When economic times get tough or financial events such as the blow-up of Silicon Valley Bank throw the markets for a loop, investors often turn to gold as a safe haven. With high inflation and the stock market trading at all-time highs, some investors are looking for a safe asset that has a proven track record of gains, and that’s gold.
Investors like gold for many reasons, and it has attributes that make the commodity a good counterpoint to traditional securities such as stocks and bonds. They perceive gold as a store of value, even though it’s an asset that doesn’t produce cash flow, while others also consider gold a hedge against inflation.
Here are five different ways to own gold, and a look at some of the risks that come with each.
1. Gold bullion
One of the more emotionally satisfying ways to own gold is to purchase it in bars or in coins, such as at Costco. You’ll have the satisfaction of looking at it and touching it, but ownership has serious drawbacks, too, if you own more than just a little bit. One of the largest drawbacks is the need to safeguard and insure physical gold.
To make a profit, buyers of physical gold are wholly reliant on the commodity’s price rising. This is in contrast to owners of a business (such as a gold mining company), where the company can produce more gold and therefore more profit, driving the investment in that business higher.
You can purchase gold bullion in a number of ways: through an online dealer such as APMEX or JM Bullion, or even a local dealer or collector. A pawn shop may also sell gold.
Note gold’s spot price – the price per ounce right now in the market – as you’re buying, so that you can make a fair deal. You may want to transact in bars rather than coins, because you’ll likely pay a price for a coin’s collector value rather than just its gold content. (These may not all be made of gold, but here are 9 of the world’s most valuable coins.)
Risks: The biggest risk is that someone can physically take the gold from you, if you don’t keep your holdings protected. The second-biggest risk occurs if you need to sell your gold. It can be difficult to receive the full market value for your holdings, especially if they’re coins and you need the money quickly. So you may have to settle for selling your holdings for much less than they might otherwise command on a national market.
2. Gold futures
Gold futures are a good way to speculate on the price of gold rising (or falling), and you could even take physical delivery of gold, if you wanted, though physical delivery is not what motivates speculators.
The biggest advantage of using futures to invest in gold is the immense amount of leverage that you can use. In other words, you can own a lot of gold futures for a relatively small sum of money. If gold futures move in the direction you think, you can make a lot of money very quickly.
Risks: The leverage for investors in futures contracts cuts both ways. If gold moves against you, you’ll be forced to put up substantial sums of money (called margin) to maintain the contract or the broker will close the position and you’ll take a loss. So while the futures market allows you to make a lot of money, you can lose it just as quickly.
In general, the futures market is for sophisticated investors, and you’ll need a broker that allows futures trading, and not all of the major brokers provide this service.
3. ETFs that own gold
If you don’t want the hassle of owning physical gold or dealing with the fast pace and margin requirements of the futures market, then a great alternative is to buy an exchange-traded fund (ETF) that tracks the commodity.
Three of the largest ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Physical Gold Shares ETF (SGOL). The goal of ETFs such as these is to match the price performance of gold minus the ETF’s annual expense ratio. The expense ratios on the funds above are only 0.4 percent, 0.25 percent and 0.17 percent, respectively, as of January 2024.
The other big benefit to owning an ETF over bullion is that it’s more readily exchangeable for cash at the market price. You can trade the fund on any day the market is open for the prevailing price, just like selling a stock, and avoid the huge transaction costs of selling physical gold. So gold ETFs are more liquid than physical gold, and you can trade them from the comfort of your home.
Risks: ETFs give you exposure to the price of gold, so if it rises or falls, the fund should perform similarly, again minus the cost of the fund itself. Like stocks, gold can be volatile sometimes, but these ETFs allow you to avoid the biggest risks of owning the physical commodity: protecting your gold and obtaining full value for your holdings.
4. Mining stocks
Another way to take advantage of rising gold prices is to own the mining businesses that produce the stuff.
This may be the best alternative for investors, because they can profit in two ways on gold. First, if the price of gold rises, the miner’s profits rise, too. Second, the miner has the ability to raise production over time, giving a double whammy effect.
Risks: Any time you invest in individual stocks, you need to understand the business. There are a number of tremendously risky miners out there, so you’ll want to be careful about selecting a proven player in the industry. It’s probably best to avoid small miners and those that don’t yet have a producing mine. Finally, like all stocks, mining stocks can be volatile.
5. ETFs that own mining stocks
Don’t want to dig much into individual gold companies? Then buying an ETF could make a lot of sense. Gold miner ETFs will give you exposure to the biggest gold miners in the market. Since these funds are diversified across the sector, you won’t be hurt much from the underperformance of any single miner.
The larger funds in this sector include VanEck Gold Miners ETF (GDX), VanEck Junior Gold Miners ETF (GDXJ) and iShares MSCI Global Gold Miners ETF (RING). The expense ratios on those funds are 0.51 percent, 0.52 percent and 0.39 percent, respectively, as of January 2024. These funds offer the advantages of owning individual miners with the safety of diversification.
Risks: While the diversified ETF protects you against any one company doing poorly, it won’t protect you against something that affects the whole industry, such as sustained low gold prices. And be careful when you’re selecting your fund: not all funds are created equal. Some funds have established miners, while others have junior miners, which are more risky.
Why investors like gold
“Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier,” says Juan Carlos Artigas, global head of research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain stretches, though it doesn’t always beat them, and its track record shows much lower returns over time.
- Liquidity: If you’re buying certain kinds of gold-based assets, such as ETFs, you can readily convert them to cash.
- Low correlations: Gold often performs differently from stocks and bonds, meaning when they go up, gold may go down or vice versa. So gold might be used as a hedge.
In addition, gold offers other potential advantages:
- Diversification: Because gold is generally not highly correlated to other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
Those are a few of the major benefits of gold, but the investment – like all investments – is not without risks and drawbacks.
While gold performs well sometimes, it’s not always clear when to purchase it. Since gold by itself doesn’t produce cash flow, it’s difficult to determine when it’s cheap. That’s not the case with stocks, where there are clearer signals based on the company’s earnings.
Moreover, because gold doesn’t produce cash flow, in order to make a profit on gold, investors must rely on someone else paying more for the metal than they did. In contrast, owners of a business – such as a gold miner – can profit not only from the rising price of gold but also from the business increasing its earnings. So there are multiple ways to invest and win with gold.
Bottom line
Investing in gold is not for everyone, and some investors stick with placing their bets on cash-flowing businesses rather than relying on someone else to pay more for the shiny metal. That’s one reason legendary investors such as Warren Buffett caution against investing in gold and instead advocate buying cash-flowing businesses. Plus, it’s simple to own stocks or funds, and they’re highly liquid, so you can quickly convert your position to cash, if you need to.
It’s easy to get started buying a fund – here are the best brokers for ETFs.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
