The advantage of gold investing is that traders are interested in this highly liquid asset at any stage of the market’s fluctuation. It cannot devalue like particular stocks or currencies. Inversely, gold bars, gold jewelry, gold coins, etc. prices rise during hyperinflation, developed economies’ crises, bankruptcies, wars, or pandemics. In the last century, there even existed the gold standard used for money emission.
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Advantages of trading gold assets in Forex:
- Moderate market volatility and high liquidity.
- No portfolio risk of sharp depreciation.
- Low entry threshold.
- Long-term profitability exceeds a bank deposit’s profitability.
Another advantage of buying gold is relatively easy price forecasting based on the price past performance. Gold quotes don’t depend on particular economies. It’s definite fundamental and business factors that drive them, such as interest rates, inflation, GDP predictions, the USD rate, the situation at the gold mines, cash flow, etc.
- 1 Five ways to invest in gold
- 2 How to manage risks when trading gold?
- 3 Gold investments Summary
Five ways to invest in gold
There exist several ways of investing money in gold bullions, gold coins, etc. The difference between them is based on a few criteria:
1. The amount of investments:
- Small sums can be invested in gold mutual funds’ certificates, gold bank deposits, or gold bars. Buying gold jewelry and coins, whose price will be rising simultaneously with gold quotes and numismatic underlying value, is becoming more and more popular. You can also open a brokerage account with a Forex brokerage services.
- Large capital can be invested in overall stock markets: ETFs and mutual funds, gold futures trading , gold mining companies stock.
2. Ways to invest in gold
- Directly — buying pure gold: buy gold bars, coins, gold jewelry. When investing money in gold widely circulated coins, one can make additional profits from growth in their numismatic value.
- Investing in gold indirectly – Making money from a difference in exchange rates: investing in securities, gold mutual funds, and CFDs.
Gold investment: pros and cons. How to invest in gold? Let’s find it out.
1. Owning physical gold
When you buy physical gold you get direct exposure to gold. That means you buy physical gold for real, and then you can use it at your discretion: keep it at home, in a bank’s safety deposit box, or use a safe storage option.
Benefits of trading gold bars and physical metal:
- Psychological effect. Physical gold bullion seems to be a more reliable gold investment option compared to account figures.
- Usability. Using things and personal ornaments made of gold is a part of everyday luxury. What’s more, you can always trade your gold objects in or cover a part of their cost by pawning them at the price of scrap gold.
Cons:
- Some banks can impose additional requirements on non-residents if they wish to buy pure gold.
- Storage. You can store your gold in a bank, but what if the bank goes bankrupt? You can take it back only if you’ve been storing it in a safe deposit box. Keeping your gold at home can be risky too. First, you need to be sure that no one will steal your bars. Second, the yellow metal requires permanent care and special storage conditions to avoid oxidation.
- Liquidity. You cannot sell gold in a few clicks without leaving your home, like securities.
- Mobility. Transportation of physical gold outside the country is regulated by law, and the owner isn’t often the one who benefits from that.
- Selling gold. You can easily sell gold bullion back to the bank that sold it. Other buyers may demand an examination. Some countries impose VAT when gold is sold. Total expenses may go up to 20-25% of the metal’s value.
2. Gold certificates
In the USA, a “gold certificate” was a security issued by the US treasury until 1934. It used to prove the ownership of gold deposited with a bank. Nowadays, a “gold certificate” means an agreement between a lender and a borrower, under which the borrower (issuer) is obliged to pay back the borrowed money. The amount will depend on the rate of gold. A certificate owner does not own real gold or have the right to physical delivery and isn’t secured against the issuer’s bankruptcy.
A gold certificate can be compared to a bank deposit. Many investors put a money equivalent into their bank gold accounts but do not buy physical gold. Instead, they get the right to have the money returned with interest at a price valid upon the predetermined period’s expiration. Disadvantages of gold deposits:
- High bank margin — around 8-10%;
- Risk of losing your deposit: the Deposit Insurance Fund does not secure gold deposits in case of bank bankruptcy in some countries.
3. Buying gold ETFs and mutual funds
An investor purchases shares of ETFs and mutual funds that make investments in the global market’s gold physical assets. The SPDR Gold Shares ETF, iShares Gold Trust are example of such gold funds. That’s the world’s largest investment fund whose assets are 100% backed by its own gold.
An alternative to gold ETFs would be investing in gold mutual funds (such as Franklin Gold and Precious Metals Fund). Investors have to contact an asset management company and entrust their money to that company (mutual funds). Then they receive a certificate that grants them the right to have a deposit with interest income.
Pros:
- To invest in mutual gold funds, one does not have to access a stock market directly.
- High liquidity of gold ETFs’ shares.
Cons:
- Entry threshold. To buy ETF gold stocks, one needs to have access to a stock market exchange, which incurs exchange fees, brokerage fees, and management fees. An investor must qualify as a “qualified investor.”
- Liquidity. In most cases, investing in mutual funds does not allow one to withdraw money earlier without paying early withdrawal fees. Also, an investor can lose both profits and capital if a mutual fund has turned out loss-making by the certificate expiry date.
- Bankruptcy risk.
4. Gold CFD trading
A CFD stands for “contract for difference.” It’s an agreement between two parties to pay the difference between the quotes effective on the agreement’s commencement and termination dates. Technically, it looks like the following: a trader from wherever in the world opens an account with a broker, has himself/herself verified, tops up the account, and opens trades to sell or buy assets. The broker earns a commission. CFDs are tied to XAU quotes. Just like in the case of certificates, the trader doesn’t own real gold. Note that CFDs are complex trading instruments, and thus before using them and taking any investment decisions seek advisory or brokerage services.
