For an investor, gold is a glittering temptation. After all, it is a relatively safe commodity when it comes to investment returns. But if you think investing in gold is foolproof, it is far from that. Many investment planners consider gold as a hedge to protect your wealth against the risk of loss. And they are quite right as investing in gold, traditionally speaking, has been used by generations as a hedge against inflation.
Worries over inflation still hold and as a result gold is considered as a good investment by many even today. If you are contemplating investing in gold, there is more than one reason to do so. To begin with – it is a protection and insurance against:
• Global uncertainty
• Currency debasement
Besides, there are several advantages of investing in gold.
Why Invest in Gold?
This precious metal plays a major role in your long-term investment and financial strategies. Though there are different opinions about using gold to protect against inflation or about its effectiveness, there is no denying that gold protects and also improves your purchasing power. In addition, it helps manage risk.
When determining its role in a portfolio i.e. in inflation protection or currency hedging, it is essential to use and analyse gold as a strategic component and not in isolation. As far as investors’ portfolios are concerned gold helps in numerous ways, including:
• Protecting their global purchasing power
• Reducing portfolio volatility
• Serving as a premium liquid asset
• Minimising losses during systemic market risk
One significant factor about gold is that, you can get immediate cash for gold even in situation when selling of other assets can cause huge market-to-market losses.
It’s never too late to invest in this precious metal, regardless of its price. However, there is a thumb of rule to follow: the dollar cost averaging. Put a particular amount of money for investing in gold, no matter what the price. This strategy will lessen the downside of gold investment and also spreads risk out over a long period of time, especially for an average investor.
You can invest anywhere between 3 and 10 percent in gold to be on the safer side. Here are 4 ways you can invest.
1. Gold Bullion
You can buy physical gold such as coins, jewellery and bars and store them in safety deposit boxes in bank or in your home. Besides, you can sell gold jewellery and coins for cash to your local gold buyers.
If buying bullion or gold coins, try to avoid big premiums. It must be close to the spot price; maximum 10 percent premium is still fine. The higher the premium you pay, the less profit you are likely to make. Gold coins that come from the national mint are made and sold typically at a 4 percent mark up and the retailer’s margin is likely to be 1 to 3 percent.
Here’s how you should calculate the gold premium:
• Subtract spot price from the quoted gold price
• Divide the number by the spot price
• Multiply it by 100
It is important to establish why you are buying gold bullion to avoid getting ripped off. For example, if you are buying it as a long term investment, try to negotiate a price that is closest to the spot price otherwise you will have to sell it for a much higher price in order to make profit.
2. Gold ETNs
ETNs or exchange-traded notes are more risky, although they are flexible and you have the option to trade them long or short. However, they have no principal protection. These debt instruments track an index where you give money to the bank for an allotted period of time. Upon maturity the bank will pay you a return, which is based on the performance of the gold futures market.
This means, there are chances of losing all your money.
3. Gold ETFs
Gold exchange-traded funds are a great way to invest in this precious metal without storing it physically. When you buy ETFs, you own gold equivalent to 1/10 an ounce. In case the investor demands outdo the available shares, golf ETF issuers need to buy more physical gold and convert it into stock.
On the contrary, when investors sell and if there are no immediate buyers, the issuers redeem the gold and sell the gold equivalent.
4. Gold Miner Stocks
This again is associated with higher risks as they trade with the larger equity market. When buying gold-mining stocks, make sure the companies you are opting for have strong production and reserve growth. Also, they must have proper management and good inventory. Buy stocks from companies maintaining consistent production or at least have smaller-cap companies under their wings.
Most importantly, do not buy stocks from small gold miners, especially those in exploration phase and have no cash flow. Their chances of actually striking gold and becoming profitable are less. Besides, very few companies become takeover targets.
Investing in gold is indeed a good option to hedge financial uncertainties. However, it is recommended to stick to gold coins and bullion as they will serve you under most circumstances. You must also check the background of the company with which you are doing business. Finally, it is imperative to ensure that your gold ownership vehicle truly reflects your investment and financial goals and aspirations.