Long before the stock market, gold has been a trade asset - and it remains important today.
Gold bullion or gold ETFs allow investors to have better opportunities - but is it a good idea to invest in gold in 2023?
Continue reading to find out!
Since the beginning of the stock market, gold has negatively correlated with stocks, while it correlates rather well to inflation expectations. However, gold has been a key financial asset for a long time, and it stored lots of value centuries before the stock market.
Gold coins once weren't an investment asset; they were used as currency. Even before that, gold was a symbol of wealth and was held in treasures millennia ago.
In a financial sense, gold bars and bullion gained traction in the 19th century. Many nations used the gold standard - which consists of fixing the currency value to the current gold price, and banks would allow an individual to convert their fiat currency from the bank into gold. The gold standard has been abandoned, and now most countries use a freely floating fiat currency.
Gold prices remained almost relatively stable until the global economic crisis in 2o08. Back then, the price of physical gold doubled in the next couple of years, making gold a good investment. The rise of prices was affected by central banks using quantitive easing or QE for short as inflation expectations increased dramatically.
QE, in theory, should create inflation, and the gold prices follow the inflation's rise of general prices, making physical gold a good hedge against inflation.
How to Invest in Physical Gold?
One of the top things about investing in gold is that, according to personal circumstances, you can invest in it in many different ways. You can add gold stocks to your trading accounts; you can invest in pure gold bullion, the gold market, or a gold mining company - endless possibilities.
So, let's discuss below all the best ways to buy gold.
Physical Gold - Gold Coins & Gold Bullion
The most famous way to invest in gold is to buy physical gold - such as gold bars and coins. The gold bullion can be purchased from a reputable dealer or an online broker, as you would buy stock.
Some investors can also buy gold jewelry or a gold product. However, buying gold jewelry isn't the best idea, as it comes with a huge markup because of the labor involved in making it.
Physical gold comes with many perks, such as you being able to sell it anywhere in the world, but it comes with one issue - storage. Physical gold takes up space and can be stolen, so you should insure the gold you own to cover yourself against loss or theft.
Investing in gold stock or gold mining companies may be a simpler process compared to buying physical metal. You can use your brokerage account to buy gold stock, which is considered trading on the stock market.
Several large, notable stocks in the gold mining sector are:
- Barrick Gold Corp. (GOLD)
- Newmont Corp (NEM)
- Franco-Nevada Corp (FNV)
The key point to remember is that gold stock's value correlates with the gold prices, but it's also based on the current profitability of the chosen gold mining company. So, investing in a specific company can have the same risk as investing in any other kind of stock. That is why we advise you to invest in gold stocks as a part of your diversified portfolio.
Gold funds are great if you want to invest in gold but do not have the time to track gold stocks yourself or want to participate in the hassle of storing physical gold. These funds, such as the Gold and Precious Metals Fund, are led by pro investors, and their goal is to beat passive index funds.
In this case, you aren't buying gold; you are just buying paper backed by some sort of debt or equity. The value of the gold mutual funds doesn't exactly match the gold's price on the market, and the investment may not track the price of gold.
ETFs or exchange-traded funds are a solution if you don't want to deal with the problems of storing and insuring gold and other issues. Gold ETFs enable investors to get their hands on the benefits of gold without dealing with storage.
Exchange-traded funds track the physical commodity, but they are considered more liquid and generally cheaper than owning physical gold.
Futures & Options
Gold futures and options are considered the riskiest ways to invest in gold, but they offer the highest returns if everything works out. Futures and options fall in the category of derivative; in other words, their value is based on the underlying asset, or in this case, gold.
To purchase gold futures or options, you will need an online broker to sell these products. Once you have set up the account, you can buy and sell gold on the online platform, and the platform can charge a fee or some interest rates for you to use the platform to trade gold.
If this is the route you want to take, it's important to track your investment so you can sell it if it declines in value.
Gold Mining Companies
Investing in a private gold mining company is not a well-known way to invest in gold, but it can certainly be lucrative. This is generally treated as a speculative investment, so there is no sure way to tell if you will earn a lot of money this way.
