Ways to Invest in Gold

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Simpler Trading Team

Jul 05th 2022  .  10 min read

Gold is one of the world’s most precious metals commonly associated with currency and jewelry. However, it’s much more than another way to make financial transactions or symbolize wealth. It has many uses in civilization, such as evolving technology and medical science. It has a vital role in our existence and progressing society to new advanced qualities of life

It should be no surprise that gold is a naturally occurring element that takes many hours of labor and expensive machinery to extract from the earth. The finite supply of gold has made it valuable as both a currency and a commodity. For that reason, traders and investors will continue to look for ways to profit from the precious metal.

Investing in Gold

Investors have many choices in adding the metal to their portfolios. Those choices are purchasing bullion, shares of stock, mutual funds, exchange-traded funds (ETFs), or trading futures and options in the commodities market. Investors can hold or invest by physically purchasing coins, bars, and bullion.

Typically, most investors buy physical gold for its intrinsic and extrinsic value. However, investors who hold physical gold will need to store it safely. For this reason, some investors implement strategies that use funds based on gold or options in the futures market. Investors vary in their investment selections based on the method that works best for them.

The History Behind the Precious Metal

For thousands of years, countries and civilizations worldwide recognized the precious nature of gold. More recently, the United States recognized it as the standard for the U.S. dollar, which is known as the “Gold Standard.” The Gold Standard Act was enacted by President William McKinley and passed on March 14, 1900. This act established gold as the only metal for redeeming paper currency. At the time, it set the value of the metal at $20.67 an ounce.

However, it was abandoned in 1913 when Congress created the Federal Reserve to stabilize gold and currency values in the United States. The U.S. and European countries suspended the gold standard to allow them to print money to pay for their military involvement in World War I. Since then, the value of gold has continued to rise as investors look to it for stability during uncertain economies. Mutual funds, ETFs, and IRAs have become increasingly popular.

Graphic of gold Bullion and coins

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Investing in Bullion

Investors have found some very valid reasons to buy physical gold, which is one of the most popular ways to invest in precious metals. However, there are a few things investors should keep in mind. One of the most obvious is storing it securely; physical bullion is vulnerable to theft, and keeping it safe will be an added expense.

Another thing to keep in mind which is not so obvious, is selling gold bullion. It’s not like the stock market, where you can sell your shares, and another investor takes ownership. Investors will have to find a buyer. Bullion dealers and online communities will be great options to sell your bullion; however, they will usually buy it lower than the spot price.

Below are valid reasons to consider physical bullion:

  • Diversification – Gold is a natural addition to any investment portfolio.
  • High demand – While mining still takes place, the supply of this valuable metal is still somewhat finite. Obtaining gold allows investors to take advantage of certain tangible commodities in which demand is generally higher than supply.
  • Asset Protection – Investors have consistently held on to this during geopolitical and financial unrest.
  • Wealth Preservation – Gold allows families to maintain and preserve wealth over a period of time.

What is the Spot Price

The spot price of gold is the market price of one ounce. The price is quoted in troy ounces but can be converted into other amounts. The price per ounce is the same globally as most markets use live gold prices listed in U.S. dollars. The spot price is constantly changing, making it crucial for investors to remain updated on market conditions and news.

By studying the gold chart – starting with a long-term history that goes back at least 100 years, investors can better understand what causes fluctuations in the price. The price of gold remained somewhat stagnant until the 1970s. It took off in a long uptrend, underpinned by rising inflation due to skyrocketing crude oil prices.

During the energy crisis and the resulting economic downturn of the 1970s, Americans experienced the OPEC oil embargo of 1973, where oil prices jumped 350%, and inflation rippled through the economy. Consumers conserved energy, cars got smaller, and entrepreneurs worked on solutions – although the economic crises got worse.

After topping out at $2,420 an ounce in February 1980, it turned lower near $800 in the mid-1980s in response to Federal Reserve monetary policy. As of May 2022, gold is trading at $1,882 per ounce.

Gold Funds Available to Investors

Investors interested in a more liquid and lower hassle entry into the gold market might consider exchange-traded funds replicating the commodity’s movements. SPDR Gold Trust (GLD) trades shares on the New York Stock Exchange (NYSE) and can be bought or sold at any time throughout the trading day, just as a share of stock. Each share of the ETF represents one-tenth of an ounce. GLD invests solely in bullion and directly exposes the metal’s price moves.

