5 ways to buy and sell gold
Investors frequently look to gold as a safe haven when economic times are difficult or international conflicts, like what is happening with Russia and Ukraine, throw the markets for a loop. Some investors are looking for a safe asset with a proven track record of gains, and gold fits the bill because inflation is on the rise and the stock market is trading far below its highs.
Gold is popular among investors for many reasons, and it has qualities that make it a useful alternative to conventional securities like stocks and bonds. Despite the fact that gold is an asset that doesn’t generate cash flow, they still view it as a store of value. Because of the Fed’s actions to boost the economy, such as cutting interest rates close to zero, and government spending, some people view gold as a hedge against inflation.
5 ways to buy and sell gold
Here are five different ways to own gold and a look at some of the risks that come with each.
1- Gold bullion
Buying gold in bars or coins is one of the more emotionally fulfilling ways to do so. You’ll enjoy the satisfaction of seeing it and touching it, but if you own more than a small amount, ownership also comes with significant disadvantages. The requirement to protect and insure physical gold is one of the biggest drawbacks.
Purchasers of physical gold are entirely dependent on an increase in the price of the commodity to turn a profit. This is in contrast to business owners, where a company (like a gold mining company) can produce more gold and, as a result, more profit, raising the investment in that business.
A local dealer or collector may also be able to help you buy gold bullion. Online dealers like APMEX and JM Bullion are also options. Gold can be purchased from a pawn shop. As you are purchasing, take note of the spot price for gold, which is the price per ounce that is currently being offered in the market. To avoid paying more for a coin’s collector value than its actual gold content, you might want to trade in bars rather than coins. Here are 9 of the most valuable coins in the world (although they may not all be made of gold).
Risks: If you don’t keep your holdings secure, the biggest risk is that someone will physically take your gold from you. When you have to sell your gold, you run the second-largest risk. Receiving the full market value for your holdings can be challenging, especially if they are coins and you require cash immediately. Therefore, you might have to be content with selling your assets for much less than they would otherwise fetch on the open market.
2- Gold futures
Although physical delivery is not what drives speculators, gold futures are a good way to speculate on the price of gold rising (or falling).
The ability to use such high levels of leverage when investing in gold through futures is by far its biggest benefit. In other words, for a relatively small investment, you can own a substantial number of gold futures. You could quickly make a large sum of money if gold futures move in the direction you anticipate.
Risks: Investors in futures contracts face a double-edged sword when it comes to leverage. If the price of gold moves against you, you’ll have to put up a sizable amount of money to keep the contract open (this is known as margin), or the broker will close the position and you’ll lose money. You can therefore lose a lot of money on the futures market just as quickly as you can make it.
The futures market is typically only for experienced investors, and you’ll need a broker who supports futures trading—not all of the big brokers do.
3. ETFs that own gold
A great alternative to owning physical gold is to purchase an exchange-traded fund (ETF) that tracks the commodity if you don’t want to deal with the hassle of doing so or the frantic pace and margin requirements of the futures market. iShares Gold Trust (IAU), SPDR Gold Shares (GLD), and Aberdeen Standard Physical Gold Shares ETF are three of the biggest ETFs (SGOL). These types of ETFs aim to match the price performance of gold less the annual expense ratio of the ETF. As of March 2022, the expense ratios for the aforementioned funds are only 0.4 percent, 0.25 percent, and 0.17 percent, respectively.
The ease with which an ETF can be converted into cash at market value is another major advantage over owning bullion. Similar to selling a stock, you can trade the fund on any day the market is open for the going rate. As a result, gold ETFs are easier to trade and have greater liquidity than physical gold.
Risks: ETFs give you exposure to the price of gold, so whether it increases or decreases, the performance of the fund should be similar, again minus the fund’s operating expenses. Gold can occasionally be volatile, just like stocks. The biggest risks associated with owning the physical commodity, however, can be avoided by using these ETFs: safeguarding your gold and getting the most out of your holdings.
4. Mining stocks
Investing in the mining companies that create the gold is another way to benefit from rising prices for the metal.
Given that they can profit from gold in two different ways, this alternative may be the best one for investors. First off, the miner’s profits increase along with the price of gold. Additionally, the miner can gradually increase production, creating a double-whammy effect.
Risks: You should thoroughly understand the business before investing in individual stocks. There are a lot of extremely risky miners out there, so you should be careful to choose a reputable participant in the market. Avoid small miners and those who don’t yet have a mine that is producing as much as possible. Finally, mining stocks can be volatile, just like all stocks.
5. ETFs that own mining stocks
Don’t want to learn too much about specific gold companies? Then investing in an ETF might be very wise. You can gain exposure to the largest gold miners on the market by using gold miner ETFs. You won’t be significantly harmed by the underperformance of any one miner because these funds are widely diversified across the industry.
VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Junior Gold Miners ETF (GDXJ), and iShares MSCI Global Gold Miners ETF are some of the larger funds in this industry (RING). As of March 2022, those funds’ expense ratios are 0.51 percent, 0.52 percent, and 0.39 percent, respectively. The benefits of owning individual miners are combined with the security of diversification in these funds.
Risks: While the diversified ETF shields you from any individual company failing, it won’t shield you from something that harms the entire sector, like persistently low gold prices. Additionally, keep in mind that not all funds are created equally when choosing your investment. While some funds invest in senior miners, which are less risky, others do so with junior miners.
Why investors like gold
“Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier,” says Juan Carlos Artigas, executive director of research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain stretches, though it doesn’t always beat them.
- Liquidity: If you’re buying certain kinds of gold-based assets, you can readily convert them to cash.
- Low correlations: Gold often performs differently from stocks and bonds, meaning when they go up, gold may go down or vice versa.
In addition, gold offers other potential advantages:
- Diversification: Because gold is generally not highly correlated to other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
These are just a few of the main advantages of gold, but like all investments, it does have risks and drawbacks.
Even though gold occasionally performs well, it’s not always obvious when to buy it. Since gold doesn’t generate cash flow on its own, it can be challenging to tell when it is a good deal. With stocks, however, there are more obvious signals based on the company’s earnings.
Furthermore, since gold doesn’t generate cash flow, investors must rely on someone else to pay more for the metal than they did in order to profit from gold. Owners of a business, such as gold miners, can profit from both the rising price of gold and the business’s growing profits, in contrast. Thus, there are numerous ways to invest in and profit from gold.
Bottom line
Not everyone should invest in gold, and some investors prefer to stick with making bets on companies with steady cash flow rather than hoping that someone else will pay more for the shiny metal. For this reason, renowned investors like Warren Buffett advise against buying gold and instead recommend investing in cash-generating companies. Additionally, stocks and funds are simple to own and highly liquid, allowing you to quickly convert your position to cash if necessary.
The best brokers for ETFs are listed below, making it simple to get started purchasing a fund.
