How to Invest in Gold?
Gold has served as a medium of exchange for goods and services on every continent for centuries. Now this precious metal is an important investment asset - leading investors and financial companies invest in the purchase of gold. Gold trading can be profitable if you build your trading strategy correctly. We have prepared a detailed guide, thanks to which you will be able to get acquainted with the basic principles of gold trading.
Historically, gold has been one of the most popular investment vehicles. Investors account for 30–40% of the total volume of gold purchases, and jewelers account for 40–50%.
During periods of crisis, investors, hedging risks, increase investments in gold, while in moments of stability, demand for jewelry grows, which encourages jewelers to increase their production.
The combination of these factors makes the demand for gold stable and sustainable, which enhances the role of the precious metal as a tool for capital preservation. At the same time, the variety of formats for investing in gold makes the choice not very simple.
Gold trading can be profitable if you build your trading strategy correctly. Let's try to understand this issue.
How Do People Feel About Investing in Gold?
In 2022, tens of thousands of investors around the world were asked what gold means to them personally and what their expectations are from investing in gold.
Most of those surveyed by the World Gold Council consider gold to be a reliable and long-term investment that protects and increases wealth over time.
62% of investors in Germany, Canada, China, India and the US said that owning gold makes them feel safe.
60% of investors in the US and 57% of investors in Germany trust gold more than currency, i.e. fiat money.
Globally, about 50% of retail investors and consumers have bought gold at least once in their lives.
What Is Gold?
Gold is a dense, yellow, lustrous precious metal with unique physical properties that distinguish it from other precious metals.
It is this combination of qualities that makes gold so special:
- Gold is very rare: a one-ounce gold nugget is harder to find than a five-carat diamond.
- Gold is very malleable: an ounce of gold can be drawn into 80 kilometers of five-micron-thick wire.
- Gold does not rust or tarnish: pure gold does not react with oxygen, so it remains bright and shiny.
- Gold is virtually indestructible: it is resistant to acids, corrosion, and most other chemical reactions.
- Gold is almost always found in nature in relatively pure form. A large amount of gold is mined in mines located on all continents except Antarctica. Among the world's largest gold producers are China, the USA, Australia and Canada.
- Some gold can also be found in fresh and sea water, but in very low concentrations, making it difficult to detect and extract.
Where Is Gold Used?
Gold has always played an important role in our lives.
For years it has been used to make the most valuable items such as Olympic medals, Oscars, Grammys and more.
In addition, the physical properties of gold mentioned above allow it to be widely used both in industry and in household items.Let's look at the key sectors using gold:
Jewelry. About 50% of all gold mined today is processed into gold jewelry. Due to its softness, durability and brilliance, gold is an ideal metal for creating beautiful things.
Investment coins and bars. Governments, banks and private investors buy investment gold coins and bars to preserve wealth and protect themselves in times of inflation and economic instability.
Electronics. You are reading this article online, which means that you are currently using a device that contains a significant amount of gold. Smartphones, computers and tablets use gold in their processors and connectors. You can also find gold in game consoles, printers, TVs, and just about everything electronic.
Medicines. For many years, gold has been used in dentistry and medicine, mainly because it is non-reactive and non-toxic. Gold injections are used to treat muscle damage and rheumatoid arthritis, and gold microparticles are used to treat certain types of cancer. Even
Covid tests use gold.
Space exploration. Gold is used in almost every spacecraft. In addition to being used in circuits as a conductor, spacecraft are equipped with gold-plated polyester films that reflect infrared radiation and help control the temperature of the spacecraft.
Finally, among many other uses, gold is also used in the manufacture of glass, clothing, cosmetics, and even books.
What does this mean for investors? Unlike any other metal, gold has special physical properties that make it an essential ingredient in many fields, including technology and space exploration.
Investor demand for gold coins and bars is also expected to continue to grow. For example, in the Eurozone, demand for physical gold has been steadily increasing since 2019 and is likely to remain high going forward.
Growing industrial and investment demand for gold can help keep the price of the precious metal stable in the long run, which will benefit your gold savings.
Key Aspects of Investing in Gold: a Bit of History
To begin to better understand the essence of investing in gold, let's look into the past. In world history, relatively recently, an event occurred on a global scale that changed the economy beyond recognition. Countries have agreed to abolish the so-called gold standard.
