There are multiple ways for a person to invest in gold. Some are direct investments, and others are indirect. The objective of the direct investment route is to own physical gold, and the aim of the indirect method is to receive the financial benefits of investing in gold. In this article, we will explore the eight forms of investing in gold and the advantages and disadvantages of each way of investing in gold
In “The Alchemist,” Paulo Coelho narrates the story of Santiago, an Andalusian shepherd boy. The boy follows a recurring dream to find a gold treasure in the desert. He meets an alchemist who can change any metal to gold on the way. The Portuguese novel with the story of an Andalusian boy transcended boundaries to become one of the most read novels in history. The book connected with every reader due to the global fascination with gold. And for centuries, people have searched for ways to own gold.
Today acquiring gold is not as challenging as in the story. There are multiple ways for a person to invest in gold. Some are a direct investments in gold, while others are indirect investments. The objective of the direct investment route is to own physical gold, and the indirect method aims to receive the financial benefits of investing in gold.
This article will explore the methods of investing in gold and the advantages and disadvantages of each form of investing in gold. The ways of investing in gold are-
- Physical Gold- Bars, Coins
- Gold Jewelry
- Allocated gold accounts
- Internet investment in Gold
- Gold Exchange Traded Fund
- Futures, Options, and forwards
- Gold mining stocks
- Investing in Gold Loan finance companies.
Direct investments in gold refer to buying gold as an investment to reap returns from the price appreciation of the commodity. Generally, direct methods of purchasing gold entitle the buyer or his agent to take possession of gold. In direct investments, the return on investment is purely based on the appreciation of the price of gold. This method of investment has the least correlation with economic conditions and other asset classes.
Direct methods of buying includes-Buying Gold Bars, bullions, coins, and jewelry, Buying allocated gold accounts, and internet investment in gold.
Generally, investment in gold through the direct method can be an absolute hedge against all economic and political risks. Since the owner holds the gold, they can exchange gold for money whenever he requires it. As direct methods are not dependent on intermediaries, the economic conditions and financial situation of intermediaries will not affect the liquidity of gold.
1. Physical Gold- Bars and Coins
One of the most popular forms of buying gold for investment purposes is buying gold coins and bars. According to the World Gold Council Gold bars and coins account for 66% of gold investment demand and 25% of all gold demand. Gold coins are available in 1.55grams, 3.1 grams, 7.8 grams and 15.6 grams and 31.1 grams (1 troy ounce).
Gold bars are available in 1,10,20,50,100 & 1000 grams. Most individual investors buy gold bars and coins in these sizes. But gold is available in many sizes and specifications.
Most Central Banks and large institutions buy London Good Delivery Bar (LGD). These are known as gold bullions weighing 400 ounce (12.4 Kilograms of gold equals a 400-ounce bullion gold)
Buying gold coins and bars may require a premium than the spot price of the gold.
Advantages of Buying Gold Coins, Bars and Bullions
The Advantages of buying gold bars and coins include the opportunity to possess real gold. These are a store of wealth that can be held by individuals and can keep out of the reach of government and other regulators. When Banks and Governments freeze people’s assets in distress or default, Physical gold can be of help. Holding physical gold bullion as a portion of personal wealth ensures financial support in the most pressing times.
There is no risk of financial distress of intermediaries like ETFs or Stock due to investors holding assets directly.
Following are the benefits of owning physical gold in bars, coins, and bullions.
1. Physical access to the asset-
Investing in gold by buying physical gold bullion and bars and coins gives the investor the pleasure of owning the physical asset. By having gold billions of bars in custody, individual investors can safely carry and transport significant value of money.
2. Non-recourse asset-
An essential aspect of investing in gold is diversifying people’s wealth from financial instruments to non-financial instruments like gold. Wealth in the form of financial assets and real estate is highly regulated. Banks or other lenders can access the financial assets to settle the due if an investor files for insolvency. But investing in gold bars and under physical custody limits banks’ access to obtaining the assets.
3. Complete insulation from financial market risk-
As a store of value, gold has been considered an excellent tool for diversification to hedge risks. Having gold physical bars or coins reduces the dependency on the financial system for accessing and transacting gold. In an extreme situation like war or sanctions on countries, all other asset values plummet. The value of gold bars and coins increases in extreme distress conditions.
