How to invest in gold ? The Guide for Beginners
Are you considering to add gold in your portfolio ? You do not know how to buy and what are the different exisiting solutions ? We present everything in one page.
According to Investopedia, an Exchange Traded Fund is 'marketable security that tracks an index, commodity, bonds or a basket of assets like an index fund'
Therefore, a gold ETF tracks the domestic physical gold price. It is a dematerialized form of gold that represents 1 gram of gold in most of the cases. A gold ETF enables you to purchase gold in an electronic form. As a result, you can buy and sell gold ETFs as you could trade stocks. Gold ETFs makes the process of investing in gold really convenient, since everything is electronic. However, when you sell back your ETFs, you do not get back physical gold but rather the equivalent amount in cash.
If safe and low-risk investment is not for you, then ETFs offer a more speculative investment alternative to physical gold. Another option would be to delve into both worlds: speculate on the price of gold via a Gold ETF as well as buying some physical gold to spread and reduce the element of risk.
Gold Futures are associated with contracts between a buyer who agrees who take delivery from a seller, a specific quantity of gold at a pre-determined price on a future delivery date.
Gold futures are also paper gold, gold exchanged electronically. The main gold futures are traded in the NYMEX and the TOCOM, in the form of 100 troy ounces and 1000 grams. They are highly speculative financial instruments subject to important volatility. Therefore, they can involve substantial risk than their upside return profile.
Gold Mining Stocks
The performance of gold mining stocks is strongly linked to the global demand for the yellow precious metal.
But other factors that drive the demand for gold as an investment (economic uncertainty and political instability) can also be beneficial for the gold mining stock performance. Indeed when demand for gold investment increase, the profitiability of the gold mining companies providing the metal will increase, which in turn benefit the owners of shares of those mining companies.
The only downturn is that when you are buying a gold mining stock, you are investing in a business, rather than in a commodity. Therefore, the potential return on investment will be the consequence of the profitability of the mining company, rather than the increase of the gold spot price.
Gold bars are available in the bullion market in a wide range of weight, from 1g to 1kg. Compare to gold bullion coins, they have a lower premium above the gold spot price, due to their lower manufacturing cost. The bigger the gold bar, the smaller the premium. However, smaller minted gold bars such as 5g or 10g are more expensive for purchase, it is more cost effective to buy 1kg gold bars than 10 x 100g gold bars.
Always make sure to buy gold bars from an LBMA manufacturer, and sold with an authenticity certificate. This factor guarantees that your gold bar is made of 99.99 % of gold
Gold coins are very popular nowadays and available in various sizes. From 1oz to 7g, you can invest in gold by buying gold sovereign or britannia, maple leaf or krugerrand. Because of their small size, they are really easy to store, carry and trade.
Gold coins offer a greater flexibility at resale compared to gold bars. When you own a 1kg gold bar, you can not cut it in half and sell 500g. With gold bullion coins, you can easily divide your physical gold portfolio into smaller units and sale back few coins when you need money.
British bullion coins offer also the benefit to be free of Capital Gain Tax, because of their legal tender status in UK. Those coins include gold sovereigns and britannia.
Where to buy gold ?
Buy gold online
A lot of dealers nowadays offer the possibility to buy gold directly online. We recommend that you make your own research and you look at criterias such as the settlement terms, the delivery conditions (charges, delivery time...)
Buy gold over the counter
Buying gold directly in a shop over the counter can be also beneficial for you, as you can get direct advice and chat with a professional in person. Consider the following criterias : word of mouth, recommendation, reputations, how many years the business has been in the industry
What is the best moment to buy gold ?
Is gold still a good investment ? Is it too late to invest in gold ?
Bear in mind that there is several factors that are beneficial for the gold price. Gold price tend to rise when there is high inflation and economic or political uncertainty. It is also historically not correlated to the US dollars.
So when you notice one of these signs, it is a good moment to invest. However, there is no right or wrong answer.
The good strategy for new investors is to buy small amounts regularly in order to have an average price. For instance, if you bought when the price was at 1000 $, and then price gold spot price goes down to 920£, you can make a second purchase to stabilise your: total purchasing price/ average cost of your gold investment.
Consider the following points before you start to invest in gold
- Investor Profile: why do you want to buy gold ?
- Budget: how much money do you want to invest in gold ?
- Premium for gold bars vs gold coins
- Most suitable way to buy gold online for you: online or OTC ?
- Tax applicable for gold in your country
Physical Gold vs Paper Gold
|Physical Gold||Paper Gold|
|Control over your wealth||No real control|
|Full ownership. If you don't hold it, you don't own it.||You never own any gold|
|Personal Security and peace of mind||Trust in a third party is required|
|Secure investment||Speculative investment|
|Unique element to your portfolio||Similar to any other share or fund|
|Low risk||Higher risk|
|Crisis insurance||Open to same risks as all investments|
|Timeless asset||Not an asset|
|Keep for generations||Too risky to keep for generations|
|Long term||Short term|
|Potentially profitable||Also potentially profitable|