In every type of market you can be sure to expect an increase and decrease in prices, but it’s important to reduce that volatility by looking at the overall bigger picture. When you learn how to invest in gold correctly you can reduce those price fluctuations in your investment portfolio.
Keep in mind that gold still offers valuable protection in case currency debasement and inflation occur. The main idea is to not focus only on one area of your portfolio since you would want your other investment options to continue gaining profits when the rest are not performing well in the market.
According to money managers and investment gurus, it is a good idea to devote at least 3 to 10 percent of your investment portfolio to gold. For more aggressive investors, though, they aim for about 20 to 25 percent, although this is much riskier. It all depends on the kind of investor that you are whether you aim for volatile assets, which can lead to thriving and profitable investments.
When it comes to buying gold, you need to set aside a specific amount of money for gold regardless of this commodity’s cost. This should be done using a dollar cost averaging strategy on a regular schedule until you slowly build your profits.
Moreover, it is applicable for investors with moderate tolerance for risks as this strategy minimizes potential downsides. As mentioned, various managers of gold companies and brokerage firms recommend as much as 3 to 10 percent to be devoted to gold.
Considering how gold offers protection from inflation, currency debasement and insurance for your investments, it makes sense to explore this option as a means of growing your wealth. It is only a matter of deciding the best way to invest in gold to reduce risks and build your assets at the same time.
1. Physical Gold
There are several types of physical gold that you can buy for investment purposes including jewelry, coins and bullion bars. In terms of coins, some of the popular ones include the American Eagle, American Buffalo and the Canadian Maple Leaf.
These coins are IRS-approved and are excellent choices when investing in precious metals. You may either place these coins at home in a safe deposit box, or put them in depositories. If you decide to buy and sell at reputable custodians, your gold can be stored with these professionals or even be traded.
Pros: Allows for total control by allowing you to buy at the lowest premium over spot with the highest purity levels. It is also in your possession and out of reach of the government in case of an economic collapse.
Cons: It is more difficult to trade then “paper gold” and there may be associated storage costs when handling physical gold.
2. Gold ETFs
Also known as Exchange Trade Funds, ETFs give you an opportunity to diversify your investment portfolio, and there is no need for you to store any physical gold. The main idea is to choose an ETF that is physically-backed, and it is best that the gold spot price is indicated.
Pros: ETF’s are very easy to trade, where you can buy or sell like stocks using a brokerage account and you don’t have to worry about any storage fees since you are not investing in physical gold.
Cons: There is no physical ownership of the precious metals in case of an economic collapse and some ETFs are not backed by real gold. Additionally, ETFs have a tracking error that may be susceptible to some price discrepancies.
3. Gold ETNs
An Exchange Traded Note or ETN behaves more like a bond. It is an unsecured debt note that is issued by an institution where it can be held to maturity, or traded at will. With Gold ETNs, there is no such thing as a tracking error, and you will like how it is regarded as among the most liquid of all ETNs.
If you are interested in investing in gold, yet you are not comfortable with physical gold or futures, then ETNs may be your best option. There is also an opportunity to opt for leveraged or normal, as well as long-or short acquisition of Gold ETNs.
Pros: There is no tracking error with gold ETNs, which means the performance replicates the underlying commodity’s performance. While some index is still tracked, the return is not solely based on this. Mainly, the ETN only serves as a promise to pay the holder an amount that matches the underlying index or asset.
Cons: Since ETNs are generally debt instruments, these come with the risk if the underwriter (usually a bank) were to go bankrupt, aside from the market risk of the asset This is one of the biggest differences between an ETN and a ETF since the latter only comes with risk from the market.
4. Gold Mining Stocks
Some investors are exploring the benefits of what gold mining stocks can do to their portfolio, particularly when it comes to gaining more exposure to precious metal investing.
By purchasing stocks within listed companies or gold miners, there is a chance for you to increase returns on your investment when there are profitable mining operations. Also, this allows investors who have a comprehensive brokerage account to buy gold-related firms worldwide.
Pros: Trading is much easier with gold mining stocks, and storage is no longer necessary because your investment does not include physical gold.
Cons: There is no ownership of metals and a lack of protection in the case of an economic meltdown. Additionally, a study conducted by Yale researchers show that gold mining stocks correlate more closely with the stock market than the real price of gold.
5. Gold Futures/Options
For short-term investments, gold futures and options may be viable choices. Large institutional investors use these contracts for hedging exposure to movements in the underlying price of gold. This investment vehicle gives you a means of leveraging your capital by using the derivative market’s margin system.
Pros: Storage is not necessary since you do not own physical gold. Also, gold futures and options are very easy to trade in the open market.
Cons: There is no certainty if these are backed by actual physical gold or metal, and there is no genuine protection if the market crashes.
6. Gold IRAs
Long-term investors opt-in for the Individual Retirement Account, or IRA as an excellent structure to grow their wealth. When opening a self-directed IRA it gives you the chance to add physical metals to your retirement account to invest for the future.
As long as these gold bars, coins, or bullion meet the purity conditions set by the IRS they can be safely added to a Gold IRA. The setup process is quick and easy, and the IRA can be rolled over from your present retirement plans.
Pros: Gives you the benefit of a tax-free investment and true protection against hyperinflation and devaluation of the US dollar.
Cons: Trading is not as straightforward as it is with paper gold and you will need to dedicate storage for your physical bullion.
Learning how to invest in gold by being aware of the different types of investment options available to you, can help you quickly determine the best instrument type that matches your risk tolerance and preference. So check both the positive and negative of each option and select the most appropriate way to grow your wealth for the future.
I’ve been a financial retirement planner for over 30 years and have been investing in gold, silver and other alternative investments since 2008. When I’m not spending time with my wife and 3 beautiful children, I am learning more about new emerging technologies such as the blockchain.