In the past, investing in gold was difficult for individual investors. You could buy the actual spot commodity in the form of coins and bullion or you could speculate in the futures market. Both alternatives were unpopular and expensive for most individual traders. However, investors now have access to gold investments - learn how to invest in gold online through your brokerage account and why to invest in gold TODAY.
Imagine the surprise of the world’s first circumnavigator, Ferdinand Magellan, when upon arriving on the sandy shores of the present-day Philippines in March 1521 after the first-ever Pacific crossing, he was offered a gold bar and some spices by the native king. Gold – it was a store and show of wealth, even there, even then – in the uncharted, uncivilized territory, halfway around the world, half a millennium ago.
Perhaps Magellan shouldn’t have been so surprised. Gold had been “money” for more than 2000 years prior to his time. The first gold coins were struck in about 700 B.C. in modern-day Greece. Throughout recorded history, other assets like weapons, spices, art, metals and even food have had their day as leading stores of wealth, but gold has endured as the supreme evidence of wealth across all cultures and time.
Little has changed today. Gold competes with other assets – stocks, bonds, real estate, and paper currency among others as stores of wealth. But in today’s changing and ever more volatile world, the value of these other assets may fluctuate more than ever. What’s more – paradoxically – in response to volatility, the policies of governments and central banks, in an effort to dampen economic downturns and prop up asset prices, may, in fact, make gold more valuable relative to these other assets. In our opinion, the real purchasing power of gold, over the long term, may arise.
Like most assets, the price is determined by demand and supply. Going forward the demand for gold may continue to rise, while supply will remain constrained as it has since the beginning of time. Here are the top 4 answers to our main question: how to invest in gold online?
There are a plethora of listed gold companies. Be aware that while a gold company’s stock price is linked to the price of gold, as it represents a major revenue stream, it is not a “pure play” on gold; it’s unlikely that a company’s value will directly replicate the price of gold.
Gold companies can be divided into two generic groups: “Juniors” and “Majors”. Each category has company-specific characteristics that impact its value. Generally, Juniors focus on exploration and are riskier than Majors, which typically are already in the mining and production phase. A Junior gold mining stock can be thought of as an option play on the likelihood of striking gold and getting bought out by a gold Major. Junior gold mining stocks do, however, typically rely heavily on credit, a key risk when credit markets are under duress. In comparison, gold Majors offer the possibility of operational leverage through gold price appreciation. The theory being that costs to produce gold are relatively fixed, such that gold price appreciation expands margins and the bottom line. In reality, such costs have not been fixed – many stakeholders have wanted a piece of the pie, from increased taxation to increased wages. Gold production is also extremely energy-intensive, meaning costs are closely tied to the price of natural resources, such as oil, which has been elevated.
Complicating things further, many companies may not focus exclusively on gold. Some may also focus on other precious metals or minerals, such as silver, palladium or diamonds. If you invest in these companies, you may end up with a wider exposure to precious metals and minerals than just gold. Like any company, management will also have a large impact on the value of a gold mining company’s stock price. Good and bad management decisions can have a larger impact than the price of gold and in some instances may make or break your investment. Above all, make sure you know enough about a company to make an informed decision before investing in stocks.
If these reasons have you interested in adding gold mining stocks to your portfolio, a few top companies to consider are Barrick Gold Corp (#ABX), Randgold Resources (#RRS), Newmont Mining (#NEM), Royal Gold Inc. (#RGLD) and Goldcorp Inc (#GG). All four could benefit if gold prices rally, so open a brokerage account to learn more about them and start investing.
Continue reading for more information or start playing around in a risk-free demo account and learn how to invest in gold in real-time.
Don’t have the time to research, but still want to invest in gold mining companies? Similar to gold stocks, gold mining mutual funds and gold mining Exchange-Traded Funds (Gold Mining ETFs) are not a “pure play” on gold, but rather invest in a broad basket of gold mining companies. This makes it easier to access a wide range of gold mining companies with one investment. Many will focus specifically on gold Juniors or Majors, as described above. Most Gold Mining ETFs and mutual funds are easy to purchase directly through a broker.
The manager of the Gold Mining ETF or mutual fund makes all the investment decisions independently, so there is no need to research companies. For this convenience, Gold Mining ETFs and mutual funds charge an expense ratio. The expense ratio is generally lower for Gold Mining ETFs because they often aim to track a static basket of gold stocks. On the other hand, mutual funds typically offer active management, rotating in and out of select securities as the manager deems appropriate. For this reason, mutual funds’ expense ratios are typically higher, and some may also charge front-load and/or back-load fees in addition to an annual expense ratio. As with any investment product, make sure you are aware of any and all fees before investing.
