A question from Facebook. Alan is asking ‘How to invest in gold?.’ Probably Alan has been scared from the money-printing machine and the risk of inflation. And the question is probably in the heads of thousands of our readers.
So, today we will write about the topic on gold investment and how to invest in gold as a beginner. In May 2021 gold has recently hit an 11-year high trading at above $1900 an ounce.
1. Investing in physical bullion
This is the actual metal, and it is going to be either in coin or bar form, typically if you're buying from a reputable source this can be anywhere from a quarter of an ounce all the way up to 400-ounce bricks.
If you can afford a 400-ounce brick of gold, that’s great and as of mid-Jun ’21 this would be at about $750 000.
Physical bullion is priced about 1-10% over spot price. Typically, it's 1-5% percent at any given time but in 2021, with endless money printing, a lot of people are not trusting fiat currency and there's a lot of demand for precious metals ,that's why the price is going up, and now the dealers whether it's a coin shop or an online broker are charging closer to 10$ over spot.
If you don't know what spot price is, say gold is trading at a thousand bucks an ounce for example. If you add 10% premium to that you're probably going to be getting into that gold for about 1100 an ounce.
You also need to buy quality, as the most popular types are coming from mints or they're coming from highly reputable sources. So, you should only be investing in investment grade gold that's the whole point of the investment. You're looking for purity of 99.5% or higher.
Many investors only buy 99.9% or higher, and the most popular ways to invest in this as we mentioned are coins, because of its divisibility and its ability to be stored very easily.
If you want to make a comparison to silver, it's trading at about 1 ounce of gold can buy you about 50 ounces of silver. It means 50-times more space if you are to store silver. So gold is highly divisible and takes less space than silver to store for the same amount of money invested.
You can buy from any reputable online or offline merchant, and check if they discretely and quickly ship to you.
2. Investing in gold ETFs and gold funds
They trade exactly as stocks and ETFs, and are referred as paper-gold. And there are 3 types of these ETFs.
The first kind are investing in a company or an ETF or mutual fund or an intermediary that invests in the physical bullion, as we mentioned in the previous point.
You can pull your money together; they hold the physical bullion, and they basically mimic the spot price.
The second way are investing in ETFs or funds that invest specifically in gold futures contracts. These are companies that do exactly what the first example does, except they're not holding the physical gold and they typically don't take delivery. They're literally just betting on the future price of gold.
The third option you have are gold mining companies, which have become very popular over the past few years. You would be investing in ETF that owns a bunch of gold mining companies and is based on how those gold mining companies do.
As an example, a popular gold-holding ETF is Spyder gold shares – GLD. What they do is, as mentioned is they hold the physical bullions. So that ETF is typically going to mimic the spot price as mentioned.
You also have to take into consideration that the capital gains tax is going to be higher than other ETFs. So, when you dispose of your position, you would probably be paying a higher tax potentially up to 28%.
And the 4th option is investing in gold futures or options, and it is for advanced traders only. This is for people that either do this as a living or have been doing it for many years, and they know exactly what they're doing.
3. PROs and CONs of investing in gold
3.1 PROs of investing in gold
Number one is, that gold is a hedge against inflation. With the money printer printing trillions and trillions of dollars, it’s not surprising people lose their confidence in fiat currency. And they go back to something that is a historical store of value.
There's a finite amount of gold and it is considered hard money. This is all to battle decreased purchasing power ever since the US went off the gold standard in 1971.
Number two is all about portfolio diversification. Many people are investing in stuff linked to the financial markets, and gold is an opportunity to bring diversification to your portfolio, outside of just equities or stocks.
So, people need to provide true diversification and introduce that to their portfolio. And you can do that through precious metals such as gold.
And then final advantage is that it is easy to get started. All you need to do is literally go online, pick a reputable merchant and you can literally get started immediately.
ETFs and funds are just as easy as buying a stock so those gold ETF and funds if you already have an open brokerage account you can literally get started in investing in gold in a click of a button just by buying shares of those ETFs or funds.
3.2. The CONs of investing in gold
Number one is that it doesn't earn you anything. It is literally a pet rock, so if you invest in the physical bullion, you're going to throw it somewhere in a safe or at a bank deposit box, and it's literally just going to sit there.
There are no dividends no compound interest and no passive income coming from that investment. It is a double-edged sword, because it's not correlated, and it can't earn you passive income.
Number two is the cost for storage. If you keep it in the house safe – you might get robbed. And you may want to keep it at a bank and even then, although this is rare, what if there's a run on the bank, or what if that bank burns down. Of course, there's insurance, but the point is that the storage could become an issue and if you just want to keep the physical amount of gold in your premises you will also need to invest in some sort of security.
Number three – you are paying premium over spot and then you also have taxes as a collectible when you go to dispose of your position. Basically, the premium we mentioned is anywhere typically from 1-5%, and right now in this environment it's right around 10% and then this is also taxed as a collectible up to 28% of the value.
4. Final thoughts on gold investments
Gold is a great way to diversify your portfolio. It is a good practice for everyone to have at least 5-10% of either gold or precious metals to make up their portfolio.
At times, silver could be also under-priced, but gold has typically considered a better store of value.
The point is to preserve wealth over years – that’s the idea of the precious metals.
And a well-diversified portfolio would be: a little bit of precious metals, a little bit of real estate assets and then you have your typical usual suspects - stocks and bonds. Then with the hype over crypto nowadays – people are calling it virtual gold, but we still have to see if it will stand the test of time.
Also, if the interest rates do not go up in any time in the near future, it means that the gold is extremely valuable asset.
Hopefully, we managed to answer the ‘How to invest in gold’ question, and to give you some hints how you can get yourself started and add gold and other precious metals to your portfolio.