Investing in Gold: A Guide
Every experienced trader knows that any financial crisis endangers every asset, except for gold. While the pandemic has negatively influenced a lot of currencies and indices, the price of gold has gone over $2 000. At the start of the year, it was sold at $1 500 per troy ounce.
Its price is currently dropping due to the fact that buyers failed to maintain the price. And while some are scared for their capital, the majority are sure that the price will start increasing soon. While gold’s price dynamics are looking better than ever, it is still not the most profitable asset out there. For example, Bret oil that hit its all-time low at $15.65 last year now costs $70.
Gold is not as volatile, therefore, the profit it may potentially bring is not astronomic. Nevertheless, it’s good to trade, especially if you know how. We are going to cover everything you need to know about gold below.
There are a few ways you can trade gold. One of them is literally buying physical gold. You don’t have to do too much research in order to get started. Going to an antique shop and buying jewelry or any gold artifacts will suffice. This approach only has one significant disadvantage. If you are to sell the gold, you can only do it for a lower price. Only in the case of a significant price increase, you will be able to make some profit. Moreover, considering how fast things happen on the market, the time it takes to find a great piece and make sure it’s not fake is a little too much.
Regardless of the flaws this strategy has, you can still turn to it if it seems like something that might work out for you. Especially considering the fact that over time gold only increases in price, while your national currency drops. Therefore, you can use gold as a way to store your savings and avoid the risk of its devaluation.
Another way you can trade gold is with the help of an unallocated metal account. These are special bank accounts for precious metals. Basically, it’s a bank account that allows you to keep money in gold or silver instead of USD or EUR. In most cases, opening such an account doesn’t even require a visit to the bank. As a result, you save a lot of time you would’ve spent on looking for a gold piece to buy. Furthermore, UMAs usually do not require any commission fees, so you’re using the storage for free.
Unfortunately, there are some disadvantages as well. In most cases, your gold-related operations will have a high spread. The average difference between the buying and paying prices is around 5-7%. This makes gold only profitable as a long-term investment.
Mutual funds investments
Gold is also often used in mutual funds investments. Whenever a new investor joins, the fund spends the money on gold. This has proved to be an excellent long-term strategy. If you can wait a few years to see the profit, this might be a fit for you.
This approach is, of course, not perfect. One serious flaw it has is the high commission the fund takes for managing the assets. These fees may go up as high as 3% of the investment. Apart from that, there is only the risk of making the wrong investment, which is present in many trading strategies.
This is another way you can invest in gold. What makes it different from all the others is the fact that you buy the stocks of the fund that invests in gold along with its mining and production. It is somewhat similar to mutual funds with a few differences. One of the largest ETFs is the SPDR Gold Trust (GLD ETF). The average annual return of this fund is 9.88% that is followed up by a commission of 0.4%. Although it’s a rather high fee, the profitability of the fund compensates for it. Shares of SPDR Gold Trust are even owned by the Bank of America along with JP Morgan and Goldman Sachs. The price of the shares is tied to the price of gold. If the precious metal is going up in price, so do the shares of SPDR Gold Trust.
Unlike mutual funds, ETF’s are very liquid, so they are not only suitable for long-term investments. You can find information about any ETF out there and pick the one that you like best. In order to make decisions regarding your investment, follow the changes in the price of gold as they will directly reflect on the prices of shares regardless of the fund.
A future is a financial contract that obligates the buyer to purchase an asset for a certain price in the future. The trade isn’t tied to a specific time in the future, but if the contract expires, you cannot change the trade. Generally, futures are traded till the supply rises, which never really happens.
There are trading terminals you can use to buy or sell futures. What makes them great is the low commissions and spreads. They, however, best fit short-term traders due to the fact that their terms indicate the expiration date. As a result, you constantly have to buy new contracts.
CFD stands for a contract for difference. It is an instrument that lets you trade any asset without actually purchasing it. You only earn on the difference in prices. CFDs don’t have an expiration date, so you can use any trading strategy you find convenient. While the goal is to buy a CFD for a lower price and sell it for a higher one, you can also do the opposite. If the price is falling, buy the CFD you sold for a higher price and you will make a profit.
This is actually the fastest and easiest way to invest in gold. You have full control of the risks and do not depend on the decisions of other people. Moreover, the entering price is rather low. You can start with any amount you can afford and increase it in the future.
The market offers numerous ways to invest in gold. It’s easy to find something that will fit your goals and trading style. If you’re looking for short-term trades, futures and CFDs will work out for you just fine. If you’re after long-term deals, you might want to consider mutual funds. Remember that while your portfolio will be handled by professionals, you will also have very little control over the decisions that are made about it.