At this point, the link to the gold and foreign exchange reserve was canceled. Currencies issued by national banks received a rate pegged not to the precious metal, but to the exchange rate.
It is expected that the economy has become less stable, and crises are regular. For many, investing in gold has become a kind of hope that the precious metal will save capital. Moreover, some market participants still believe that the gold standard will return in one form or another. And for this belief there are, albeit small, but still grounds.
Investing in gold is not so easy. Prices for the yellow metal are being held back by regulators. From time to time they provide support to the economies of a number of countries. Also, the Central Banks and the US Federal Reserve can change the course by raising key rates. In addition, a decrease in the exchange price of the precious metal and negative trends for investment in gold may be facilitated by a partial easing of sanctions against China and a warming of relations between countries. However, only a part of the listed events are objectively expected in the foreseeable future.
What Affects the Price of Gold?
As with any commodity, a wide range of factors can affect the price of gold. So, if you want to buy gold, you first need to understand how, why and when its price can change.
Here are the main factors affecting the price of gold:
Inflation. When there is inflation, the price of gold usually rises. During inflation, consumer goods become more expensive, causing the US dollar to depreciate. Since gold is denominated in dollars (that is, expressed in dollars), its price also tends to increase along with rising inflation.
Supply and demand. As with any other good or service, the increased demand for gold, combined with the limited supply of precious metal mines and smelters, drives up its price.
Conversely, an oversupply of gold combined with stagnant or weak demand can cause prices to fall.
Monetary policy and the actions of the Fed. Monetary policy set by the Federal Reserve, the central bank of the United States, usually has a large impact on the price of gold. This is not guaranteed, but there is a general consensus that the price of gold usually rises when interest rates fall, and vice versa. However, historical data show that this is not always the case.
U.S. dollar. Since gold is a metal denominated in dollars, its price is usually inversely proportional to the dollar. It simply means that a stronger US dollar tends to keep the price of gold lower, while a weaker dollar is likely to push it higher.It is for this reason that gold is often seen as a hedge against inflation and the loss of purchasing power of money.
Buying Gold Bars
Gold bars come in a variety of shapes and sizes, including 50g, 100g, 250g, 500g, and 1kg. Pure gold bars are generally divided into two types: cast bars and minted bars.
Cast bars are usually engraved with a serial number and manufacturer information. Due to their simple shape and lower production costs, cast bars are usually cheaper than minted bars.
On the other hand, some minted bars may have artistic designs. Minted gold bars come with a certificate embedded in a protective sealed package, which can make them easier to sell.
Buying gold bars is the most traditional way to invest in gold for savings. About one thousand tons of gold bars are purchased annually in the world, which is 60% of the total investment in gold.
This method of investing in gold remains the easiest for individuals. They do not need to understand quotes, register on stock exchanges. All you need to know is the current purchase price. Next, you need to carefully select a bank, prepare the required amount and document. The purchase operation is carried out officially, as if you were buying a car.
So, to invest in gold in this way, you only need to come to an institution offering such a service, present a document, wait for the coin to be weighed and sign an agreement. Next, bank employees will receive the required amount from you.In exchange, you will be given an ingot and accompanying papers to it. They contain the exact weight, fineness, ingot registration number and other data. Such investments in gold are as simple and understandable as possible, but not without disadvantages:
To sell a gold bar at a bargain price, it is advisable to wait for the price to rise above 28% of the purchase price. This rise in price does not happen all of a sudden.
There are also problems with storage. When thinking about investing in gold, you will have to take care of safety. The precious metal stored at home needs a subsequent examination of authenticity. Bypassing the requirement will help rent storage space. This is also an additional cost when investing in gold.
When selling, a full inspection of the gold bar is performed. If defects appear on it during storage, this affects the price. So such investments in gold are risky. They are beneficial only in the long term, provided that the economy is unstable, and the currency significantly loses its purchasing power.
If you still decide to buy gold, pay attention to the following:
The purity of a gold bar is determined by its breakdown. The highest standard is considered to be 999 whole and 95 hundredths. It is in this sample that all ingots should be produced.
The minimum weight in which bars are produced is 1 gram. The largest size is 10 kilograms.
At the top, they provide information about:
- the organization that issued it;
- serial number.
Each issued ingot comes with its own passport and a certificate indicating its quality. Today, sales of products in two types of quality are allowed:
Upon purchase, a special cash order or check is issued, where the following information about the purchase of the product should be written:
- the total amount of the transaction;
- product weight;
- the number of products purchased;
- sample number;
- serial numbers of each purchased product;
- date and place of the transaction.
