For centuries, gold has been considered a symbol of wealth and stability. It is still one of the most popular investment options, among both experienced investors and amateurs. Today, virtually anyone can invest in gold. The choice of options is really large: coins, bars, jewelry, ETFs connected with the precious metal, and, finally, shares and bonds of mining and processing companies. This most valuable metal is a top choice for long-term investors, but is also appreciated by speculators.
This guide was made to answer one widespread question: is investing in gold really profitable? How to invest in gold to reap the highest possible profit?
What is the phenomenon of gold?
When did the era of investing in the king of precious metals begin?
Advantages and disadvantages of investing in gold
What are the ways to invest in gold?
Is it possible to lose on gold?
When is the best time to sell gold?
Is it profitable to invest in gold in 2023-2024?
Gold was once part of the monetary system. This has not been the case for a long time, but the metal nevertheless plays an important role in the world of finance. Today, gold neither backs the value of any currency, nor is applicable as a means of payment.
However, this does not pose any obstacle for gold to remain on its pedestal as the most frequently chosen investment instrument. This is due to the unique properties of the metal. First of all, gold is rare in nature and its reserves are limited. Secondly, the quality of the metal does not degrade over time. Hence, it is a scarce and valuable asset.
History shows that gold has played a very important role for people since the beginning of time. In the 1870s, people even decided to base the international monetary system on it. This was determined by the characteristics of the metal – its rarity and general acceptability.
Gold was the world's money and the standard of comparison for various currencies until the outbreak of the First World War: this was when central banks stopped maintaining parity reserves of this precious metal. Another breakthrough moment was the post-war great economic crisis (1929). Deviation from the gold standard allowed for an expansionary monetary and fiscal policy. Governments allowed themselves to print any amount of money in order to activate unused processing capacity, increase demand, and limit the disastrous effects of the crisis.
There are no perfect investment instruments: no single asset will simultaneously protect the value of your money over time, bring above-average profits, and at the same time, not involve any risk. However, gold comes somewhat close: the risk of investing in gold is actually lower than, for example, shares on the stock exchange or currencies on the Forex market.
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Some of the disadvantages of investing in gold can be seen as advantages. For example, with physical gold, you have tangible proof of value, and can exercise personal control over your investment.
So, how to start investing in gold? You can purchase it in different shapes and forms:
Bullion coins and gold bars are called "physical gold" or "investment gold". It is characterized by a pure composition (99.9% gold, not a compound) and no aesthetic value. It has no value for collectors. This is a perfect example of a long-term asset. Experienced investors recommend keeping physical gold for a minimum of 10 years and expanding your collection during this time.
If you are wondering which physical gold to choose, you should know that both gold bullion coins and bars have the same benefits. However, sometimes the fees for selling coins are so high that it is only worth buying a large amount of them.
If you decide to invest in physical gold, choose only products from reputable producers – they are much more marketable. If you plan to buy investment gold from the secondary market, choose only bullion coins and bars that are in very good condition and packed in protective certipacks. These are a guarantee of authenticity.
Paper gold is a financial instrument related to this precious metal. It is not physical gold in the form of bars or coins. However, it also allows you to make money when the price of investment gold changes.
There are several types of so-called “paper gold” available on the market:
Fully-backed bullion ETFs actually purchase gold bars and bullion coins. Some of them even allow the owner to request physical gold. Purchasing ETFs exposed to precious metals should be a medium- or long-term investment.
There are also funds that invest in gold futures contracts, the results of which mimic changes in gold prices on financial markets. It is worth paying attention to the possible exchange rate risk and hedging by the fund.
Futures contracts do not involve the purchase of a specific amount of gold. The most popular type of trading is CFDs, i.e., contracts for difference. In this case, investors can bet on a growth or decline in the price of gold. CFDs feature a financial leverage mechanism that allows you to achieve large gold gains with a relatively small capital commitment, but on the other hand, large losses are also possible in the short term. Therefore, these are high-risk instruments. Futures contracts are the favorite instruments of day traders, i.e., very active investors who open and close their positions during one trading day.
Paper gold also includes shares of gold producers or mining companies. The prices of such companies move in the same direction as the prices of the king of precious metals. However, they are characterized by much higher dynamics, and therefore extra investment risk.
An alternative may be participation in ETFs and/or funds investing in shares of companies that mine or produce gold bars and coins. Such instruments are a safer option than purchasing shares of these companies, thanks to their diversification.
Investing in gold jewelry requires extensive knowledge and intuition. Most types of jewelry lose value over time because the products are produced in large batches and in accordance with current trends.
The price of gold earrings, chains, bracelets and necklaces includes not only the value of the precious metal, but also the jeweler's margin – it may be several times higher than the value of the material. The buyer will also have to pay VAT. Keep in mind that jewelry is usually not made of so-called pure gold, because it is easily scratched during everyday use.
Investing in gold collector coins only makes sense if you have sufficient knowledge about them. Not all coins eventually increase in value. Besides, experienced collectors usually require coins in impeccable condition, properly packaged and coming with certificates of authenticity. Typically, only bullion coins that are used for numismatic reasons can be sold at a profit.
How to invest in gold on the stock market? Most gold mining companies are publicly traded and listed on major stock exchanges such as the New York Stock Exchange (NYSE) or the Toronto Stock Exchange (TSX). You can buy their stocks through a brokerage account that provides access to these exchanges.
If investing in gold on the stock market is not a suitable option for you, note that some gold producers may offer Direct Stock Purchase Plans (DSPPs), allowing investors to buy shares directly from the company. This method bypasses traditional brokerage accounts, but may have specific eligibility requirements or limitations.
Yes, because like with any other asset, the price of gold depends on a number of factors. It can decline due to the following factors:
The rule is simple: it is best to buy any investment instrument when it is cheapest, and sell it when it reaches a much higher price. (Buy low, sell high.)
Even though a large number of investors purchase physical gold during crisis periods, this is not the best time to buy it. It becomes more expensive at the peak of the crisis and cheaper during the period of stabilization and prosperity. If you tend to invest in risky assets, e.g. shares of various companies, gold is not the best option. It is regarded as a safe haven in difficult times.
2023 is marked with high inflation and record-high interest rates, so is it really a good time for purchasing gold?
It seems that the crisis is not over yet, which creates some room for the rise of the gold exchange rate in the near future. So invest in gold if you want to protect your savings and can afford a longer investment horizon.
Why is it worth investing at such a time? Because gold is resistant to inflation, unlike fiat currencies, which can be printed. There is stable demand for gold, and, reinforced by investors redirecting their finances towards safe havens, it can bring significant profits even in a shorter time.
If you look at gold price charts, you will see that its cost is growing decade by decade. Hence, its value only grows, but slowly and steadily.
You can buy as much gold as you want, but if the worth of your purchase in cash or its equivalents exceeds $10,000, you will need to fill out a Form 8300. Important information requested on this form includes your name, address, and social security number.
When choosing gold bars, pay close attention to the metal content, the fineness, and the country of origin. The most well-respected gold bar companies are Argor Heraeus, PAMP Suisse, Perth Mint, Valcambi, and Scottsdale.
How to invest in gold most profitably? Buy cheaper. The least expensive countries to purchase gold are Hong Kong, Saudi Arabia, Switzerland, UAE, USA, Singapore, Canada, and Cayman Islands.
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