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Is gold a good investment? Five ways to buy it – the pros and cons

By Connor Freitas

Is gold a good investment? That can depend on the timing of your purchase – and how you acquire the precious metal

The best way to buy gold depends on your investment objectives – and whether you want direct exposure to the precious metal. Here, we look at five popular methods of purchasing this commodity, when to buy gold, and ask: is gold a good investment?

Buying gold as an investment

Exchange-traded funds (ETFs) have gained traction as a common vehicle for those wanting to buy and sell gold. This industry has enjoyed explosive growth in recent years – in the US alone, more than $4tr (£3.04tr, €3.60tr) in assets are now under management. ETFs can provide exposure to hundreds, if not thousands, of equities and commodities at a relatively low cost for the end investor.

Gold-focused funds may track the price of bullion, mining companies, futures, or a combination of all three – delivering direct exposure without having to physically possess the commodity. ETFs are highly liquid, so they are easy to buy or sell quickly throughout a trading session. However, the fees charged by providers may prove an insurmountable downside to some – and, depending on the type of fund, there can be little benefit unless gold prices rise.

Next, a method that some would argue – logically – is the best way to invest in gold: buy a big slab for yourself. Although bullion, often in the form of bars and coins, gives investors the warm glow of an asset you can physically touch, remember there are costs associated with its production – and you’ll have to cover the cost of storing it securely. It’s not necessarily the best way to sell gold either because bullion is quite illiquid, with a real risk that a dealer will offer a price below the market rate. If this is still a path you want to tread, make sure you find a reputable provider who adheres to industry standards.

From here, we move into strategies to buy and sell gold that are mainly geared towards traders. Gold options give buyers or sellers an option, but not a requirement, to complete a transaction on a pre-determined date at a set price. This can be particularly useful for traders who believe that the precious metal’s value will head up or down in the coming weeks or months. With futures, buyers commit to buying a set amount of gold at a later date – irrespective of the market’s direction.

A more indirect approach to buying gold as an investment is to acquire stocks in mining companies involved in exploration and production. Share price movements are usually closely correlated with fluctuations in gold prices and can deliver dividends in times of strong financial performance, as well as exposure to other precious metals that the company may have an interest in. Long-term analysis of a company’s financials is essential before taking the plunge – healthy levels of cashflow, low levels of debt and its longer-term record on dividend payouts should all be scrutinised carefully.

Last but not least, we have tokenised exchanges, which give cryptocurrency owners the opportunity to gain direct exposure to gold without having to convert their digital currencies into fiat. They provide access to tokenised securities that represent the prices for underlying assets – including precious metals, bonds and shares. Just as traders in the old-fashioned economy flee to gold when there is turbulence in the stock market (a topic we’ll come on to next), these platforms give crypto consumers a safe haven during times of volatility.

Is gold a good investment?

One of the main advantages of gold is that it has a long history, so there is plenty of historical data to help when making an informed decision. This precious metal’s value in the global economy dates back thousands of years – until a few decades ago, major currencies such as the US dollar were pegged to it. Central banks continue to maintain substantial reserves of gold because it helps to preserve wealth.

Let’s imagine that, in 2000, Amanda won $275 (maybe she came second in the coming second contest). In January of that year, that was the exact price of one ounce of gold. If she stashed the banknotes into her safe and only rediscovered them today, Amanda would have that same $275 – which wouldn’t have anywhere near as much purchasing power as it did 20 years ago (adjusted for inflation, that would require about $410 today). However, if she had bought an ounce of gold, it would be worth about $1,560 – easily five times the initial sum.

Knowing when to buy gold can be a powerful buffer against money losing value – but this is easier said than done. Gold generally has a negative correlation to stocks. So when indexes such as the S&P 500 are doing well, growth in precious metal prices won’t be so pronounced.

Conversely, when the stock markets are taking a hammering, many investors will exit their positions and flee to gold. This commodity also tends to perform well during times of geopolitical instability – such as wars or political uncertainty. Just look at the end of 2019, when it delivered its best performance in nine years on the back of ever-increasing trade war tensions between the US and China.

Overall, one of the biggest advantages of gold can be that it delivers diversification. Although heavily investing in stocks is great when times are good, it can prove calamitous in the event of a sudden, dramatic downturn. Given how this commodity often moves in the opposite direction, you could find that this metal a precious tool in delivering stability. However, itdepends on your attitude to risk – and this should inform how much of your portfolio is dedicated to gold.

FURTHER READING: Gold price predictions for 2020 and beyond

FURTHER READING: Silver price forecast 2020 and beyond

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