Overall, when considering an investment in gold stocks or gold stock funds, you should understand that neither will give you direct exposure to the price of gold. Instead, you will gain exposure to a company or companies that operate in the gold mining industry.
Traders can play individual gold miners profitably if they do their homework but sector exchange-traded funds (ETF) offers an easier alternative, with broad exposure to the industry at different capitalization levels.
A few top mining funds to consider are gold bullion ETF VanEck Vectors Gold Miners ETF (#GDX), or Direxion Daily Gold Miners Index Bull 3X Shares ETF (#NUGT).
We’re talking about SPDR Gold Shares ETF (#GLD), iShares Gold Trust ETF (#IAU), and Physical Swiss Gold Shares ETF (#SGOL) to name a few. By owning shares in an exchange-traded opened gold trust, you have fractional ownership in the underlying gold. The trusts are called open-end because gold shares are issued and redeemed to accommodate investor demand. As a result, open-end trusts closely track the price of gold. There are a number of options available with relatively low expense ratios. Different funds may hold physical gold in different locations – from London to New York, even Singapore.
If a key priority of yours is to invest in physical gold, but like the convenience of investing in gold through an exchange, make sure that is clearly stipulated in the fund’s prospectus to ensure the trust uses no derivatives. If you’re interested in taking delivery of the physical gold, make sure you are aware of any limits imposed before you invest, as some funds may set fairly high requirements that could preclude you from accessing the underlying gold you own. These details can be found in any fund’s prospectus.
Overall, open-end gold trusts may offer an effective and relatively inexpensive way to invest in gold.
Derivatives traded on exchanges settle in a central clearinghouse that matches buyers and sellers. Gold derivatives are bilateral contracts that have more flexible structures and fractional investment requirements.
Derivatives trade on margin. The initial margin – or cash deposit paid to the broker – is a fraction of the price of the underlying contract. Consequently, investors can achieve notional gold value considerably greater than their initial cash outlay. While this leverage can increase return-on-investment, it also increases the chance for significant losses in the event of an adverse price movement in gold.
Gold margin trading offers some of the best risk/reward opportunities of any ﬁnancial market IF (big if here) you know how to exploit it. The availability of leverage, meaning the use of borrowed funds to control large blocks of troy ounces and thus magnify gains and losses, creates the unmatched proﬁt potential for those with limited trading capital IF (again, really big IF here) they learn how to control the downside risk.
For example, with 100:1 leverage, a 1 percent move means 100 percent proﬁt. It also means a 100 percent loss.
Understanding and controlling this risk, and knowing how much is appropriate in a given situation, is what distinguishes the winners and professionals from the losers on whom they feed.
With this backdrop, let’s explore some specific reasons investors may consider buying gold at today’s prices:
There was a time, until World War I when gold was money and money was gold, or at least backed by real, physical gold. Then the need to repay war debts induced the involved countries to “print” money. Countries became partially disengaged from the gold standard then, and more disengaged with the onset of the Great Depression and World War II. But printing money on a massive scale happened only during these crises.
Today, it seems that the “crisis” is nearly perpetual, and the virtual printing presses run all the time. Virtual? Yes, you don’t even have to print the money anymore; it can simply be created with the stroke of a keyboard. And it’s become so easy that trillions in new paper “fiat” currency will be created – all to chase the same amount of goods and services. It may be worth keeping in mind that there is no upper limit to the number of dollars that can be created, and to the extent that gold (or anything else for that matter) is priced in dollars, there is no upper limit to what the price of gold can be. One estimate calls for $15 trillion to be printed in the next three years worldwide. We are getting ever further away from the gold standard.
Of course, that brings the potential for uncontrollable inflation. That is unless these central banks can “mop up” the liquidity, withdrawing the cash from the economy. But in doing so, central banks will slow their economies – a politically unpalatable scenario. Add to that the crushing public debt loads, which induce countries to inflate their way out of debt, that is, to allow their currencies to depreciate and pay with cheaper money later, and we have a powerful mixture for future inflation. And what happens when there is inflation – or when people anticipate inflation? The price of gold may go up.
Comparatively, the next five reasons to invest in gold are relatively simple:
Aside from governments and central banks, ordinary citizens of developing nations see gold as the present and future storehouse of wealth. Moreover, they are buying it in increasing quantities as questions loom about their own currencies, and now the currencies of others like the Euro and U.S. dollar.
