invest in Gold

Investing in gold sounds like a thing of the past for the millennial generation that I belong to. You can only grab our attention if you talk to us about new technologies, unicorn IPOs and investing in crypto-currencies. However, nothing could be further from the truth. Investing in gold is still very much en vogue because of its refuge value and I don’t see this changing anytime soon.

The uncertain economic outlook arising from the US-China trade war and worsened by massive cash injections of the major central banks including the Fed and the ECB into the financial markets make investing in gold seem one of the few safe places to put your hard earned money in.

The gold spot is up 16,57% YTD (Source: Bloomberg), trading at $1,481.0700/ounce, while the S&P 500 was up only 19,64% YTD, as I am writing these lines (Source: Bloomberg).

 In this blog post, I am going to share the 4 main ways you can invest in gold.

1. Physical gold

The traditional and old way to invest in gold is to buy physical gold. Physical gold exists on the market in the form of jewelry or bullion (Bars, coins ) which can be purchased from your local gold dealer or even from some banks.

The main advantage of buying physical gold is to have direct ownership. There is no ambiguity with respect to the owner, it is you.

But with this comes the disadvantage of managing storage and incurring storage fees. It is obviously not recommended to store physical gold in your home. Some of the gold dealing companies offer gold storage service( sometimes as part of a package) or you can decide to go for an accredited gold vault provider.

2. Gold mining stocks

This is another way to gain exposure to gold investing by buying gold mining stocks.

These are companies that mine, exploit and produce gold and so ultimately derive their value from gold.

But buying gold mining companies is not the same as investing in physical gold. In the latter, you own the physical gold, in the former you own shares in a company which business is gold extraction and production which is considered a riskier investment. (Check out this Investopedia post to understand some of the risks inherent to stock investing).

That is why these companies should, in theory, reward stock owners for that extra risk by higher returns than the gold spot, under normal market conditions.

As an example, S&P Commodity Producers Gold Index is up 30.46% (Source: spindices.com) while gold spot is up 16,57%, YTD (Source: Bloomberg).

Although these stocks performance is usually correlated with the price of gold, it is not a systematic rule, meaning if the stock market is down, the stock price of these companies might be down even when the gold spot price hasn’t changed or is up.

You can choose to invest in individual companies (You can find a list of gold mining stocks in the constituents of the S&P Commodity Producers Gold Index) or you can also choose to invest in an pool of gold mining companies through an ETF that tracks the performance of the S&P Commodity Producers Gold Index such as the iShares Gold Producers UCITS ETF, or the ones that track the MSCI ACWI Select Gold Miners Investable Market Index such as iShares MSCI Global Gold Miners ETF.

3. Gold-backed securities

An alternative to investing in physical gold is to buy gold-backed securities such as gold backed ETFs.

Gold-backed ETFs combine somewhat the advantages of holding physical gold and the liquidity of the stock- exchange traded securities, making it a convenient way for retail investors to participate in the gold market.

ETFs are designed to track the underlying security price, and in this case it tracks as closely as possible the price of gold spot through different financial instruments while being required to hold a physical gold ratio to the overall value of the fund.

When you invest in a gold-backed ETF, you do not incur custodial, transportation or storage fees but there are annual management fees (which are usually lower in comparison to fees incurred holding physical gold). The dealing spreads are also usually lower as ETF’s are traded in the stock Exchange.

On the other hand, you do not have direct ownership of the gold through gold-backed ETFs. What you owns is shares of the ETF which itself owns the gold and keeps it with a custodian.

For certain gold-backed ETFs, the gold quantity corresponding to your investment can be redeemed but the redemption fee is usually relatively high.

There will be different tax implications when owning an ETF vs owning physical gold depending on your tax residency.

Among the most famous and widely popular gold-backed ETFs is the SPDR Gold Shares ETF, which is the world largest gold-backed trust, with $43.83 billions under management, as of today.

4. Gold options and futures

Another way to participate in the gold market is via trading gold options of futures.

This is more of a short term speculation on the gold spot fluctuation because options and futures contracts are speculative in nature (unless you already own gold and want to buy protections against a drop in gold spot price). Each contract has an expiry date at which the it has to be settled, and so cannot be subject to a buy and hold strategy.

Disclaimer: I am not an Investment advisor not a professional tax advisor. This blog post is for informational purposes only and is not intended to be an investment nor a tax advice. You should always consult with a investment advisor or a professional tax advisor for details about your investments and their tax implications. Investments are risky and past performance is no guarantee of future performance.

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