If the XAUUSD costs 1,730 USD, to buy the minimum volume of 0.01 lots, you will need as little as 17.30 USD (1,730*100*0.01*0.01), which is less than the minimum deposit of 50 USD.
- Lowest fees. There aren’t any stock exchange fees. There are only spreads, swaps, and a small fee per each lot traded in an ECN-account.
- The opportunity of opening a short position. With a Forex broker, you can earn from investing in CFDs on XAU even if the price of gold falls.
- 1:100 Leverage. Stock market brokers’ leverage does not usually exceed 1:10.
- You do not have to be a “qualified investor.”
Cons:
- Low volatility makes this type of gold investment inappropriate to scalping and short-term strategies.
- As you have to use bigger leverage and increase trade volumes, this kind of gold investment is associated with bigger risks compared to currency pairs.
You can open trades in the XAUUSD free and without registration right now! Click on “For beginners” – “Open a demo account” in the menu bar on top of LiteFinance’s site. Then click on “Trade” and choose the XAUUSD in the “Precious Metals” tab in the left menu.
5. Gold futures and options trading
Gold futures trading and options trading is similar to CFD gold trading: a trader opens an account with a broker, has himself/herself verified through QUIK, Thinkorswim, or any other platform of that kind, and sends a broker orders to open trades. The difference is that the trader becomes the real owner of securities registered by a depositary. Gold can be delivered only under the terms of commodity futures contracts, but non-deliverable gold futures are even more interesting to private traders.
Pros:
- Guarantees. Regulators and stock exchanges strictly control stock brokers. The purchased securities are automatically registered with a depositary.
Cons:
- High entry threshold. To buy the minimum lot and pay commissions, at least 1,000 USD is required. Non-U.S. citizens will need a sub-broker authorized to work with US brokers to trade gold in the US stock markets.
- Complexity. Futures and options are derivative financial instruments. Their terms of use are more complicated than those of CFDs or exchange-traded funds, so traders should understand the specifications well.
- Limited choice of securities if one is not a “qualified investor.”
5 Ways comparison table
I made a table to compare all the above-mentioned cons and pros.
| Investing advantages | Investing disadvantages | |
| Physical gold | Guarantees. No risk of a broker’s or bank’s bankruptcy. | Low liquidity: the bank is the only real buyer;Storage issues;Certification issues when selling;High margin: taking taxes into account, the loss can go up to 20-25% of the bid price. |
| Gold certificates | As physical delivery is excluded, associated expenses, including certification costs, are lower. | No right to own physical gold;High entry threshold;Risk of the issuer’s bankruptcy. |
| ETF gold | High liquidity. | High entry threshold;Big expenses: brokers’ and gold mining companies stock exchanges’ commissions, fees, repository costs, taxes. |
| Gold CFD trading | Low entry threshold: 50-100 USD plus leverage;High liquidity covering minimum margin and spread costs;Opportunity to open trades immediately in either direction when the price of gold is growing or falling;Minimum expenses. No stock exchange’s or depositary costs. There are only spreads and swaps. A trader decides himself/herself how to pay taxes. | Low volatility. Big leverage required;Scalping-unfriendly. |
| Futures and options | High liquidity. | High entry threshold from 1,000 USD;Futures quotes are different from direct XAU quotes, and therefore it’s more difficult to analyze them;One has to be a “qualified investor.” |
How to manage risks when trading gold?
There are several ways to cut risks:
- Diversification. Investing in such assets inversely correlated to gold as gold mining stocks, indexes, treasury bonds, deposits. The Gold price’s fall is covered by stock assets’ growth. Conversely, stock assets’ fall will be partially covered by growth in the XAUUSD’s quotes.
- Periodic portfolio rebalancing. For example, reducing loss-making assets’ share in favor of more profitable assets.
- Fundamental factors control: macroeconomic statistics, currency rates, stock markets’ quotes, supply and demand in the gold market, inflation, global GDP predictions, geopolitical arena, etc. Control correlated markets too.
And the main gold investment advice for long-term traders would be the following: don’t rush to get rid of your gold investment when the price of gold goes down. History says that quotes’ moves are wavy. That means the precious metals will grow to new highs after a fall.
Gold investments Summary
Historically, gold has been subconsciously viewed as a key to financial stability. The US dollar is just a piece of paper that people trust. It can be printed in whatever quantities and increase the national debt. Greece and Cyprus have already shown how “reliable” state bonds can be. Hypothetically, if a global crisis occurs and the major currencies hyper-inflate, they will devalue compared to gold because it’s gold that remains the world’s safe-haven asset.
Who can be interested in gold investments:
- Active investors who want to diversify risks and balance investment portfolios.
- Conservative investors. The precious metal is less volatile than stock assets or cryptos. Despite some periods of declining gold prices, gold will always trend up in the long term, compared to currencies. Inflation explains that.
- Investors who can afford to freeze their spare money for at least ten years.
What do you think: is buying gold for five, ten, or fifteen years a promising strategy? Let’s discuss that in the comments section. Also, feel free to ask any questions on investing or trading in the comments section. Open a demo account and have a go at conducting your first trades! Believe in yourself, and you’ll get everything you want!
