The best ways to invest in gold

Once you have made up your mind to invest in gold, you can choose from a variety of investment forms. These include purchasing gold in physical form (such as gold bars or jewelry) or futures as well as buying into a fund that tracks a stock index of companies active in gold mining. Let’s take a closer look at how you can become an investor in gold.
Best ways to invest in gold

ETFs and mutual funds

Buying gold-based exchange-traded funds (ETFs) or mutual funds is one of the most common and convenient ways of investing in gold. Some gold ETFs are described as “gold stocks” – they are instruments that mimic fluctuations in the gold price and can be traded on an exchange just like any regular stock. The best-known such gold ETF is the SPDR Gold Trust (GLD), traded on the NYSE, which holds gold bullion on behalf of its shareholders. If investor demand for the shares exceeds (or falls short of) supply, the fund would buy or sell physical gold in order to restore the balance. However, as this does not happen in real time, GLD may trade at a slight premium or discount to the actual price of gold during the course of daily trading. The premium or discount is the difference between the current market price and the net asset value of an ETF.

In addition to investing in physical gold, some ETFs also include other types of securities such as gold futures contracts as underlying assets. One risk of such “IOU” or “paper gold”-backed ETFs is that in times of high demand for physical gold, there may simply not be enough physical gold available – or only at a sizable premium – if investors want to redeem their investment.

Other ETFs may track gold mining company stocks. The best known of these is the VanEck Vectors Gold Miners ETF (GDX); it shadows the NYSE Arca Gold Miners Index, which tracks the performance of companies in the gold mining industry.

Gold mutual funds operate on a similar principle as ETFs, investing in a diversified portfolio of gold-related assets. However, while most ETFs are constructed to simply track gold prices or other market indices, mutual funds are often actively managed, which usually mean higher fees.

The pros and cons of gold ETFs

The main advantage of gold ETFs is that they are very liquid, and can provide direct exposure to gold without the hassle involved in holding physical gold.

However, gold ETFs also come with some downsides. While annual expense fees are usually manageable at less than 0.5% of fund assets, commissions charged on each trade – at up to $10 – can add up, making it costly to gradually build up a gold portfolio at some brokers. It makes sense to find a zero-commission or low-commission broker using one of our tools.

Also, some popular US gold ETFs, including GLD, are not available at EU-based brokerages, because the way they report their operations and risks is incompatible with EU regulations on the transparency of retail investment instruments (regulations known as PRIIPS). Gold-backed ETFs that are available in the EU include the Sprott Physical Gold Trust (PHYS) or the iShares Physical Gold ETC (SGLN).

To learn more about ETFs, check out our guide on how to buy ETFs online.

Best ways to invest in gold

Mining company stocks

When weighing how to invest in gold, buying shares in gold mining companies is an alternative way of gaining exposure to this commodity. From global behemoths to small-cap companies that are primarily focused on exploration, there are hundreds of publicly-listed gold miners to choose from; and their shares can be easily bought or sold on any online broker platform.

One benefit of investing in gold mining companies is the leverage they offer to gold prices. Mining companies’ costs, such as wages or equipment, are usually fairly constant, so any increase in gold prices – and therefore revenue – will translate to a much higher percentage rise in their profits. But the biggest advantage of gold mining stocks over plain gold is that they have growth potential beyond increases in the price of gold. If a mining company increases production or acquires other gold mines, its profits and share price might outperform gold prices. In addition, some mining companies also pay dividends, generating regular income for you that pure gold cannot.

Still, gold mining stocks have their own risks, as well as some features that gold investors may find unattractive. As leverage can work both ways, many gold miners actually hedge themselves against gold price changes to mitigate losses in the case of falling gold prices. While this is good business sense on their side, it does water down your exposure to gold prices, and can limit your gains when gold prices rise. Gold miners also often extract other minerals and metals besides gold – again, sensible diversification for these companies that nonetheless dilutes the anti-cyclical properties of pure gold. Meanwhile, gold mining companies, just like any other business, face all kinds of operating risks, including regulatory issues, environmental protests, worker strikes, or political risk in the case of gold mines located in politically unstable countries.

Best ways to invest in gold

Physical gold

The most traditional way to buy gold is in physical form, in the shape of solid gold bars or coins. These are made and sold by government or private mints, and range from 400 oz gold bars held by central banks to 1/10 oz coins the size of a US dime. Some well-known gold coins include the American Eagle, the Canadian Maple Leaf or the South African Krugerrand. Interestingly, gold coins are legal tender and have a face value, though you’d be foolish to pay your grocery bill with a $50 1-oz American Eagle coin (current market value: ca. $1,800).

The pros of physical gold

The advantage of physical gold is that it gives you direct exposure to gold prices. Most types of gold coins and smaller bars are relatively liquid assets, meaning it is easy to find a seller or buyer if you want to raise or lower your gold holdings. It is also the ultimate safe haven, as gold bars or coins will be there with you even in the event of a serious crisis or complete breakdown of the financial system.

The cons of physical gold

However, physical gold also has some drawbacks, most of which have to do with the costs of buying and holding gold. On top of the pure gold value, the mint will charge a small premium, and retailers may also add a margin – together these can add up to as much as 5-10% of the value of the gold content itself, especially in the case of small denominations. Shipping costs and customs duties may also apply; and once you bought your bars or coins, you will want to take out insurance and/or rent storage space in a bank vault to keep them safe. Costs are proportionally lower for large gold bars, but large bars are relatively illiquid. Speaking of security, scams may also occasionally occur, so make sure you buy from reputable mints, traders or jewelers.

Jewels and collectibles

Special cases of physical gold investment include jewelry and numismatic coins. These often have very high markups on top of the value of their gold content – also called meltdown value – to reflect their artistic value, workmanship or rarity. Because of this, they are not usually recommended for strictly investment purposes; though they may be traded, even for a profit, on niche artwork or collectibles markets.

Best ways to invest in gold

Gold futures

Gold futures are complex financial instruments designed to bet on movements in the price of gold. In essence, holders of gold futures enter into a contract to either buy or sell gold at an agreed price at an agreed time (though actual delivery rarely takes place). Similarly to other futures, these contracts involve trading on margin and may lead to sizable losses. They are recommended mainly for seasoned investors with a high tolerance for risk.

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