Gold has always been a sign of wealth. It is a very rare precious metal and it is sought after by many. It is one of the most widespread ways of investing too. The price of gold, just like any other commodity on the market tends to go up and down depending on the supply and demand.
This precious metal is mostly used for jewelry as many might have already guessed. It is also used in aviation, electronics, in the health sector, and others. The biggest buyers are governments, fashion brands, and banks. The USA has the largest reserve of gold in the world, then comes Germany and the IMF is third. As an individual investor, you could also put some of your money in gold.
Why should you invest in the precious metal
History has shown that gold is more stable and remains a good investment option even in times of crisis. Over the last 40 years, its value has gone up and some of this was due to people’s fear of inflation. After 9/11 the political uncertainty led to another increase in the price. You should know that it is not always that way. Usually, the precious metal stays stable in times of crisis. There were multiple ups in the price throughout history and this makes it yet again a desirable way for diversification of the portfolio of many traders. Investment Opportunities
1. Gold Bullion
This is the most widespread option when it comes to owning gold. The bullions are made out of pure gold and have a serial number for tracking. They are a pretty fight, but they also have some downsides – it is difficult to exchange them for cash and you have no way of dividing them, which is a crucial flexibility issue. You can opt for bullions with smaller sizes – they might be the best option.
2. Gold Funds
Another way to invest in gold is through gold funds. In this way, you don’t actually possess the precious metal. You can invest in shares of ETF tracking gold which stands for a particular amount of gold. You can contact a broker for help with this operation since you will be dealing with the stock exchange market. Choosing to invest in gold also helps with minimizing your risks if you are a smaller investor because the minimum buy-in is one share. The average ETF charges around a 0,44% expense ratio per year which is enough to cover the expenses regarding the transaction. Remember that gold is a way to diversify your portfolio – you shouldn’t put all your money into it. ETFs are a great way to still participate in this market in case you don’t want to deal with physical bullions.
3. Gold Futures and Options
A future is an agreement to buy or sell a certain commodity on a particular date that is yet to come. The so-called gold futures refer to contracts and include a certain amount of gold. This resembles margin trading with crypto. In order to buy futures, you have to work with a broker. You will be opening a position and giving your prediction of the fluctuation of the precious metal. In case you are right, you will earn money and vice versa. If your balance falls below a certain amount, you will have to put in more money. Once the contract expires, it is in most cases settled in cash, which you should plan accordingly.
When the market is in contango it means that the price and spot prices are less than the value of later expiry contracts. If the situation is the other way around, it’s called backwardation.
You can choose gold options instead of futures. Using futures you will be able to buy at a certain fixed value and for a set period. In this way you could minimize your losses of the investment in the beginning. There are also some cons of working with options. Futures enable you to buy precious metal at the current market value. It is not this way with options – you will have to pay a premium.
Why are there fluctuations in the value?
The market for precious metal works with supply and demand, but there is no inflation. Most of the time the more currency is printed the higher the inflation. With gold, it is a lot more stable and the only factor that affects the value is people’s fear in times of crisis.
Central banks affect gold as well especially when the foreign exchange reserves become full. When this happens, they start disposing of the gold they have because for them this could be considered a dead asset that doesn’t bring any return.