All manufactured ingots undergo special certification for quality standards. This is a necessary rule for the release of gold items on the territory of the country, controlled by the current legislation. All ingots must meet quality standards.
There are several types of precious coins for investing in gold, differing in the level of profitability. This parameter is highest for those that have not been in circulation before. The price of such an investment coin is built depending on the circulation (rarity), weight, year of issue and a number of other factors. There are also coins with different quality of minting and those that have already been in circulation for some time.
If you plan to invest in gold in this way, it is important to immediately decide on security issues. The main risk is associated with sellers. Therefore, it is highly desirable to have a good understanding of where exactly you plan to buy such a specific asset. The most reliable is the purchase of coins through dealers who have evidence of their expert competencies.
Coins can be investment, commemorative, anniversary. Accordingly, the benefit of investing in gold cast into coins will depend on the circulation they were minted. The average period required for a significant price increase is about 5 years. Annually, the cost can grow up to 18% of the primary one. This allows you not to worry about inflation in the market.
In world practice, at the moment, the largest circulation is the investment gold coin Krugerrand, which is produced in a very large circulation (46 million coins weighing 1 ounce), due to which its spot price is only 2% higher than the cost of gold in metal. At the same time, the price of a coin in European banks is only 5–6% higher than the price of a coin manufacturer. This makes the coin an attractive instrument for small investments.
Some coins also have collectible and historical value.The pricing of such coins to a lesser extent depends on the economic situation and is determined by the numismatic value.
Is it worth it to buy gold coins issued by a bank? This type of investment is not active. You can get a quick profit from the purchase of anniversary or commemorative bank products.
However, this process is complicated by some nuances.
First of all, this type has low liquidity. This is due to the fact that the demand for such products is quite small. The sales market is mainly based on collectors who collect such products.
Secondly, the price of such products is overpriced. All coins are issued in various variants and types of minting. They can be dedicated to memorable events or any events. The smaller the series of manufactured products, the more they will cost. It will also affect your income.
It is necessary to monitor the movement of the value of one or another type of gold moment. Not always from the moment of acquisition they immediately become liquid, and the price for them begins to grow actively.
Based on this, this method is not suitable for short-term types of transactions. Since the initially inflated cost can lead the investor's balance to a negative value if he decides to quickly sell it after the purchase.
Is it profitable to buy such products? At first glance, no, but such an investment instrument has one positive aspect. For the most part, after acquiring a gold coin, it immediately becomes cheaper by several orders of magnitude. After the entire circulation is sold out, auctions among the owners will begin.This is due to the fact that even though the overall demand for such products is small, there will be more people who want to purchase a coin from a particular series than its circulation.
Those who did not have time to buy on time will start looking for owners to purchase a product from them. Consequently, the price in such a transaction will be higher than it cost at the beginning. The more such transactions and demand for a particular series, the more you can get for it. Some sold copies pay for themselves up to 5-10 times, but it takes time to get the desired profit. It may take more than one year from the moment of acquisition for the demand for the coin to increase.
Exchange Traded Fund (ETF)
Gold-linked certificates, such as ETFs, trade on most stock exchanges just as freely as stocks. Typically, one or 1/10 ounce of gold is tied to an ETF certificate and placed in a special vault. Each year, the funds charge a commission for storage, gold insurance and various management costs, which is 0.25 - 0.4%. The payment of the commission is expressed in a decrease in the amount of metal tied to the certificate. The assets of the funds are backed by real gold, which is stored in vaults, which determines the high correlation between the price of the fund's shares and the price of gold. ETF funds, reflecting the growing demand for this instrument, buy 180-380 tons of gold every year.
The main advantage of buying ETF certificates, rather than bars or coins, is that the buyer does not have to bear the costs associated with holding gold, and the high liquidity of the instrument ensures low purchase costs – usually transaction costs do not exceed brokerage commissions in the stock market. ETF certificates are highly liquid instruments. For example, the average daily volume of transactions on certificates of the largest ETF fund SPDR (ticker GLD US) is $146 million.