Disadvantages of Buying Gold Coins, Bars and Bullions
Main disadvantages of buying and holding gold coins, bars and bullions are high storage cost and insurance cost. Another risk of owning physical gold is the risk of theft or accidental loss. Evaluating and ensuring the purity of gold bars and coins are another risk factor to consider. It is advised to always buy gold coins and bullions from banks or reputed dealers. World gold council insists that buyers of physical gold should ensure authenticity of coins and bars with assay marks.
Below are the disadvantages of buying gold coins, bars, and bullions.
1. Cost of storage and insurance
Storage of God bullions and bars are costly with banks and bullion dealers. Additionally, insurance costs are also high. The cost of carrying gold increases with time, reducing the return on investment from gold.
2. Risk of theft
Gold stored as bars and bullions has a high risk of theft or loss. Investors need to spend a significant amount of money and effort securing gold.
3. Ascertaining the purity of gold bullion.
Investors should be buying gold bars from banks and reputed bullion dealers to ensure the purity of the gold bars and bullions.
2. Buying Gold Jewelry
Although buying jewelry is not the best way to invest in gold, there is no better investment gives both financial and psychological benefits like gold. Almost half of the gold demand comes from jewelry demand. Of which the demand from India and China is the most significant. Jewelry demand continues to increase due to the cultural and social relevance in India and China. Jewelries are made of various purity levels of gold such as 24 carat,22 carat, 18 carat and 14 carats.
It is important to note that the transaction cost is higher when you invest in gold jewelry. There will always be a markup from sellers in the form of design and making charges when you buy and a similarly a mark down when you sell jewelry. Purely on a financial valuation metric investment in gold jewelry is not a great investment due to the high transaction cost.
Advantages of buying gold jewelry
The most important advantage of buying gold jewelry is the physiological benefits. The value of gifting gold jewelry to your loved ones or buying it for yourself is not measurable. As an ornament, you can wear it, and as an investment, you can sell it when you need it. Generally, buying gold jewelry is easy. It is available in the smallest quantities, which helps anyone start investing in gold. Another advantage of buying gold jewelry is that it promotes saving habits and helps create wealth for individuals and households. No other item retains its value even after lifelong use, like gold.
Like gold coins and bars, gold jewelry can be a store of wealth outside the reach of governments and authorities. Jewelry will help maintain a separate non-recourse asset in the case of any default of loans and any sanctions.
The benefits of investing in gold jewelry are following.
1. Psychological benefit of owning jewelry
Gold is considered an investment, but one should not underestimate the psychological benefits of owning gold ornaments. Gold jewelry is an excellent way to spend money on consumption and still form parts of an investment portfolio.
2. Convenience in buying and selling
Gold jewelry is convenient to buy and sell due to the availability of the number of jewelry shops. Jewelry purchase does not require any dmat account or any formal KYC procedures.
3. No storage cost for small quantities
Gold jewelry in small quantities does not require storage costs. Individuals wear ornaments that don’t need any management expenses or storage costs.
Disadvantages of Buying gold jewelry.
Primary disadvantage of buying gold jewelry is that a lot of psychological value is not derived if we don’t wear jewelry. High transaction costs when buying and selling jewelry in form of manufacturing charges and wear and tear mark downs, drains a portion of price appreciation of gold. Jewelry also has the risk of theft and will have high storage and insurance costs. confirming the purity of gold in the jewelry is another challenge with buying gold jewelry. The World Gold Council insists on ensuring hallmarks on all gold jewelry.
Following are the disadvantages of investing in gold jewelry.
1. High transaction costs
Making charges and sales markdowns are high for gold jewelry. In some cases, making charges on gold jewelry reaches 15% of the value of the gold. This high transaction cost makes gold investment in jewelry an unattractive investment option.
2. Risk of theft of the jewelry
Another disadvantage of owning gold ornaments is the risk of theft and loss. To avoid theft, investors need to store the jewelry in a safe deposit with banks costing annual management fees.
3. Risk of ascertaining the purity of gold
Ascertaining the purity of gold in an ornament is a challenge. Specialized skills are required to know the quality of gold in a piece of gold jewelry.
4. Reduced liquidity
Lower liquidity is another challenge in investing in gold jewelry. Often, selling gold ornaments becomes complex, even with the sellers of the gold jewelry. This reduced liquidity and high selling costs reduce the attractiveness of investing in gold.
3. Buying to allocated gold accounts
If you are a super wealthy person or investing for an institution an excellent way of investing in gold is buying in to allocated gold accounts. Allocated gold accounts are accounts provided by banks and bullion dealers to buy, hold, and sell gold. They operate similarly to currency bank accounts. Due to the minimum investment size of 1,000 ounce of gold, this option is not available to everyone.
