Gold has long been a go-to investment during uncertain times. Whether it’s economic turmoil or market volatility, such as the collapse of Silicon Valley Bank, investors often turn to gold as a reliable store of value. In this article, we explore different ways to invest in gold and the risks associated with each option.
1. Gold Bullion: The Traditional Choice
One of the most tangible ways to invest in gold is by purchasing physical gold in the form of bullion or coins. Holding gold in your hands can offer a sense of security, but it comes with significant challenges. Physical gold must be securely stored and insured, and it does not generate cash flow like other investments. Moreover, to profit, investors must rely on the value of gold increasing.
Purchasing gold bullion can be done through online dealers like APMEX or JM Bullion, or even through local dealers and pawn shops. However, you should always be aware of gold’s spot price to ensure you’re making a fair deal, and opt for bars over coins, as the latter may carry additional collector’s value that could impact liquidity.
Risks: Physical gold is susceptible to theft if not properly secured, and selling gold quickly might force you to accept less than its true market value. Additionally, storage and insurance costs can add up over time.
2. Gold Futures: High Leverage, High Reward
Gold futures allow investors to speculate on the future price of gold without needing to own the physical commodity. One of the key advantages of futures is the leverage they offer—allowing you to control large amounts of gold for a relatively small initial investment. If the price moves in your favor, you can see substantial gains in a short period.
Risks: The leverage in futures works both ways. If the price of gold moves against your position, you may be required to put up additional money (called margin), or the broker will close your position at a loss. For this reason, futures trading is typically reserved for more experienced investors, and not all brokers offer this service.
3. Gold ETFs: Convenience and Liquidity
For those who want to avoid the hassle of storing physical gold or the risks of futures trading, exchange-traded funds (ETFs) provide an excellent alternative. Gold ETFs, such as SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and abrdn Physical Gold Shares ETF (SGOL), track the price of gold and allow investors to trade them like stocks.
One major advantage of ETFs is their liquidity. You can buy or sell your shares at any time during the trading day, and you don’t have to worry about the costs associated with securing and insuring physical gold.
Risks: While gold ETFs track the price of gold, they can still experience volatility. Additionally, investors need to consider the expense ratios of these funds, though they are typically lower than the costs associated with physical gold ownership.
4. Gold Mining Stocks: Double the Potential
Another way to benefit from rising gold prices is by investing in gold mining companies. When the price of gold increases, these companies often see their profits grow. Additionally, mining companies have the ability to increase production, which can further boost their stock prices.
Investing in mining stocks gives you exposure to gold while also potentially providing dividends if the company pays them. However, it’s crucial to carefully research individual companies, as some miners can be risky investments, especially if they are small or still in the development stage.
Risks: Mining stocks can be volatile, and companies may face challenges beyond the price of gold, such as operational difficulties or regulatory hurdles. Smaller mining companies, in particular, can be very risky if they haven’t yet started producing gold.
5. ETFs That Own Mining Stocks: Diversified Exposure
If picking individual mining stocks feels daunting, you can invest in a gold miner ETF, which offers diversified exposure to several mining companies. Funds like the VanEck Gold Miners ETF (GDX) and VanEck Junior Gold Miners ETF (GDXJ) give investors a stake in multiple miners, reducing the risk associated with any single company underperforming.
These funds combine the advantages of owning individual mining stocks with the safety of diversification. However, not all ETFs are created equal—some focus on well-established miners, while others include junior miners, which can be more volatile.
Risks: While diversification mitigates the risk of one company performing poorly, it does not protect you from overall industry trends. Sustained low gold prices can affect all the companies in an ETF, leading to losses across the board.