The growing popularity of investing in the gold market through the purchase of ETFs has been a major factor in the growth of investment demand for gold since the early 2000s.The largest ETF funds, such as SPDR, iShares COMEX Gold Trust and ETFS Physical Swiss Gold Shares, are financially audited two or more times a year by world leaders from the Big 4, and the auditor Inspectorate International Limited fully recalculates the amount of gold in vaults twice a year . The funds only hold cash in their accounts to the extent necessary to pay for administrative expenses and do not contain any derivatives. In this context, we can safely say that investments in ETFs are no more risky than investments in physical gold, while they are cheaper than investments in coins and bars.
Unallocated Bullion Account (UBA)
The key advantage of unallocated bullion accounts is that they allow the investor to avoid the risks and costs associated with the transportation and storage of precious metal bars. Compulsory medical insurance accounts take into account the amount of precious metal in grams, while some banks offer urgent compulsory medical insurance accounts, on which interest is charged in grams of metal – usually in the range of 0.1 – 2.5% per annum.
Since banks do not purchase gold, they do not bear the costs associated with the purchase and storage of the precious metal, which makes this instrument cheaper. The main motivation for banks to participate in compulsory medical insurance programs is that they raise money at rates 2–4 times lower than those on deposits.
The key risk for the investor is that the MHI is not covered by the deposit insurance system: in the event of a bank failure, the depositor will have to wait for the delivery of the metal or compensation for its value in money at the exchange rate on the day of bankruptcy in the general queue of creditors.The volume of obligations under CHI accounts can be an order of magnitude higher than the backing of physical gold. In the event of improper hedging of price risks, the bank may incur significant losses, which will jeopardize the ability to fulfill obligations to customers.
In the context of investing in UBA, the main task of the investor is to choose a reliable bank with low spreads to precious metals prices.
Before opening an account, you must complete the following steps:
- study the offers of banks providing this service;
- after the bank is selected, check its licenses;
- study the reputation of the banking institution. This is very important, because in the current economic situation, many banks lose their licenses very quickly. A metal account cannot be insured, therefore, in case of loss of a license or other problems with the bank, it will not be possible to return the investment;
- prepare all the documents required for opening an account.
The downside of such investments, in addition to the risk of losing the deposit, is a low profitable percentage of the deposit. In many cases, it simply does not exist. This type is perfect for short-term speculative metal market transactions.
Shares of Gold Mining Companies
From time to time there is a thesis in the media that buying shares in gold mining companies can be a good bet on the gold market. However, upon closer examination, this statement looks too superficial.
The fact is that investing in shares brings investors additional risks associated with the operating activities of companies. Various emergencies regularly occur at gold mines: mines flood, drilling equipment fails, and contractors delay the delivery of equipment. The largest gold miners repeatedly violated their production plans, which negatively affected their stock quotes. At the same time, investments in gold mining stock indices are less affected by the operational problems of individual issuers.
The general mood of investors in the financial markets also has a very strong influence on the dynamics of shares. When economic expectations worsen, investors shift to government bonds and gold, thereby reducing their risks. When the market situation improves, interest in shares increases, which leads to an increase in their quotations. Thus, gold mining stocks are simultaneously affected by two opposite vectors, which leads to the fact that the correlation between gold mining stock prices and gold prices is low. This makes miner stocks a bad bet on the gold market.
Alternative Investment Solutions
There are also more specific formats of investments in gold, which have their own characteristics. For example, you can buy precious metal jewelry. However, their cost is tied not only to the price of the material. It includes the work of a jeweler, taxes, the store's margin, including incl. staff salaries. This reduces the likelihood of buying gold that is comparable in price to the prices of pure precious metal bullion on the exchange.
Also, jewelry gold has a lower standard than bank gold. So, a bank ingot is usually cast from a precious metal of 999 samples. Those impurities are minimal. Jewelry is made from alloys. For example, 750 or even 585 samples can be used for wedding rings (rather, it is the “standard” for this kind of product). Of course, such things are suitable for investing in gold if they are antique, rare, or branded. This is reflected in their sale price and ensures that the value of the asset increases over time.
Selling jewelry always requires expert judgment. This is an additional cost for the owner. Finally, the sale itself is not a quick process. If you want to get a decent price, you will have to look for a buyer for a long time. This is not the most convenient gold investment option for individuals.
