Along with the increasing volatility and crisis of global financial markets in recent years, gold investment is becoming more and more popular from time to time. However, there are still many investors who remain unconvinced that gold is a good investment product and a good tool for buying assets. In essence, you must understand the difference between investing in gold and other investment methods in order to make purchases that are in line with your long-term goals.
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Method 1 of 2: Understanding the Risks and Benefits of Investing in Gold
Step 1. Study the history of gold as a means of payment
Gold has been used as a means of payment far longer than most other instruments. Although not all places accept gold as an ideal means of payment, there are many who accept it so that gold has been considered a "de facto" universal currency since the 19th century. Although it is no longer used as a common means of payment, there are many people who believe that gold needs to be used as currency again.
- Most of the world's economic powers decided to abandon the standard payment in gold during the Great Depression. The United States partially abandoned this currency during the reign of Franklin Roosevelt and completely forgot about it when Richard Nixon became president.
- Almost all modern currency is paper money – the value of which is determined by the government that issued the money. Critics of the standardization of the value of gold say the same about gold (it is valued only because the government considers it valuable).
Step 2. Understand why gold is a good investment
Gold is usually bought as a “safety net” from various forms of investment risk in the market. In other words, it can provide protection against poor market performance, inflation, and currency fluctuations. The price of gold is determined by the amount of demand and supply, not the valuation of the currency or the decline in market performance.
- Gold can make your investment portfolio more varied. One of the keys to financial diversification is to own a variety of assets (stocks, bonds, real estate, precious metals, various other commodities). When diversifying assets, it is very important to collect assets that have different values (not correlated with each other). Traditionally, gold has had low correlation with stock markets in the United States, emerging markets, and high-value bonds. In fact, gold has a lower correlation with these assets than the correlation between one asset and another. This means, gold has a high diversification potential.
- Gold also serves as an inflation safety net. Gold prices tend to rise along with inflation. This happens because when inflation occurs, investors increase the value of gold by buying it as an alternative to cash.
- While the benefits of gold as an investment are highly debated, it is usually considered a good repository of value. Even if the purchasing power of cash diminishes over time due to inflation, the value of gold will remain stable.
Step 3. Understand why gold is a bad investment
There is a growing opinion among investors that gold is not a safe investment product, nor is it the best safety net against inflation.
- Some investment researchers see that the demand for gold does not actually rise when stocks fall or currencies lose value. There are many experts who believe that the increase in the price of gold is only caused by the fear of investors who buy it in a hurry because they believe the price will go up. If this assumption is correct, gold is not a safe investment as it has been claimed.
- A thorough examination of gold's track record shows that the object's value has only increased a few times during severe inflation or declining market performance. While some people believe that gold can become an alternative currency when an economic order collapses, there are still many who are skeptic.
- Gold does not provide a guarantee of return on investment like various other types of investments. The famous investor, Warren Buffet, refuses to invest in gold in any form. According to him, it doesn't make sense to invest in a material that doesn't have much use if you can buy stock from a profit-making company.
Step 4. Learn the factors that affect the value of gold
No matter what the critics say, buying gold has become a popular investment tool in every generation. There are several factors that affect the price of gold:
- The Washington Agreement of Gold is an agreement made in 1999 to limit the sale of gold from 14 countries in one year. The motive of this deal is to keep the market from being oversupply of gold so that the price falls. Critics often attack the agreement by viewing it as a nuisance to normal supply and demand.
- Weakening economic performance can make investors sell their commodities or assets for cash. This makes supply increase and demand decreases so that the price of gold goes down.
- National crises or wars tend to increase investor demand for gold, generally because they are afraid of currency depreciation. Investors buy gold stocks and commodities to fight the economic crisis and support the value of stocks in general.
Method 2 of 2: Buying Gold Stocks
Step 1. Learn the different ways to buy gold stocks
In general, one can invest in gold stocks in three ways: you can buy stocks through a gold mining company directly; You can buy funds traded on the gold exchange; and you can buy gold mutual funds.
There are various pros and cons to each of these methods. Buying shares of a mining company provides direct access to the lucrative but high-risk gold mining market, while buying through mutual funds and gold exchanges has lower risk and better diversification
Step 2. Analyze specific gold mining companies
The simplest way to invest in gold is to buy shares in mining companies. This is a high-risk method, but the profit is greatest. Investing in a mining company is the same as betting that the company is able to make a profit, very different from investing in various places. Analyzing the company thoroughly is very important because you have to be sure that they can perform better than their competitors.