Is Investing in Gold a Good Idea in 2023?
If you are worried about the current inflation or the uncertainty of the world's geo-political environment, then investing in gold may offer peace of mind with financial uncertainty of the world. Looking at the short-term, gold can be as volatile as any other asset, but looking at long-term investing, gold prices do not fall drastically - they retain their value.
That being said, when you start thinking about investing in gold, consider your investment portfolio. You can pick between gold stocks, physical gold, gold ETFs or gold mutual funds, and gold futures or other precious metals.
No matter what kind of gold you choose for your investment portfolio, we advise you to invest no more than 10% in gold. Every investment strategy carries risks, and owning physical gold does too - which is why you should consider gold mutual funds, gold ETFs, or most importantly, physical gold, because it's the safest choice.
So, the thing is - buying gold is a good investment, but you should be careful about the way you're doing it.
Why Is Investing in Gold a Good Idea?
To invest in gold, you should know what makes it a good investment. There are several reasons why this precious metal is a must-have in your portfolio.
Below, we will dive into several reasons why owning physical gold or gold futures is something you should consider.
Preservation of Wealth
Gold is important in preserving wealth in modern times, as it has played an important role in previous generations. Paper money hasn't been as good at preserving wealth if you look at the history of fiat currencies over the centuries.
Let's explain it like this - if you had an ounce of gold fifty-ish years ago, you could hold gold or exchange it for about 35 dollars, which was enough to buy a fancy bike at the time. If you held onto that ounce of gold and exchanged it for US dollars today, you could still buy a fancy bike. However, if you exchanged it for dollars fifty years ago - you certainly couldn't buy a fancy bike for 35 dollars now.
An ounce of gold is still worth the same, but the Us dollar isn't, mainly due to inflation.
Hedging Against the Dollar
Gold can be a great hedge against the dollar, as it protects against inflation and declining value. As inflation rises and the dollar falls, gold's value appreciates.
When investors are faced with losing the value of their money, they will look into hard assets that maintain value, such as gold bars or gold coins. Gold's value appreciates because it's always priced in US dollars, no matter where the gold coin is sold. Investors such as central banks must use their share of US dollars or some other secondary reserve currency, to buy gold, making the dollar's value dip further.
Also, the dollar's declining value makes gold cheaper to buy for investors with other currencies in their pockets.
Tensions in a certain region or country, such as wars and political issues, can affect the economic environment in the entire world. Because of that, investors will buy gold as a haven to protect their assets during uncertain or trying times. Investors who invest in gold during times of political or economic uncertainty were able to preserve their assets.
Another good thing about gold is that it can be traded anywhere in the world, so it's a fantastic haven. It's simply not controlled by governments.
Diversification of a Portfolio
Diversification of a portfolio is something you shouldn't skip out on. If you need to protect your portfolio in case the dollar falls, the rising inflation, or just want to protect your wealth, you should buy gold stocks or invest in physical gold.
The past performance of gold is a clear sign that it's a good underlying asset if you don't want to be losing money with instability in financial markets.
Holding gold stocks, such as investments in gold mining companies, appeals to growth investors - but not income investors. Gold stocks don't always follow the price of gold - they can rise or fall depending upon the profitability of that specific gold company.
Even when the price of gold falls, some gold mining companies can manage to stay afloat and profitable. A small rise in the prices of the physical metal can result in huge gains on gold stocks because the gold stocks get a much higher ROI, especially compared to the owners of physical gold.
Gold stocks show strong performance regarding dividends, so this might be the perfect time to start trading. Dividend-paying stocks are better than non-dividend-paying because they show higher returns on the original investment, so many investors opt for them.
Investing in gold has many perks, such as a safe haven or a hedge against inflation. It is also a pretty decent way to diversify your portfolio. The best part about it is that there isn't a single way to invest in gold - there are numerous ways to go about it.
In our opinion, there is no 'right' way to invest in gold; you can choose the best method for your needs. However, the important thing to remember is that investing in gold carries risks, so you should get accompanied by the risk of your investment method before you go.