Amid the economic uncertainty caused by the pandemic – including stock market volatility and fears of a recession – gold is rallying. According to CNBC, gold prices surpassed $1,800 per ounce last year and are only expected to rise.
For many experts, this means that now is a great time to invest in gold. But how should you get started? Below, check out this beginner’s complete and easy guide to investing in gold.
How the gold market works
The gold market looks different today than it once did, in the age of the California Gold Rush or when the U.S. still relied on the gold standard. Today, most currency is fiat currency (including the American dollar), which means its only worth comes from the government backing it. Fiat currency is not backed by a physical assets, like gold or silver.
However, gold is still prominent in the global economy in the form of jewelry, collectibles, bars and bullion, and even in industry as a conductor of heat. This market landscape offers investors a broader range of investment options than ever before.
Is investing in gold a good investment?
Investing in gold can absolutely be a good investment if done correctly. Because gold prices (like those of other commodities) tend to rise in inverse relation to stocks, gold is a popular “safe haven” investment for bear markets and recessions.
In other words, it can be a great way to diversify your portfolio and hedge against the volatility of stocks.
Recently, the issuance of trillions in stimulus packages has pushed the country to near its debt limit, which is the legal limit on the amount of debt the country can incur. This has caused the US to make a decision on whether or not to raise the national debt limit. Raising the debt limit would authorize more spending to cover the country’s debts. This is sort of like raising the country’s credit limit. A lack of action could cause the US to default, raising concerns about a financial crisis.
The US dollar is not a finite resource, nor does it have any intrinsic value, since it hasn’t been backed by gold since 1972. Because of this, many investors have flocked over to alternative investments like gold and cryptocurrencies.
You don’t get into gold for an instant profit, but rather for diversification and security against volatility. It can be a good long-term investment strategy.
How do I start investing in gold?
There are many different ways to invest in gold, but some are easier ways for beginners and individual investors to get started, while others offer more stability, protection, or financial upside.
Gold investment options for beginners
Streaming and royalty companies
Streaming and royalty companies are considered by some to be the best option for investing in gold. This investment option is less risky than even stocks, mutual funds, or ETFs, largely because returns are based on a fixed percentage rather than the profitability of the mining company.
What are streaming and royalty companies? They essentially act as the financial backers of mining companies. Because of the high risk involved in mining due to price fluctuations, miner strikes, accidents or natural disasters, and more, mining companies often have trouble getting funding. They also require a lot of capital to get up and running.
Streaming and royalty companies provide funding for the operation in exchange for either a fixed percentage of the mining company’s revenue (royalty companies) or physical metals (streaming companies).
The streaming or royalty company is guaranteed to receive a fixed percentage of revenue no matter how much the miner profits, without incurring the risk of operating the mine. This makes investing in streaming and royalty companies more secure than investing in mining company stocks.
Stocks, mutual funds, and ETFs
Because of the nature of the stock market, gold and gold-mining stocks, mutual funds, and ETFs all come with risk. However, they can provide some simple and low-cost investment options.
For example, gold-based ETFs can be an alternative to investing in physical gold. These ETFs have the advantages of diversification across many companies, ease of ownership in a brokerage or IRA, and no need for individual company research.
However, not all gold ETFs operate the same way. Some invest in indexes, some are tied directly to prices, and some are actively managed, like mutual funds.
Remember that mining is an inherently risky business, meaning it’s also risky to invest in. Although gold mining gives you exposure to other precious metals besides gold – which can provide some cushion if gold prices fall – it’s still important for you to carefully research any companies you plan to invest in and/or the prospectuses of the ETFs you’re considering.
The downside of gold ETFs is that you won’t actually own physical gold. With this approach you will own a paper asset instead of a hard, physical asset. In times of economic crisis, physical assets are generally considered to be a safer haven.
Gold investment options to avoid
Close to 50% of the global gold market goes toward gold jewelry. Sounds promising, right? Unfortunately, investing in gold jewelry is not a great option. This is because, in addition to prices being highly dependent on fluctuating supply and demand, gold jewelry is marked up astronomically before being sold.
This means the person who makes the most money is the jeweler, not the investor.
For the right person, investing in physical gold can be the safest move, because this is the only way to own the precious metal itself. Having physical assets can be more secure than stocks, which are sensitive to changes in the economy.
However, it is worth noting that investing in physical gold like bullion, bars, and coins can involve dealer costs and potentially shipping fees. Likewise, there can be markups in physical gold.
Of course, it also requires storage, which can be a burden if you own a large amount.
Typically, futures contracts in any industry are only good for very experienced investors. This is because futures trading involves agreeing to pay a fixed price for a certain amount of a commodity at a given time. If the price of the commodity falls before that time, your contract could become worthless and you could lose everything.
Gold futures are only recommended to investors with lots of experience, industry knowledge, and capital they can afford to lose.
How much should you invest in gold?
As with any investment, you never want to put too many eggs in one basket, especially if you’re a beginner. Most experts agree that you should put no more than 10% of your portfolio into gold, and buy small amounts over time.
On the other hand, financial experts like Robert Kiyosaki, author of the best-selling personal finance book of all-time, Rich Dad, Poor Dad, calls gold “God’s money.”
He points out that physical gold has been a reliable investment and store of value across all of time, history, and geography.
Investing in Gold
Investing wisely requires that you pay close attention to the numbers. Before making a decision, carefully weigh the pros and cons of each investment option against your own goals, investment experience, and budget. The World Gold Council provides great resources, including detailed tracking of gold prices so that you can make informed decisions.