Is it worth investing in gold? Here’s how to do it

How to invest in gold? Is it better to buy physical gold, ingots or invest in the gold commodity on the financial markets?

Gold has always been one of the best investments to protect your savings from inflation and financial market turmoil. Unsurprisingly, then, investing in gold is a very popular choice among those looking for a safe way to grow their money.

But how do you invest in gold? What are the best purchasing methods and strategies to adopt? And above all, is it worth investing in gold?

There are various financial instruments through which it is possible to invest in gold, such as ETFs, futures, options and shares, as well as the direct purchase of physical gold.

We will delve into all the possible ways to invest in gold, analyzing the advantages and disadvantages of each option. In this way, the investor, from the beginner to the more experienced, will be able to choose the strategy that best suits his needs, considering his current quotation and market trends.

Why invest in gold

Gold has always been considered a safe haven, capable of protecting savings from the effects of inflation and financial market turmoil. While its value may fluctuate, gold remains one of the most stable and reliable commodities for investors.

Additionally, gold is considered a limited resource, meaning that its availability decreases as mines become depleted. This keeps the demand for gold constant, helping to maintain its value over the long term.

History demonstrates that gold is a timeless asset: not only does it manage to be a successful capital-preserving asset, but gold’s high valuation and record demand has allowed the precious metal to outperform most other investment assets.

According to the World Gold Council, record buying of gold by central banks in 2022 helped boost global demand for the precious metal, even as many exchange-traded funds (ETFs) have shifted to other more lucrative investments due to the interest rate increase. Additionally, demand from jewelers and buyers for gold bars and coins remained strong. According to UBS,2023 could be a good year for gold, as experts predict that the price of the precious metal could rise by 19% for every 100 basis point drop in interest rates, once the Fed to adopt more accommodative monetary policy.

How to invest in gold

Investing in gold means betting on an increase or decrease in its price over time. However, the choice of how to invest in gold depends on the investor’s individual preferences and level of experience.

For those who want to invest in gold through financial instruments, there are several options to choose from, such as gold mutual funds, ETF and contracts for difference (CFD). These tools allow you to trade the price of gold without having to physically own it, which can be convenient and flexible. However, these instruments also carry a certain level of risk, as their value can fluctuate significantly based on market conditions.

For investors who prefer to have direct control of their investment, buying physical gold in the form of bars or coins can be an attractive option. There are many precious metal dealers that sell physical gold, both online and in person. However, buying physical gold also comes with additional costs such as safekeeping and insurance, as well as the need to find a safe place to store the precious metal.

Buy physical gold

Buying physical gold means buying and possessing gold in its two forms of investment: coins and bars.
In both cases we are speaking of pure gold, i.e. gold with 999.9 thousands.

There are of course countless objects that are made of gold, including coins. But when this is not pure it means that it is alloyed with other metals, which contaminate the goodness of the good.

Previously gold coins had value as a means of payment. Today, with the presence of banknotes, the value of gold coins has once again coincided with their intrinsic value, relative to the gold actually contained.

It will depend on three factors:

• the gold price of the day;
• the grams of pure gold contained;
• the spread, or the difference in cost, applied by the retailer.

In the same way, ingots represent the other classic form with which it is possible to invest gold.

The ingots are made of pure gold and come in all sizes, even from a few grams.
Investment in gold coins or bars is in fact now within the reach of all budgets, even for a few hundred euros, and is beyond the performance and costs of the financial markets, although it obviously has costs and risks associated with detention.

It is possible to buy physical gold for investment, exempt from VAT, through banks or professional operators in gold, companies duly registered in a special register kept by the Bank of Italy. Always pay attention to the reality to which you decide to entrust your savings.

Investing in gold with ETCs or ETFs

ETF (Exchange Traded Funds) and ETC (Exchange Traded Commodities) are passively managed financial instruments that replicate the performance of a benchmark, or of an underlying reference.

By buying ETFs, investors can trade in the financial market as if they own the underlying physical asset. In fact, these instruments function as a sort of borrowing of the underlying, in this case gold, of which the interest will then have to be repaid.

