A comprehensive guide to investing in gold for beginners

Although the days of the California Gold Rush are well behind us, investing in gold retains its luster much like the precious metal itself. 

Gold investments for beginners

Why is gold valuable?

Gold has held on to its shine in the eyes of investors worldwide largely because of its historical association with the value of currencies. In antiquity, this precious metal was used for making coins, and when paper notes were introduced, their value was determined in a given amount of pure gold, called the gold standard. Although this practice was abandoned in the 20th century, gold retains a historic importance in the global financial system, thus making it a highly valuable asset to own. 

Gold is an important investment, as it can help you balance out your overall portfolio. Read this comprehensive guide on investing in gold for beginners to avoid the most common traps and put yourself in a position to make an informed decision.

Gold investments for beginners

Why should you invest in gold?

Physical gold is one of the oldest and most valuable commodities in the world. In the course of history, owning physical gold served as a hedge against almost any kind of crisis or economic upheaval, such as rampant inflation, war, recession or natural disasters. Although financial markets and tradable assets have become extremely sophisticated in recent times, allowing investors to manage risks by purchasing a variety of specialized instruments, gold still remains one of the safest havens and is often used to build a balanced investment portfolio. Most people do not rely solely on gold as an investment option, but rather think of it as a means of generating steady profit in the long term. Few novice investors think of buying gold as an investment option, since holding gold investments, unlike owning stocks or buying crypto, is not associated with rapid gains. Nevertheless, gold is a highly liquid asset, meaning that you can buy and sell gold relatively quickly due to high demand.

Gold investments for beginners

What's the best way for a beginner to invest in gold?

Investing in gold doesn’t necessarily mean owning gold bars, although this is certainly an option. There are multiple ways of purchasing gold, ranging from buying gold bullion, shares of gold mining companies or gold exchange-traded funds (ETFs), or purchasing gold options and futures contracts. If you want detailed information on all the various alternatives of investing in gold, read our article on the best ways to invest in gold. One word of caution: there is no perfect recipe for investing in gold, as each option comes with its own risks and benefits. In order to get started in gold trading as a beginner, you should consider the following options:

  1. Gold Bullions
  2. Gold Coins and Jewelry 
  3. Gold ETFs and Mutual Funds
  4. Gold Mining Companies and Stocks

1. Buying gold bullion is probably the most common way of investing in physical gold. Gold bullion comes in the shape of solid gold bars ranging from 400 oz to a few grams, but it’s most commonly available as one- and 10-ounce bars. They are typically made and sold by government or private mints. The price of gold hovers around $1,800 per ounce (as of September 2021), which means that investing in gold bullion is rather expensive. If you decide to buy gold bullions, make sure you choose a reputable dealer.

2. Some of the best-known gold coins include the American Eagle, the Canadian Maple Leaf or the South African Krugerrand. Really sought-after coin types may trade at a premium, but the price of more ordinary ones more or less aligns with their gold content. The most common gold coins weigh one or two ounces, though heftier ones are also available. Gold coins are legal tender and carry a face value, but few people buy gold coins to use them for shopping. Although gold coins are available at pawn shops and private collectors, it’s usually best to purchase them from a reliable, licensed dealer. Buying pieces of gold jewelry is an alternative way of investing in gold. Tread with extra caution here and always make sure that you purchase gold jewelry from a reputable dealer. Also make sure you check the purity of the gold used to make the particular piece. Gold purity is measured in karats, and 24 karats equal 100% gold. You can read about the pros and cons of investing in physical gold in this article. 

3. 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 act as “gold stocks”, meaning that their price moves in tandem with the gold price, and they can be traded on an exchange just like any regular stock. The best-known such ETF is the SPDR Gold Trust (GLD), traded on the NYSE. Some ETFs have gold futures as underlying assets, while others may track gold mining company stocks. The best known of the latter 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 invest in a diversified portfolio of gold-related assets, but often carry higher fees than ETFs because they are actively managed by portfolio managers. You can read about the pros and cons of buying into gold ETFs here. 

4. Purchasing shares in gold mining companies is also an option for gaining exposure to this precious metal. 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. However, investing in gold mining companies comes with peculiar risks. Mining itself has a lot of obvious risks, while some mines are located in countries with unstable political climates. Check out the advantages and disadvantages of investing in gold mining stocks in this article.

 Although gold futures and gold options may seem as enticing investment opportunities, these are complex financial instruments that are not recommended for beginners.

Gold investments for beginners

When should you buy gold?

Money managers often emphasize that all investors should keep at least a small portion of their portfolio in gold because gold has acted as a safe haven throughout history.

Of course, investors can trade around their position and add to their gold allocation if fundamentals align. More technical traders might prefer to use charts to establish good entry points.

From a fundamental perspective, gold has historically done well when US real yields were compressed; in other words, when the difference between the yield on US Treasuries and the US inflation rate started narrowing or even went into negative territory. For example, if inflation heats up and treasury bonds don’t compensate enough, gold becomes relatively more attractive. In the above scenario, the USD also tends to weaken against other currencies.

In times of economic or political crises and uncertainties, gold prices have a tendency to rise sharply. But predicting a crisis is often difficult and usually by the time it becomes apparent, gold has already staged a rally. Also, even gold prices may suffer temporarily in such panic situations if investors rush to sell everything (even gold) to get cash in order to meet margin calls.

A good strategy to avoid investing all your capital at a market high is to spread out your purchases over time. Even though gold may yield lower returns in the short term, it still remains a great asset to diversify your portfolio.

Gold investments for beginners

Bottom line

When it comes to investing in gold, there’s no one-size-fits-all approach. Nevertheless, getting to know your investment options and building an investment strategy can greatly help in making the right decision.

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