How To Invest In Gold?
There are many methods to invest or benefit from the gold price movement. Here we cover the most popular ones.
Investing in Gold Mining Companies
Investing in physical gold has some drawbacks when compared to other investments tools like shares, bonds, and property that give dividends, coupons, and rent. Some investors chose to invest in gold mining companies to gain exposure to dividends and capital gains.
Shares in gold mining companies can be volatile due to the inherent leverage in the mining sector. Leverage increases investment gains but also increases the corresponding risk of capital loss if the trend reverses.
For instance, if you own a share in a gold mine where the costs of production are $400 per ounce and the price of gold is $1000, the mine has a profit margin of $600. A 10% increase in the gold price to $1100 per ounce will push that margin up to $700, a 17% increase in the mine's profitability, and potentially a 17% increase in the share price. On the other hand, a 10% decline in the gold price to $900 will reduce that margin to $500, a 17% fall in the mine's profitability, and potentially a 17% decrease in the share price.
Some mining companies hedge the gold price to reduce the risk and volatility. This provides the mining company and shareholders with less exposure to short term gold price fluctuations, but reduces potential returns when the gold price is rising.
Investing in Gold coins and bars
A popular way of holding gold is buying gold coins. The bullion coins are priced according to their weight, plus a premium or mark-up above the gold spot price and varies between coins and dealers.
One of the most popular gold coins is the American Eagle bullion coin, which is guaranteed by the U.S. Government and has been in circulation for over 160 years.
The most traditional way of investing in gold is by buying bullion gold bars. Gold bars can be held either directly or indirectly. In the direct method you hold the gold in your own safe and in the indirect method the gold is held in a safe deposit box or bank vault on your behalf.
Exchange Traded Funds
Gold exchange traded funds (ETFs) are expected to track the gold price almost perfectly and therefore represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. The securities are 100% backed by physical gold held mainly in allocated form.
There is an annual storage fee and a commission for trading in gold ETFs. The amount of gold in each certificate declines gradually over time since a small amount of gold in the account is sold to cover the annual expenses of the fund such as storage, insurance, and management fees.
Gold Accounts
Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Digital gold currency accounts and the BullionVault gold exchange work on a similar principle. Gold accounts are typically backed through unallocated (investors do not have specific bars allotted to them) or allocated (keeping gold in a safety deposit box for the investor) gold storage.
