When economic times get tough or the stock market looks jittery, investors often turn to gold as a safe haven. With inflation spiking and the stock market hovering around all-time highs, some investors are looking for a safe asset that has a proven track record of gains, and that’s gold.
Savers and investors like gold for many reasons, and it has attributes that make the commodity a good counterpoint to traditional securities such as stocks and bonds. They perceive gold as a store of value, even though it’s an asset that doesn’t produce cash flow. Some see gold as a hedge against inflation, as they worry that the Fed’s actions to stimulate the economy – such as near-zero interest rates – and government spending may send inflation racing higher.
One of the more emotionally satisfying and different options for buying gold is to purchase it in bars or in coins. You’ll have the satisfaction of looking at it and touching it, but ownership has serious drawbacks, too, if you own more than just a little bit. One of the largest drawbacks is probably the need to safeguard the physical gold and insure it.
To make a profit, owners of physical gold are wholly reliant on the commodity’s price rising, in contrast to owners of a business, where the company can produce more gold and therefore more profit, driving their investment higher.
You can purchase gold bullion in a number of ways: through an online dealer such as APMEX or JM Bullion, or even a local dealer or collector. A pawn shop may also sell gold. Note gold’s spot price as you’re buying, so that you can make a fair deal. You may want to transact in bars rather than coins, because you’ll likely pay a price for a coin’s collector value rather than its gold content.
Gold futures are a good way to speculate on the price of gold rising (or falling), and you could even take physical delivery of gold, if you wanted, though that’s not what motivates speculators.
The biggest advantage of using futures to invest in gold is the immense amount of leverage that you can use. In other words, you can own a lot of gold futures for a relatively small sum of money. If gold futures move in the direction you think, you can make a lot of money very quickly.
ETFs that own gold
If you don’t want the hassle of owning physical gold, then a great alternative is to buy an ETF that tracks the commodity. Three of the largest ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and Aberdeen Standard Physical Gold Shares ETF (SGOL). The goals of ETFs such as these is to match the performance of gold minus the annual expense ratio. The expense ratios on the funds above are only 0.4 percent, 0.25 percent and 0.17 percent, respectively, as of July 2021.
The other big benefit to owning an ETF over bullion is that it’s more readily exchangeable for cash at the market price. You can trade the fund on any day the market is open for the going price. So gold ETFs are more liquid than physical gold, and you can trade them from the comfort of your home.
Another way to take advantage of rising gold prices is to own the miners who produce the stuff.
In some ways this may be the best alternative for investors, because they can profit in more than one way on gold. First, if gold rises, the miner’s profits rise, too. Second, the miner has the ability to raise production over time, giving a double whammy effect. So you get two ways to win, and that’s better than relying on the rising price of gold alone to buoy your investment.
ETFs that own mining stocks
Don’t want to dig much into individual gold companies? Then buying an ETF could make a lot of sense. Gold miner ETFs will give you exposure to the biggest gold miners in the market. Since these funds are diversified across this sector, you won’t be hurt much from the underperformance of any single miner.
The larger funds in this sector include VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Junior Gold Miners ETF (GDXJ) and iShares MSCI Global Gold Miners ETF (RING). The expense ratios on those funds are 0.51 percent, 0.52 percent and 0.39 percent, respectively, as of July 2021. These funds offer the advantages of owning individual miners with the safety of diversification.
Investing in gold is not for everyone, and some investors stick with placing their bets on cash-flowing businesses rather than have to rely on someone else to pay more for the shiny metal. That’s one reason legendary investors such as Warren Buffett caution against investing in gold and instead advocate buying cash-flowing businesses. Plus, it’s simple to own stocks or funds, and they’re highly liquid, so you can quickly convert your position to cash, if you need to.