An investor holding an allocated gold account can use the account like a bank account. He can stores his gold and can buy, sell or transfer the gold through a dealer or bank. The fees and charges of allocated gold accounts will vary depending on the size of investment and facilities of the bullion bank.
Advantages of Buying gold to allocated gold account
Buying gold into allocated gold accounts is the most secure way of investing in gold. Insurance and storage costs will be managed by the bullion bank and generally included in the charges. Gold in the allocated accounts will be demarcated for the account holder. This is the preferred way of holding gold for the wealthiest people.
Disadvantages of Buying gold in allocated gold account
The minimum investment size available for Allocated gold accounts is 1,000 ounces. Not everyone has access to this mode of acquiring gold. Allocated gold accounts are usually associated with high management costs which includes security and insurance costs.
4. Internet Investment in Gold
Internet investment in gold has become increasingly popular. It allows investors to buy and store physical gold online. Since this is a recent development, the World Gold Council advises investors to be cautious on the type and size of their investments.
Investors in Internet investment in gold must go through a detailed due diligence process. This is to evaluate the provider credentials, features and constraints investment.
5. Buying Gold ETF
Exchange Traded Funds are one of the cheapest and simple way to invest in all assets. The same is true for Gold ETFs. There are two types of Gold ETF’s, those which buys physical gold. And the other invests in gold mining companies and track the performance of mining company stock prices. The ETF’s that invest in Physical gold is a pure play gold investment strategy. ETFs invests in gold mining stocks track gold price and other economic factors.
iShares gold trust is one the major Gold ETF directly investing in physical gold. While VanEck vector gold miners ETF invests in Gold mining companies.
Advantages of Investing in Gold ETF
- High Liquidity-
Gold ETFs are liquid, as it is traded like stocks and bonds. Unlike buying physical gold, investing in gold ETFs provides high liquidity and friction less opportunity to buy and sell gold.
- No risk of theft-
Since ETFs don’t give physical gold to the investors, there will be no risk of gold being stolen.
- No storage and insurance cost-
As ETF’s are financial asset, there will not be any storage or insurance cost for the investor. The cost of storage and insurance is generally included in management fees
- No Quality assurance risks-
physical gold bars and jewelry, requires specialized skills to ensure purity. Investing ETFs is a way to avoid the risk of low quality of gold.
Disadvantages of investing in Gold ETFs
- Management fees or expenses Ratio-
EFTs charge management fees, which normally includes insurance cost and storage cost and management expenses. Over long periods, this management fees can have a dent on the actual performance of gold.
- No possession of real gold-
Gold ETFs can be redeemed for money only and no option to receive real gold. This limits the ETF route of gold investment’s ability to diversify away from financial market.
To Know more about world’s largest ETFs follow the link
6. Buying Futures, Options & Forwards
Another indirect method to invest in Gold is through derivatives such as Forwards, options and futures. Although this tracks the movement of gold prices, it requires specialized skills and familiarity with financial markets.
The advantage of gaining exposure to gold through derivatives is it allows investment in low values. Contracts and options can be bought and sold in small fractions, helping investors to gain access to gold.
Disadvantage of using derivative to invest in gold is that it is only a financial trade. This method is used mostly by traders and large gold investors to hedge the risk exposure to fluctuations in gold price.
7. Buying Gold mining stocks
Stock price of gold mining companies tracks the price performance of gold. Generally, when gold prices increase gold mining stocks performs better. But stock price tracks the business performance and expectation of the company, and not just gold price changes.
The advantage of investing in gold mining stocks is like ETF. Gold mining stocks are highly liquid, like any other financial asset. The disadvantage of investing in gold mining stocks are that they are not purely gold investment, and they don’t diversify away from financial market risks.
8. Investing in Gold Loan Finance Companies
Many Non-Banking Finance Companies (NBFC) engage in lending money to customers against gold. Gold loan companies provide monetization opportunity for retail gold inventors. Since such banks take gold jewelry as collateral for loans, over time they acquire large inventory of gold in assets. Investing in the stock of these companies is another way of indirect investment in Gold.
Stock performance of these companies tend to be correlated with performance of gold. However, investing in stock of these companies may be risky for some investors.
In a nutshell there are multiple ways to invest in gold directly and indirectly. The suitability of method of buying gold varies depending on the circumstances and preferences of individual buyers. Gold is always an important asset to be included in most individual portfolios
Read along the forecast of gold prices.https://moneygraphit.com/2021/07/31/gold-price-forecasts/