The Safest Way to Invest in Gold

When financial markets are hit with instability and uncertainty, many investors look to gold because of its long-established record of maintaining its value during uncertain times. However, there are several ways to invest in gold, so which one is the safest?

What is the Safest Way to Invest in Gold?

One of the most common and well-known ways of investing in gold is purchasing physical gold, also called Bullion, in the form of gold bars or coins. Physical gold can be purchased from a gold broker, like Gold Survival Guide. 

Once you have purchased the gold, it can be stored in home safes or a secured vault. Where you decide to store your gold is a personal choice, that will often depend on how much gold you have and whether you feel comfortable storing your gold at home. Gold Survival Guide provides further storage information here.

Gold ETFs and gold mining stocks, such as SPDR Gold Shares (GLD) or Barrick Gold (GOLD), allow investors to invest in gold without having to buy and store physical gold.

Gold futures and contracts allow investors to buy or sell a specific amount of gold at a predetermined price on a future delivery date.

Lastly, you can also invest in gold by purchasing gold jewellery. Investing in gold jewellery is perhaps the more enjoyable gold investment option, as you can wear and admire it. However, large markups can significantly reduce your return on investment.

For more information about how you can invest in gold, see Gold Survival Guide’s “Top 5 ways to invest in gold.”

Why Invest in Physical Gold?

• It is a tangible asset that you can hold in your hand (you actually own the gold!)
• Gold can be stored outside the financial system, reducing counterparty risk (as opposed to other party risk such as ETFs, which rely on the financial institutions that manage the fund and store the gold to deliver on their obligations).
• Liquid market, driven by investor and jewellery demand. There are numerous reputable gold dealers located in cities throughout the world.
• Potential to be used as currency, if the need arises.

Disadvantages of Investing in Physical Gold

• Physical gold does not return interest or dividends (you only make money if the asset goes up in value).
• Security, insurance, and storage costs.
• Gold coins can have a markup of up to 10%(1), which reduces your ROI.

Physical Gold Versus Other Investment Options

Jewellery

Investing in gold through purchasing gold jewellery is not a very good investment strategy, largely because the price usually far exceeds the meltdown value [2]. In other words, because of the markup to cover the cost of making gold jewellery, you end up paying more than what the gold is worth. This means when it comes time to sell it, the price of gold will likely need to have risen substantially for you to make a profit. 

Before investing in gold jewellery, understand that gold retail prices can have up to a 400% markup over the underlying value of the gold [3], which is a major disadvantage when viewing gold jewellery as an investment option.

ETFs

If you do not want to worry about storage and insurance and want to avoid potentially high markups, investing in a gold ETF is an attractive option. Gold ETFs can also be bought and sold like shares on a stock exchange, which makes them slightly more liquid than investing in physical gold. However, part of the price for the ETF will include the operating costs for managing the ETF, and like buying shares, there is also the commission cost to consider [4].

Gold ETFs also come with counterparty risk, where the investor is at the mercy of the institution managing the ETF and the financial institutions that store the gold. In this regard, gold ETFs neglect one of the main reasons to invest in physical gold, which is if there is a systemic failure in the financial system, you will not lose your investment or have it significantly devalued, as you likely would with ETFs [5].

Also worth considering, the institutions involved in managing and storing the gold may have less than sufficient insurance, and in the event of financial trouble, the investor can be left with little recourse [6].

Gold Futures & Contracts

Gold futures offer investors the opportunity to make large returns on their investment. However, just as you can make large returns, you can also suffer large losses. When you invest in gold futures, you carry the risk of the future not being predictable. If an unexpected event happens, investors can be left short, losing money or needing to invest more as you face a margin call.

Even without an unexpected event, the gold futures market can be very volatile. The volatility, combined with having an expiry date for futures contracts, can leave you out-of-pocket when you need to meet your futures contract obligations [7].

Furthermore, investing in gold futures is not as simple as buying shares. Gold futures are a much more complex investment vehicle that along with excellent risk management, also requires in-depth knowledge of how the futures market works. Therefore, investing in gold futures may be best left to experienced futures investors.

Gold Mining Stocks

Investing in gold mining stocks can provide the same advantages as investing in gold ETFs. Like ETFs, mining stocks are traded on stock exchanges, so shares can be bought and sold reasonably easily and without needing to store the physical gold. 

However, mining stocks are vulnerable to the mining companies facing financial difficulties or law changes that affect the company’s profitability [8]. In such circumstances, the price of gold can be rising, while the mining company stock is dramatically falling.

Gold mining stocks also tend to lack the diversification or protection against financial market instability that investing in gold is supposed to be a hedge against. A 2005 Yale study concluded that in the 40 years the study looked at, gold mining stocks correlated more to the stock market than to the price of gold [9].

Conclusion

Investing in physical gold is a tangible investment that does not carry the counterparty risk of gold ETFs, futures, and gold mining stocks. Holding physical gold is also best as a way to hedge against financial market instability and economic uncertainty, as owning physical gold is largely removed from the wider financial system. Contact the experts at Gold Survival Guide today to further discuss why physical gold is the safest way to invest in gold.