It is not an unknown fact that Gold is rare and precious, If we talk Gold as an investment. Whatever the state of the economy is, gold is always there to diversify your assets. When we think about “Investment in Gold” You are not restricted as an investor to just invest in buying physical gold, such as coins or bullion. You have many other options too, including
- buying shares of gold mining companies
- Gold exchange-traded funds (ETFs).
- You have an option to invest in gold by trading options and futures contracts too.
In this article, we are going to understand everything about Gold investment, including risk and rewards
Risks and Rewards of Gold Investment
Gold as a currency
Gold was used as a currency, way more back than almost any other matter. Many cultures appreciated Gold as a currency, which then resulted in the establishment of the gold standard named de facto world currency established in the 19th century.
WHY IS GOLD A GOOD INVESTMENT?
¤ Gold is usually purchased as a “hedge” to cope with various forms of market risk. So, gold can offer some protection against
¤ Bad performance in various markets,
¤ Its price of gold is dependent on supply and demand, and not on currency valuations or market declines.
¤ One can add Gold to a well-diversified investment portfolio. As financial diversification can be achieved by holding different kinds of assets
Such as (stocks, bonds, real estate, precious metals, and various commodities).
It is crucial when diversifying, that hold those asset classes that are uncorrelated
What is that?
The asset class’s who’s prices do not move together are called “uncorrelated”. As gold has a low correlation with
¤ The U.S. stock market
¤ Emerging markets
¤ High-yield bonds.
Traditionally, it makes gold to have an excellent diversification potential.
¤ Gold as a hedge against inflation.
The Gold price tends to increase with the rate of inflation. It’s because, when the inflation increases investors increases the price of gold by purchasing it as an alternative to cash.
WHY CAN GOLD BE A BAD INVESTMENT
Many investors believe that, it’s just a mere fallacy that gold is a very safe investment and the best hedge against inflation. Some Investment researchers have observed and concluded that the gold demand doesn’t rise, whenever the stock’s decline or when currencies lose value. But, they believe that its demand rises simply because scared investors rush to buy it as they expect its prices to rise generally. If that is the case, then, according to many gold is not a safe investment. Also, its track record has shown that gold has performed well in times of severe inflation or market decline occasionally only. Gold also doesn’t provide the guaranteed returns that many other well-known securities do.
How to Invest in Gold Stocks
There are generally three main ways to buy Gold stocks
¤ Buy the stock in gold mining companies directly
¤ Buy gold exchange-traded funds
¤ Buy gold mutual funds.
There may be different pros and cons to each of the methods above. Such as When you buy mining company stock, it allows for direct, high-risk, and exposure to gold mining, And mutual funds and ETF’s both offer lower risk and better diversification too.
1-GOLD MINING COMPANY STOCK
It is the most direct way to invest in a gold stock. This method is both, the highest-risk one and the highest- reward too. When investing in a mining company, it means, you are expecting and placing a bet, that the company will be profitable. However, the analysis of the company is the basic step one must take, because you have to perform better than its peers. When you select a gold mining stock, few things are necessary to be looked at, Such as
¤ Look at production costs.
Gold producers often have little buying power, so being capable of producing gold at a low price is an important advantage. One can get this data given on the website of the mining company just by simply clicking on the “Investor Relations” option and then look at the report of the annual or quarterly earnings.
¤ Look at production.
It’s a sign of a strong company, if it’s able to increase its production annually. Strong production refers to both
¤ Higher revenues and lower costs.
One can get that indication of its growth by seeing the company’s annual report.
¤ Look at the company’s valuation.
The valuation of company info can be found on websites
Such as Morningstar.com. Most popular stocks in this sector
¤ Newmont Corp. (NEM).
¤ Barrick Gold Corp. (GOLD).
¤ Franco-Nevada Corp. (FNV).
2-Investing in gold mutual funds.
If you take a lower-risk option more into consideration and not sure about an outstanding company, then, you may decide a gold-oriented mutual fund as an investment. These funds keep portfolios of those companies that
¤ Process and
¤ distribute gold.
Some benefits of owning gold mutual funds Gold funds provide better diversification than purchasing one or even several companies. Unlike gold-mining stocks where it moves up and down together, with the price of gold and results in large variations in performance, which depends on how good and well managed the companies are. a mutual fund purchase, eliminates all these risks of making a poor investment choice. Gold mutual funds are managed professionally and actively.
What is active management?
It means you can let a professional select, what they consider to be the most reputable and strong companies in the industry. Be aware of the fact that there are fees associated with purchasing mutual funds.
3-Invest in gold-oriented exchange-traded funds (ETFs).
ETFs are similar to mutual funds, they offer the investor access to a wide range of stocks and bonds at a reasonable price. Gold ETF’s usually have lower fees than mutual funds, because there is no active manager. Instead, they track an index, passively.
¤ When you purchase ETF, you indirectly own gold.
¤ ETF’s may be a good choice if you want better flexibility and lower fees.
¤ In an ETF you not just invest in gold itself, but, you invest in gold-mining operations.
Includes lack of an active manager. Which results in less chance of outperforming the relevant index.
4-Purchase gold stocks.
After deciding your method of investment in gold stocks It can now simply be executed through an online broker, such as
You can find a non-virtual broker too.
¤ open an account,
¤ locate for the ticker symbol either you want to choose the stock or ETF.
To make a purchase,
¤ enter buy order with your brokerage, Enter in the ticker of stock, ETF or mutual fund you want.
¤ enter the number of shares you want and then submit the order.
No argument, any kind or shape of investment consists of risks. Including Gold. But, as global financial markets have experienced high volatility and multiple crises recently, gold has got a considerable increase in popularity. But, many investors may remain uncertain, thinking why gold would be a good investment and a good way to purchase the asset.