Investing in gold ETFs or ETCs means buying a financial instrument whose value replicates the same trend as gold. Thus, without having to own any quantity, it will be possible to earn money based on the trend in its price.

However, it should be remembered that gold, like almost all commodities, is quoted in dollars. Consequently, the prices of this raw material will also be affected by the trend of the EUR/USD exchange rate.

This means that the result of the investment in ETFs or ETCs will depend, to a small extent, also on the trend of the euro-dollar exchange rate, according to the following relationship:

• when the US dollar appreciates against the euro, the euro-dollar exchange rate falls and the investment in gold increases in value;
• when the US dollar depreciates against the euro, the euro-dollar exchange rate rises and the investment in gold loses its value.

It is important, before investing in gold, to also consider the period in which you are. Analyzing the trend of the dollar can in fact be a good way to understand (minimally) even the movement of gold.

Invest in gold with CFDs

Some investors prefer to invest in gold with CFDs. In this way, the asset is not physically acquired, but one speculates on the performance of an underlying which reproduces the gold price.

Through special platforms managed by reliable and authorized brokers it is possible to trade both upwards and downwards, exploiting fluctuations in the price of gold to obtain gains proportional to the extent of the fluctuation itself.

In other words, investing through CFDs does not involve the physical acquisition of gold, but only speculation on the price trend, obtaining gains proportional to the size of the gold price fluctuation.

By positioning yourself short, therefore, you can also speculate on the possibility that the price of gold will suffer drops. However, it is important to remember that, as with any financial investment, there are always risks to consider and that it is necessary to operate with prudence and awareness.

Investing in gold through futures and options

futures and options are derivative financial instruments whose value depends on that of the underlying, i.e. the asset on which these contracts are built.

Gold futures or gold options are nothing more than tools that also replicate the trend of gold, allowing you to earn from its rise if you decide to buy one of the two tools.
Gold is therefore the underlying of these derivative instruments which, compared to ETFs and ETCs, present greater risks.

With derivatives it is in fact possible to make use of leverage, expanding the possibilities of gain or loss beyond the means permitted by one’s invested capital.
Leverage is both an opportunity and a risk, a factor that makes futures and options more extreme solutions than the previous ones and recommended only to expert investors, perfectly aware of the risks they run.

Investing in gold with shares

It is not possible to buy shares of gold. Instead, it is possible to invest one’s savings in shares of mining companies, i.e. companies whose financial performance is closely related to that of the raw material.
It is not at all uncommon to practice this type of indirect investment, betting on the movement of the price of a raw material by not exposing yourself directly to it but to the shares of a company for which it is of fundamental use.

Investing in gold through shares of mining companies is therefore possible and often more prudent than investing directly in the raw material, even through the financial instruments listed above.

The risks of such an investment are linked to the fact that the financial performance of the company being invested, and therefore of its shares, will not depend exclusively on the performance of the gold.

There will certainly be other factors that could affect its performance, although in the long run it will be aligned with that held by gold, as if it were a benchmark.

Investing in gold is worth it?

The safe haven par excellence obviously has not only positive sides, but we can also find many negative sides. To give a clear picture of the situation, we have therefore decided to also list advantages and disadvantages of this type of investment.

Let’s start by seeing the advantages of investing in gold:

• securing capital - gold has always been considered a valuable asset, since its extraction is rather complex. Stocks involving gold have, for precisely these reasons, slight changes over time and low volatility;
• long-term returns - gold’s best returns are over a long period, since due to its value it tends to remain a security that increases in value. The increase in the value of gold occurs above all in moments of greater economic insecurity, since many choose it as an investment for its stability;
• stability in case of default - gold is a physical asset, which is therefore not subject to default.

Let us now look at the critical issues of this type of investment. The biggest disadvantage of investing in gold is the long term. In fact, it is not possible to be able to obtain returns if not over a rather prolonged period of time.

The low volatility of the asset in fact ensures that the price remains stable. This also has a second disadvantage: if the price falls for one reason or another, it would be difficult to buffer the losses.
In fact, when the price settles at lower levels, it could remain so for a long time.

Original article published on Money.it Italy 2023-05-02 16:36:03. Original title: Investire in oro: come comprare, conviene?