Gold, gold, gold, what hasn’t already been spoken about this shiny yellow metal, the ‘money of kings’? Humankind has been fascinated with gold ever since the beginning of time. Entire kingdoms have been created and destroyed over this commodity.
The great J.P. Morgan in 1912 even once said, “Gold is money; everything else is credit.” From circa 1871 until a century later, much of the world was on a gold standard, meaning gold used to form part of a functioning monetary system.
Although it’s been five decades having shifted from this mechanism, people are still enchanted by the visual allure and wealth heritage of the precious metal. Central banks the world over have continued to hoard hundreds of tons of gold over the last decade.
However, does this commodity have considerable investment value, or perhaps ‘not everything that glitters is gold?’ Despite being a noble metal, there are still risks involved, meaning the potential to generate substantial profit and losses is relatively equal. Let’s explore the investment vehicles for gold.
Advantages of gold
Gold ticks nearly all the boxes for an asset that has proven to maintain and even increase in value for decades. Fundamentally, gold is an extremely scarce commodity that’s incredibly challenging to mine.
Moreover, gold still has relevant utility in jewelry, coinage, aerospace, electronics, and other industries. Gold will usually be valuable and in-demand, coupled with the inherently low supply.
Enthusiasts have always viewed gold as a store of value, a ‘market crash-resistant’ safe haven retaining purchasing power regardless of how good or bad the economy performs. This is partly because the precious metal has no counterparty risk to any other financial market.
However, gold bugs tend to argue over whether gold should be treated as an investment or not. Historically, most experts regard gold as a hedge against inflation or when investors feel the value of a particular fiat currency is eroding.
In a rare case of hyperinflation, there’s a strong belief gold can and has been used as a ‘substitute currency’ to conduct trading. This has generally been the perception of gold, that it’s usually purchased as ‘insurance’ or a defensive asset because it doesn’t necessarily yield any profits like other financial instruments.
Yet, not every person invested in gold may be interested in the commodity for these reasons. The advantage of this gold is it can perform the duties of being a defensive asset and an investment depending on your objectives and purchasing method.
Physical gold, primarily in the form of bars or bullion, is considered the old-fashioned, true method of owning gold. Despite this, owning gold bars carries the most risks. The other alternative is gold coins like the American Gold Eagle, Australian Kangaroo, and the South African Krugerrand.
While coins are quite expensive, they are a lot easier to sell. Coins are less bulky and can be highly collectible in pristine condition and rarity. However, unlike bars, they don’t contain near-100% pure gold and are generally pricier than bars on a per-weight basis.
However, most investors consider coins as investable. On the other hand, bars are typically purchased for maintaining wealth and purchasing power for the long term rather than seeking a profit.
Yet, one of the obvious issues with bars is holders will need a place to store their gold, along with considering insurance and forgery risks. Additionally, bars would be more challenging to resell at a later date, which is why they aren’t usually purchased as traditional investments.
A gold certificate is a document representing ownership of a particular gold quantity. Gold certificates are issued primarily by banks, investment companies, gold makers, and gold dealers.
A few centuries ago, certificates served the same role as cash since they were used as a medium of exchange. Any certificates which have survived from any period since are quite valuable nowadays.
The clearest advantage of certificates is that the holder doesn’t need to own the physical gold. Yet, this investment vehicle carries many transparency risks and the dangers of the issuing company going under.
Derivatives are the simplest way of investing in gold for numerous reasons. You can trade online through several financial markets like forex, futures, options, stocks, spread betting, etc. The most significant benefit of derivatives is investors don’t need to own any physical gold or asset.
You can access a wide range of gold-related markets for speculative, hedging, and buy-and-hold purposes. On the downside, most derivatives are leveraged products, which generally carry a substantial risk of unrecoverable loss.
Mining companies & exchange-traded funds (ETFs)
Rather than purchasing the physical gold, it certainly makes sense to buy the stocks of the publicly listed companies mining the metal. The general idea would be if gold performs well at a price, the value of the company shares should consequently grow.
Yet, it, unfortunately, isn’t so simple since the company and gold’s price may not always share this correlation. As with buying any other stock, investors need to perform a thorough fundamental analysis of the company as well.
If you have a genuine keenness and experience for equities, investing in mining companies can undoubtedly be a profitable endeavor. An alternative to gold company shares is ETFs which are indexed financial products consisting of numerous assets linked to the price of gold.
This asset class is considered a more diversified approach to investing in individual stocks.
Despite being a glorified asset, gold carries its own volatility uncertainties and is subject to heavy speculation like any other market. Moreover, periods will exist where the demand is substantially less than the supply.
Ultimately, the investing vehicles primarily online-based have a lower entry barrier, are far more cost-effective and don’t need holders to own the physical asset. On the downside, such methods have numerous individual counterparty risks, a stark contrast to purchasing the real gold, whether in coin or bullion form.
Although the latter avenues are considered the proper way of owning the precious metal, they are unsurprisingly expensive, require extra mechanisms like storage and insurance, and aren’t very liquid.
Ultimately, your involvement in gold depends on whether you see the commodity as a traditional investment or a defensive asset and weighing the pros and cons of each.