Having been in financial markets since the 1980s, I have seen many people fixated on gold as an investment. In the financial industry, these investors or traders are affectionately referred to as "gold bugs", which the Free Dictionary defines as:
An investor or investment adviser who keeps a portfolio consisting largely or exclusively of gold and gold-related products. They invest in gold because it is usually protected from inflation and tends to maintain its value, even in bad economic times.
Getting exposure to gold-related assets can be achieved by buying gold, buying gold-related exchange-traded funds (ETFs), and buying the shares of gold mining companies. Let's analyse each option:
1. Gold mining shares:
- In buying these shares you are investing in companies involved in gold mining operations, and then indirectly own a portion of the gold reserves these companies extract.
- The shares can offer significant potential returns, especially during periods of rising gold prices. However, they are also subject to company-specific risks, such as operational challenges, management decisions, and geopolitical factors.
- Investing in shares provides exposure to the gold industry while also diversifying a portfolio across multiple companies, which can mitigate the risks associated with individual companies.
- Shares tend to be more volatile than the price of gold itself because they are influenced by production costs, exploration success, and market sentiment towards the mining sector, among other factors.
2. Gold ETFs:
- Gold ETFs are investment funds that track the price of gold. By investing in a gold ETF, you indirectly own a proportionate share of the underlying gold held by the fund.
- They offer a convenient way to gain exposure to gold without the need for physical storage or handling and can be bought and sold on stock exchanges, providing liquidity and ease of trading.
- ETFs typically hold a diversified portfolio of gold bars or other gold-related assets, which spreads the risk associated with owning a single gold bar or coin.
- Gold ETFs charge an expense ratio, which represents the management fees and operational costs of the fund. This cost should be considered when evaluating the overall returns.
3. Gold bars:
- Gold bars can be purchased in various sizes and weights, and they are typically stored in secure vaults or personal safes.
- Some investors prefer the security and peace of mind that comes with owning physical gold as a tangible asset that you can possess.
- Storing gold bars requires proper security measures to protect against theft or damage. The additional costs for secure storage facilities or insurance should be considered.
- Liquidity may be an issue for prospective investors because selling physical gold bars may involve additional steps compared to selling gold ETFs or gold mining shares. Finding a reputable buyer and ensuring fair pricing can be more challenging.
There are also gold mutual funds, professionally managed investment funds that invest in a diversified portfolio of gold-related assets and are popular among individual investors who prefer a diversified approach to gold investing and want professional management of their investments; and gold futures and options, which are derivative contracts that allow investors to speculate on the future price of gold. They are typically used by institutional investors, hedge funds, and experienced traders who are seeking leveraged exposure to gold price movements. These instruments require a good understanding of the futures and options markets and are generally considered riskier and more complex.
While gold's popularity is attributable in part to its physical nature and widespread ownership, its significance as a store of value, safe haven asset (hedged against inflation, currency fluctuations, and geopolitical risks), and portfolio diversifier plays a more significant role in its enduring appeal to investors, both newer and more experienced.
Gold's historical track record of preserving wealth during times of economic uncertainty or market volatility can make it appealing to those who are just starting to build their investment portfolios, while more mature investors may choose to include gold in their portfolios as a means of diversification and risk management.
Interestingly, being a "gold bug" can be contagious, and historically, the commodity has experienced surges in popularity as an asset due to economic uncertainties, inflation concerns, geopolitical tensions, and market volatility.
While hindsight helps identify when and why these surges occurred, gold prices can be influenced by a wide range of factors, including supply and demand dynamics, central bank policies, currency and economic fluctuations, and investor sentiment.
The choice between owning gold mining shares, gold ETFs, gold bars, or other gold-related investments depends on an investor's goals, risk tolerance, and preferences. And while we can observe long-term trends in gold investing, it's essential for investors to conduct thorough research and diversify their portfolios to mitigate potential risks. Gold mining shares offer potential returns but come with company-specific risks. Gold ETFs provide convenience, diversification, and ease of trading – some ETFs are invested in a diversified range of gold stocks, as well as those that invest in gold mining. Gold bars offer tangible ownership but require storage and security considerations. It's important to carefully evaluate these factors and consult with a financial advisor before making any investment decisions.
