There is so much information on the internet about why people should invest in gold, including the various investment options for this precious metal. If you are new to investing, you may be confused about which option would work best for you. Some options are cost-effective, while others provide better security.
In this guide, we will discuss the advantages and drawbacks of some gold investment methods. This will enable you to understand what you want to invest in. You may want to visit this website if you do not know how to invest in gold. Gold is a high-risk commodity because its market price is volatile. Therefore, it is important to go through this detailed guide before making any investments.
Asset Classes for Gold Investors
Commodities are treated as one class of assets. However, you can use the following classes of assets to invest in the gold market:
- Direct ownership through physical holdings, third-party storage, and jewelry
- Indirect ownership through gold mining shares and stocks
- Collective investment scheme through ETF
- Gold derivatives through options, spread betting, and CFDs (contract for difference)
Each class has different strategies, and we will discuss a few of them according to the following:
- Effectiveness – do the returns match the spot price?
- Efficiency – is the option low cost?
- Security – are the assets safe?
- Practicality – is it quick and easy to execute?
- Liquidity – can you quickly convert to cash?
Direct Ownership – Physical Holdings
Effectiveness
Investors who choose to hold physical bullion have a proportionate relationship between their assets’ value and the market price. This makes it the most effective and simplest method of benefitting from an increase in the price of the commodity.
Efficiency
The costs of transactions in this option are quite steep, making it expensive for short-term holding. Gold dealers are fond of selling the commodity higher than the spot price so they can make a profit. After that, you will pay extra fees for shipping, security, and home insurance. And when you want to sell off, you will still pay extra fees for selling.
Security
It is quite difficult to trace gold, which makes it vulnerable. However, you can mitigate theft through security measures and insurance. You also need to keep your collection a secret because that is the best form of security against theft.
Practicality
It is more difficult to sell gold than to buy because you need to find a buyer who will give you the best available price. Also, private buyers cannot verify whether the commodity is authentic or not. As a result, they offer ridiculous prices.
Liquidity
The bullion market is reliable and active because there is more demand for the commodity. Commercial buyers are also willing to offer cash instantly.
Direct Ownership – Third-Party Storage
Effectiveness
Investors can benefit directly from the market price just like the physical holding strategy. Hence, it is an effective way to gain from an increase in the commodity’s price.
Efficiency
The platform offers efficient storage because it integrates storage and broker solutions. Your bullion does not leave the facility whether you want to buy or sell. The cost of storage is low because the facility holds bullion on a commercial scale.
Security
The storage facility is secure and provides insurance for investors. The custodian also publishes their external stock audit report so investors can rest assured that their investments are safe.
Practicality
By clicking a few buttons on your phone or computer, you can easily buy bars or coins from online dealers. However, you need to get more information on online dealers before investing.
Liquidity
You can easily get a buy-back offer from the custodian, which guarantees easy sale without hassles.
Indirect Ownership – Mining Stocks
Effectiveness
The movement in stock prices does not tally with the spot price of the commodity itself. This implies that if the commodity’s price rises by 20%, stocks may underperform or overshoot.
Efficiency
The buying process is quite efficient, but its transaction costs do not reflect how the stocks are rising or falling. Also, if a mining company’s license is revoked, the investor may bear the loss.
Security
The security of mining companies is quite unreliable especially in countries where they have a lot of natural resources and weak laws.
Practicality
You can easily use your stockbroker to purchase stocks from mining companies as you would do when you want to buy shares in other companies.
Liquidity
The shares are quite liquid, especially for small-sized investments. You can trade when the stock exchange is open and get the funds within 3 days.
Collective Investment Scheme – ETF
Effectiveness
The ETF price closely follows the spot price of gold because ETF shares are fractions of real bullion holdings.
Efficiency
ETFs are very efficient investment platforms. Their balance sheet can absorb costs of insurance, administrative overhead, and security.
Security
ETFs usually store their assets with well-known financial institutions. Therefore, your investment is safe. But this does not strike out the possibility of losing your assets if calamity befalls the custodian.
Practicality
You can easily trade your shares through an online broker.
Liquidity
You can easily convert shares to cash within three days of trading.
Gold Derivatives – Spread Betting
Spread betting involves placing a bet about the direction of gold’s spot price. If this interests you, then you should learn more about gold options.
Effectiveness
The outcome of a spread bet or CFD is closely linked to your chosen gold benchmark’s performance. This implies that the strategy is effective for speculating short-term movements in price. If you prefer a longer period, the leverage costs will accrue in form of financing fees. When an open bet is held overnight, the investor will be charged for it to be rolled over to another day.
Efficiency
The spread betting or CFD provider raises the profit margin so they can make their own profit. For instance, if the price of gold is currently at $800.1, the provider can offer a bet where you will only profit after the price goes beyond $800.4. The inefficiency of the platform is referred to as a “spread”.
Security
Spread betting is risky as the chances of losing money are consistently high. Also, the provider may become insolvent.
Practicality
You can trade CFDs or bet on apps and websites that are user-friendly. The bets are easy and quick to place too.
Liquidity
You can close and convert a bet into cash in split seconds. This makes it a very liquid investment strategy.
Final Note
There are various methods of investing in gold and each method comes with several strategies. This gives you a variety of options when you want to invest. We highlighted the rewards and risks of some strategies. You can take advantage of this golden opportunity by utilizing one or more strategies to gain from the gold market.