Other ETFs are available that invest in both bullion and publicly-traded companies in the business of mining, refining, or production. Investors can also consider VanEck Vectors Gold Miners ETF (GDX) and Barrick Gold Corporation (GOLD).

Gold stocks tend to rise and fall more often than the price of gold itself as political events, or environmental concerns could impact stock prices. This makes investing in an ETF that owns gold stocks a higher-risk investment. By studying the underlying asset and the price chart, investors of an ETF can obtain guidance as to the appreciation potential of a fund.

Graphic for commodities chart representing gold

Futures Options Trades

Options traders, who want to manage risk on gold futures, use options on futures or ETFs. These contracts represent the right but not the obligation to buy or sell futures. Traders specify how much they are willing to risk and the timeframe for the trade.

Options can be used whether the price of gold is going up or down. Should you be wrong, the maximum risk associated with buying options is the premium paid for the contract.

Put and call options on futures are available in the U.S. through the Chicago Mercantile Exchange and can be bought and sold through a futures broker. Options on SPDR Gold Shares ETF can be traded in a brokerage account that has received approval for options trading. 

Some traders buy and sell futures contracts (GC) that trade on CME to speculate on short-term moves higher or lower.

Gold Mining Stocks

Mining stocks don’t always move in tandem with bullion prices — mining companies profit based on their operating performance and not the price of gold. Investors won’t have the physical product or metal if the companies are unsuccessful and go insolvent.

Gold Investment Strategies

Several ways exist to invest in gold: buying the metal itself, buying funds, or buying options. However, it consistently performs as a part of portfolio diversification.

Investing in bullion for individuals takes the form of bars or coins. ETFs are available to trade. But, in a system-wide crisis, investors will want to own the physical metal.

Mutual funds and exchange-traded funds that invest in gold or the shares of mining companies offer a more liquid and low-cost way to invest in the metal. While accessing a qualified broker enables anyone to purchase it in its physical form, only more practiced investors and traders trade futures or futures options.

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FAQs on Investing in Gold

Q: Is the gold price the same as the spot price?

A: When prices are quoted, they are typically going to be spot prices unless otherwise noted. The spot price refers to the market price for immediate delivery.

Q: Why do investors watch the gold prices?

A: Investors want to buy gold at the lowest price possible. Investors watch the price chart to look for trends in the market as well as areas of support where they can buy or areas of resistance to sell at.

Q: Why are gold prices constantly fluctuating?

A: The price moves due to numerous influences, such as:

Central bank activity
Monetary policy
Interest rates
Currency market activity
Inflation/deflation
Geopolitics
Risk appetite or aversion
Jewelry demand
Investment demand

Currency markets can have a dramatic effect on the price. Gold is typically denominated in U.S. Dollars, a weaker dollar can potentially make it relatively less expensive for foreign buyers. A stronger dollar can potentially make it relatively more expensive for foreign buyers. 

This currency relationship can often be seen in the price. On days when the dollar index is sharply lower, gold may be moving higher. On days when the dollar index is stronger, it may be losing ground. Although, there are environments where both the price of gold and the U.S. dollar rise or fall together.

Interest rates have an influence on gold prices. It pays no dividends and does not pay interest, the price may potentially remain subdued during periods of high or rising interest rates. Should interest rates drop, gold may benefit. It could also move higher even with high-interest rates, and it could move lower even during periods of ultra-low rates.

Monetary policy can affect the price. If a government is actively engaged in quantitative easing or other stimulus programs, those programs may potentially weaken the U.S. dollar which potentially makes it more attractive.

Q: What is the difference between a round and a coin?

A: A round is a coin that is not minted by a sovereign government, rounds generally only have a melt value associated with them. Whereas a coin is legally minted by a sovereign government and can hold historical and melt value.

Q: What are the disadvantages of holding gold?

A: There are some disadvantages of holding gold which consists of:
Storage – the metal will take up space and will need to be safe from burglary
It does not generate dividends or income
it can be difficult to sell
price fluctuates constantly

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