An investment that has stood the test of times in the ever-evolving world of finance is ‘Gold’. When you lay out the trajectory of the history of investing, only a few investments have been worthy enough to be an opponent of gold. Serving as a hedge against a myriad of challenges ranging from the grip of inflation, economic upheaval, unpredictable currency fluctuations, and war, gold stands as an investment that promises stability and reassurance.
In the world of investment, everything that glitters is gold
A fact that all of us are aware of is that gold as an investment has lower chances of being exposed to market volatility and economic downturns. That is because its status quo is such that it demonstrates a negative correlation with other assets during times of market turmoil. This provides a cushion against portfolio losses when other investments falter. Therefore, a lot of people invest in gold to protect their wealth.Some choose gold because of the possible financial returns. However, a question that perhaps runs in the minds of most beginners and newcomers is, how do we invest in gold?
For a debutant, one of the most recommended gold investments is ‘Gold IRAs’.
If you are looking to add diversity to your retirement investment strategy, one option is to move a portion of your existing individual retirement account (IRA) into a gold IRA.
Interestingly, there is a lineup of gold IRAs to pick and choose from. With a traditional gold IRA, your money can grow over time on a tax-deferred basis. Alternatively, you can choose a Roth gold IRA, where you fund the account with after-tax dollars. This means that when you take distributions during your retirement, you won’t owe taxes on them. Roth IRAs bear resemblance to traditional IRAs with the only distinction being that they are taxed in different ways.
Another option, specifically for those who run a small business or are self-employed, is a Simplified Employee Pension (SEP) gold IRA. This could be set up for both yourself and your employees, if applicable.
If you are not investing, it might be beneficial to work with a reputable gold IRA company. They can assist you in setting up the necessary arrangements to ensure you follow IRA regulations correctly. The company has the ability to help you appoint an IRA-approved custodian and select a depository to securely store the physical gold within your IRA.
Apart from gold IRAs, a (g)old-fashioned method of investing is through physical gold.
Physical gold is available in various forms, such as gold bars and gold coins. Note that an alternative method is investing in gold jewellery but it does not bear the same characteristics as an actual gold investment (this is because moulding jewellery has an expenditure that is excluded from its gold content. For instance you have to pay for craftsmanship and branding which are extrinsic to the value of gold). While the tangible nature of physical gold can be appealing, there are practical considerations to keep in mind. Storing and insuring this valuable metal is a crucial aspect to consider.
The potential return on investment from gold is tied to the fluctuations in its market price. There are multiple options for purchasing gold, including established gold dealers, private collectors, and even pawn shops.
The cost you pay for gold will be influenced by factors like the purity of the gold in the bar or coin as well as the prevailing price of gold at the time of purchase.
For instance, gold bullion is frequently available in sizes such as on-ounce or 10-ounce bars. As of 14th August 2023, the gold price per ounce was US$ 1,912.34. Alternatively, investing in gold coins might be a more straightforward option, as they come in quantities of one ounce or even smaller denominations.
A simpler but refined alternative to purchasing physical gold is investing in the stock of companies engaged in gold mining., refining, and trading. This approach involves buying shares of gold mining companies through your brokerage account.
Several widely recognized stocks in this sector include:
- Newmont Corp. (NEM): Newmont is headquartered in Colorado and holds the distinction of being the largest gold mining company globally. Its operations span across North and South America, as well as Africa.
- Barrick Gold Corp. (GOLD): Based in Toronto, Barrick Gold is a major player in the gold mining industry. It operates in 13 countries worldwide.
- Franco-Nevada Corp. (FNV): Unlike traditional gold miners, Franco-Nevada focuses on purchasing royalty rights from the other gold mining operations. Its headquarters is in Toronto.
A disclaimer that comes with this option is that while the stock prices of gold companies are influenced by fluctuations in gold prices, they are also influenced by the specific financial health and performance of each company. Therefore, just like investing in other stocks, investing in individual gold companies carries similar risks.
A more secure option than this would be investing in gold ETFs (Exchange-Traded Funds) and gold mutual funds. Gold ETFs provide exposure to gold’s stability, liquidity and diversification compared to physical gold or individual stocks. Gold mutual funds offer exposure to gold’s potential with active management by professional investors. There are various types of gold funds, including passive funds and actively managed funds.
However, an important consideration is that both of these represent paper assets backed by debt, equity or future contracts which means that they may not perfectly align with actual gold market prices. Additionally, their performance might differ from physical gold due to factors like company performance or market dynamics
Withstanding the test of time
There are polarising views amongst investors about gold and its potential benefits. Investors often turn to gold for specific reasons, typically during intense market upheavals or when gold prices surge, However, this reactive approach overlooks gold’s broader value as a fundamental strategic asset across various long-term investment scenarios.
The biggest strength is that gold is a risk-management tool with power that lasts. It serves as a durable diversification tool for portfolios over the long term. Its global demand across different sectors contributes to its low correlation with other assets, making it valuable for multi-asset portfolio managers. This quality minimises portfolio volatility and drawdowns, leading to a better risk-adjusted performance against extreme risks.
Additionally it is a wealth-preservation tool with liquidity. Gold’s history of playing an enduring role as a store of value is impressive. Its rarity and resistance to decay makes it a dependable means of preserving and amassing wealth. Even in the past it has functioned as both currency and a link to monetary systems. The depth and liquidity of the gold market solidify its status as a reserve asset for central banks and institutions.
Furthermore, gold stands out among other liquid alternatives. Owing to the fact that economic growth significantly influences gold’s performance and investment advantages. During economic expansions, gold demand rises due to its use in jewellery, technology, and industries beyond its investment appeal.
Evidently, there are many narratives around gold, most of them sway towards positive commentaries. While being aware of the lustre and the risks of gold, it is important to understand that its core attributes make it essential for more than just reactive purposes.
(Sandunlekha Ekanayake)