There are various methods of investing in gold, from purchasing physical bullion coins to purchasing shares in mining companies. Each method of investment carries with it different risks.
Gold has long been seen as a safe investment option, and many investors use it to diversify their portfolios. Before making a decision on investing in gold, investors should carefully consider their initial capital, desired returns, and preferred risk level.
Investors are advised to hold some gold in their portfolio as an insurance policy against financial uncertainty, both physically or through one of the many exchange-traded funds (ETFs) available today.
Physical gold requires expensive storage requirements and insurance costs, and may also be vulnerable to theft and sale at full market value.
Alternative forms of gold investment provide greater safety with reduced expenses. Investing in gold ETFs provides investors with an asset whose price may track that of physical gold without storage and insurance costs; however, ETFs incur ongoing charges such as management fees and platform charges; alternatively investors can buy shares in gold mining companies for exposure without owning physical gold.
Exchange-traded funds (ETFs)
ETFs are an increasingly popular investment choice as they allow investors to diversify their portfolio by tracking a specific market index. ETFs can either be passively managed or actively managed and investors should always read an ETF prospectus before investing; this document typically includes details regarding investment objectives, strategies, risks and access. Investors can access them through SEC EDGAR systems or financial firms who sponsor ETFs.
As well as ETFs that follow markets, there are also commodity ETFs which track specific sectors or assets – they offer exposure to international markets without purchasing foreign stocks directly.
ETFs offer an efficient and cost-effective means of diversifying a portfolio. However, you should keep in mind that ETFs may be subject to tracking error and be more volatile than individual stocks; furthermore they may not be as tax efficient than mutual funds.
Futures and options
Gold futures and options provide investors with leveraged investment potential. When purchasing futures contracts, investors only need to put up part of the total cost (known as margin). While this can significantly boost gains, it could also cause large losses if gold moves against them.
Physical gold investments provide many advantages, including being immune from counterparty risk – the risk that paper holdings could be taken by third-parties who do not owe you their due – while investing in gold mining stocks does not present similar dangers as these companies are not directly tied to your physical holdings.
Many investors who do not wish to own physical gold or deal with its high degree of volatility prefer investing in shares of gold mining companies instead, providing a way for them to diversify their portfolio with an asset that has proven itself over time.
Gold mutual funds or ETFs offer you the chance to own shares in companies involved in mining the metal or related activities, with more liquidity than purchasing physical gold and typically lower management fees compared with investing in individual mining stocks.
Online brokers also allow investors to buy gold-related stocks directly. These stocks include major producers, explorers and developers as well as those providing royalties or streaming deals directly with miners. Their share prices tend to follow gold prices closely but may also be affected by other factors, including poor management decisions or social unrest in countries where mining takes place.
Addition of these assets can help diversify your portfolio, though they should represent no more than a minor portion. Keep in mind that unlike other investments, gold does not generate consistent cash flows and should therefore be seen as long-term holding.