About 50 percent of world gold consumption is for jewelry, while 40 percent is for investments and 10 percent is for the industry. India alone buys some 25 percent of all gold produced each year. That figure is increasing: in 2010 alone the amount of gold bought by Indian citizens increased 69 percent from 2009, and Indian households today control some 11 percent of the total global gold stock. Although demand in India dropped off somewhat in 2011 due to new import taxes, demand is growing in China, Russia, and other countries for many of the same reasons.
In part as an attempt to diversify their holdings and hedge against the inflationary effects of global money printing, central banks, for the first time since the mid-1960s, have become net buyers of gold. From 1965 through 2007, they were net sellers of gold. These banks, particularly in developing countries, want to fill their vaults with something other than paper currency and the ever-riskier bonds of sovereign nations.
Estimates call for central banks to buy some 10 percent of the new supply of gold each year. Countries like Russia and Mexico will actively buy bullion in the world market as well as directly from their domestic producers, keeping that new supply off of the world market.
If you look at a long-term chart of the price of gold versus the price of oil, you’ll notice that over time, and given some up and down volatility, gold and oil move pretty much in tandem. Put another way, an ounce of gold buys about 14 barrels of oil, plus or minus – would do so today and has done so for over 50 years. In the early 1960s, gold was $35 an ounce, and Saudi oil could be had for less than $3 a barrel.
If you, like most of us, need to purchase energy, college education, or health care over time – items that can’t be artificially deflated in price by, say, offshoring to China, investing in gold may allow your purchasing power to keep up with the price of these key goods and services. More people are figuring that out – which only adds to the demand for gold.
Gold is a commodity. The biggest bugaboo in commodity investing is that demand for eventually begets supply. That is, when the price of corn or soybeans or copper rises, what happens? Farmers plant more corn and soybeans, and miners mine more copper, and more copper is recycled – you get the idea. The supply adjustment may take a year or two to unfold, but for most commodities, more supply is around the corner when demand increases. As the saying goes: ‘the cure for high prices is high prices’, in part because those higher prices attract greater supply from the market.
For gold, not so much. Even with the increased worldwide demand for gold as a store of value and an inflation hedge, production has remained relatively flat. Production did double from the 1970s to about 2000 to exceed 80 million ounces per year but then fell back well below the 80 million marks in the mid-2000s. Only recently in 2011, did production slightly exceed the 2001 peak. Supply growth continues at a 5 percent rate in our assessment – modest in light of some of the demand figures already discussed.
Allocation to gold provides potential portfolio diversification benefits. The more asset classes you invest in, the less chance all of your holdings will fluctuate in tandem.
When considering any investment, you should not only consider the potential positive and negative scenarios for that investment over time, but also the impact on your overall portfolio performance. It is about not putting all of your eggs in one basket, as well as picking the right baskets.
It goes without saying that an investment with a positive expected return is preferred over one with a negative return. With gold, the outlook appears favorable for a number of reasons as outlined above. Equally important should be how the investment works with the rest of your portfolio; the way the expected return of this asset moves relative to your existing portfolio. This relationship is called a correlation. Adding assets whose price movements have a low correlation, or a negative correlation, to your existing assets may help improve your overall portfolio’s performance.
Think back to before the recent financial crisis had taken hold: it was great if you held assets that moved lockstep with one another on the way up. But, when the market capitulated in 2008, all those assets likely fell together as well, causing some investors to lose a great deal of value in their portfolios. The gold price has historically exhibited a low correlation with other asset classes. This fact makes gold a good source of diversification for a portfolio, and gold may help you protect yourself against downside risks. In 2008-2011, stimulated by the stock market collapse, gold was up nearly 100%.
Holding a variety of assets, including gold, the price movements of which are uncorrelated with one another, may smooth out your portfolio returns over time and help protect against catastrophic losses.
The final word: even though the price of gold, in the past ten years, has “woken up” to these trends, and has quadrupled since the late 1990s, factors suggesting a strong future are there. No asset should comprise the majority of your portfolio, but it may be hard to argue against owning at least some of the precious metal going forward.
Turns out, Magellan’s Pacific Island friends knew what they were doing.
Ultimately, when investing in gold, first ask yourself whether you want to track the price of gold or whether you’d prefer to have exposure to gold-related companies. Gold mining stocks and gold mining funds provide exposure to the value of gold companies, not directly to the gold price. The other options discussed aim to track the price of gold. Once you have made a decision, weigh the pros and cons of the various available options and start to invest in gold.
Final nugget of wisdom from an old English proverb: “when we have gold we are in fear when we have none we are in danger.”
BE ALERTED AS WE EXPLORE THE WORLD OF GOLD