The myth of buying jewelry to store value is very popular in developing countries. On closer examination, the utopian nature of this idea becomes apparent. This is due to the fact that the price of a piece of jewelry, as a rule, is higher than the price of the precious metal in the product, since the cost of labor of jewelers (up to 50% of the final cost), commissions of stores and brand premiums are added to the final price. However, artistic value is not taken into account when reselling – pawn shops buy jewelry as scrap at a significant discount to the original price, taking into account only the mass of the precious metal. In this context, it should be noted that the purchase of jewelry is justified only for its intended use – as an ornament.
It is also worth mentioning the issue of investing in objects of artistic and antique value.These investments are not inherently investments in precious metals, as their value is largely determined by the history associated with the item.
Another option is virtual accounts. So various electronic money systems offer to store funds not only in rubles, dollars or euros, but also in precious metals for a certain amount. Even the Webmoney platform has such an offer for investing in gold. In addition to the usual currency WMZ (dollar), there is WMG, which is equal to 1 gram of pure gold. A storage agreement is drawn up, and the guarantor is WM Metals FZE from the UAE.
Are such investments in gold safe, given that WebMoney is one of the veterans of the payment systems market, and a worthy and time-tested Emirati company insures your deposits? In fact, only partly. EPS do not insure the assets of their clients.
When investing in gold, you never know how national and international regulators will act in relation to the “surrogate money”, which is electronic “title units” and other digital assets. Also, all operations with payments are accompanied by a commission fee to the site. Individuals who invest in gold through such platforms always lose some of their income.
Rules for Investing in Gold
The market is constantly evolving and moving. Quotes jump, depending on demand or news, which have recently strongly influenced the domestic and foreign economies of many countries.
There are no regulators for such investments, since it is not possible to predict an event in the future that would affect the growth or fall in the value of the metal. You can trust the forecasts of major think tanks or eminent stock brokers, but they sometimes recoil.Therefore, when we invest our money in precious metals, we take risks. The risk is associated with the loss of part of the invested funds in the event of exchange rate fluctuations.
Investors can protect their assets by following a number of rules. They will help to minimize losses and, with the right actions, increase capital investments:
Decide for yourself what type of investment you need. To do this, you need to calculate the amount of investment and the timing of income. If there are large funds, then they can be directed to the purchase of ingots. At the very least, this will save money from inflation. It is better to invest in bullion for a long time. The larger the amount of investment, the more you can get from the sale in 1 year or 5 years. If the actions are aimed at obtaining quick profit against the backdrop of a growing exchange rate, use the type with the opening of a metal account.
Carefully study the dynamics of growth and fall in prices over the past year. This will help create a complete picture of future investment prospects. If prices have been declining over the past few months, then this is not the best time to buy. It is best to make a deal to buy metals on a price reversal. To do this, you should wait for the peak of the fall, and after the price starts to rise, you can open a deal.
Track price rates and analytical news related to metal quotes on a daily basis. If large amounts of money are involved, then you can use the services of professional brokers who themselves monitor all changes.Trading metals for a small amount is considered a big risk, unless, of course, the investor uses the 3rd type of investment associated with the acquisition of coins. Prices on the stock exchange are in constant dynamics. It may happen that after the purchase, the price will start to go down, respectively, and the investor's assets will decrease. If there are not many funds, then very quickly with such a decrease, the funds can be lost, and go into a negative value. As often happens after falls, growth can form.
However, all funds will already be spent. Always carefully calculate the amounts that you use in trading on the metal exchange so as not to lose them.
For a confident and stable growth of your savings, purchase gold bullion. This is not the fastest way to generate income, however, by far the most efficient and reliable in terms of overall profit.
Gold has been the main means of protecting capital from market fluctuations for decades. In the 2008 crisis, this metal was a lifeline for the economies of many countries. It was then that its liquidity rose to nearly $2,000 per ounce. Many who actively invested in metals in the 90s-2000s, with such a jump, practically became millionaires. Therefore, the main rule of gold trading is patience.
The Advantages and Disadvantages of Investing in Precious Metals
Despite all the difficulties, regular investments in gold can be profitable in the long run. Gold assets can always be cashed out if a crisis situation requires it. They will be liquid at any time, unlike stocks, bonds and other securities, electronic money, cryptocurrencies and digital tokens. Also, investing in gold always guarantees growth in the future. There will be no more metal on Earth. It cannot be printed like currency. However, you should not count on rapid growth and instant high income. Also, when investing in gold, you will need to monitor market dynamics in order to buy and sell the precious metal in a timely manner.