares trading on attractive valuations at the moment, now might be a good time to buy some gold shares.
Remember though that not all companies will perform the same, so do your own research and look at several gold mining companies before investing.
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