- When choosing gold mining stocks, keep a few things in mind. Observe the cost of production. Gold producers have low purchasing power. So, the ability to produce gold at low operating costs is paramount. This information can be found on the website of the company in question. Visit the “Investor Relations” page and read the annual or quarterly earnings reports.
- Pay attention to the amount of production. A strong company should be able to increase its annual production. Strong production equals big profit and low production cost. Look at the company's annual report for indications of production developments. A company usually includes this report in the form of a chart.
- Compare the company's debt with its competitors. The best way to look at debt is to use the debt/equity ratio, which is a comparison between a company's assets and its debts. This information can be found on websites such as Morningstar.com. The lower the ratio, the better.
- Look at the company's valuation. How high is the income of one company compared to another? Compare the price-to-earnings ratio by dividing the stock price by earnings. This information can be found on websites like Morningstar.com, the lower the number the better.
Step 3. Invest in gold mutual funds
If you choose the lower risk option or can't find a company that's convincing, look for mutual fund-based investments. The funds used include a portfolio of companies that mine, process, and distribute gold. There are several advantages of buying a mutual fund investment:
- These funds provide more diversification than buying shares in one or more companies. While gold mining stocks typically rise and fall with the gold price, there is a large variation in performance based on the efficiency and quality of the company's management. Buying a mutual fund eliminates the risk of choosing a bad investment (like buying stock in a company with large debt, for example), and limits the risk from other factors that affect the entire industry.
- Gold mutual funds are actively and professionally managed. This means that you can let the professionals choose which companies are considered the best in the industry. A good financial manager will choose a list of stocks whose performance is predicted to continue to climb in the gold industry. Understand that there are costs to buying mutual funds. This fee includes stock management funds and is usually equivalent to a fraction of the funds you invest. Look for managers who charge 1 percent or less of your total investment.
- When choosing a gold mutual fund, pay attention to its past performance, fees (the lower the better), and its rating on the Morningstar website (the higher the better). Assessments based on long periods of time are more relevant than short ones. You can also find out how it has performed in the past through the manager's website. Morningstar has a 5-star rating system for mutual funds.
Step 4. Invest in the stock exchange
Stock exchanges are somewhat similar to mutual funds in that they provide investors with access to a wide range of stocks and bonds at affordable prices. Some stock exchanges provide direct access to buy and store these commodities, while others provide buying and selling access to futures contracts. Buying gold directly involves the value of storage and is made based on its current selling price, while futures contracts are financial instruments that are made based on predictions of the future price of gold.
- Stock exchanges differ from mutual funds in that they openly sell investment products such as stocks, while their prices are set based on an index such as XAU, GDM, or CDNX (The value of mutual funds is updated daily based on the value of the assets in it).
- Gold investment in the stock exchange is usually lower cost than mutual funds because it does not use an active financial manager, but is done passively based on an index. For example, SPDR Gold Products on the stock exchange only follow the price of gold bullion. By buying this product, you indirectly have gold.
- Stock exchanges are a great option if you want greater flexibility at a lower cost. Stock exchanges let you not only invest in gold, but also invest in the gold mining operation itself. The most noticeable drawback is the absence of an active manager. Thus, there is little chance of outperforming the index being used because you are essentially investing in the index. On the other hand, the possibility of performance under the index is also smaller.
Step 5. Buy gold stocks
Once you've decided to use one of the investment methods, it's time to make a purchase. The three methods above can be executed through an online broker, such as TD Ameritrade, or E*Trade. You can also find stock brokers offline.
- After opening a new account, look for the ticker symbol for the desired stock or stock exchange. For example, if you want to buy Barrick Gold stock, the symbol is NYSE: ABX. This means Barrick Gold (or ABX) is traded on the New York stock exchange, United States.
- To buy it, just enter a buy order through your broker, then enter the ticker symbol of the stock, the desired stock exchange or mutual fund, and the number of shares you want to buy, then submit a purchase. If there is enough cash in your account, the shares are already yours. Keep in mind that brokers usually ask for commissions that vary widely.
- This purchase can also be made by contacting the broker through the number listed on the official website.
- Mutual funds can be purchased through financial advisory services. The advisor will ask for additional fees other than those charged for managing the mutual fund. These advisory services may be useful to help you find the most appropriate funding.
Tips
- Reset your gold purchases according to the investment strategy. Gold does not always offer large long-term investment returns. As an “unconsumed” commodity, its supply is relatively constant, but its demand is highly volatile. If you use gold as a safety net, sell gold when market performance is high, then buy back when market conditions are unstable.
- Ask a question. You are not a professional in the industry, but should leave gold management to a certified professional. Make sure you trust whoever is managing your money.
