4 Proven Strategies to Invest in Gold
There are many reasons why you might want to invest in gold: as a hedge against inflation, currency risks or simply to diversify your portfolio. Invest in gold without commission with each of these brokers.
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We discuss 4 proven strategies to help you invest in gold, and consider their pros and cons:
- Gold CFDs: Contracts for Difference
- Gold ETCs: Exchange Traded Commodities
- Shares in gold mining companies
- Gold bullions: gold bars or coins
1. Gold CFDs: Contracts for Difference
If you only want to profit from changes in the price of gold, without having to worry about storage or insurance considerations, you could invest in Gold CFDs (contracts for difference) with AvaTrade or FxPro.
If you expect gold to rise above its current price of US$ 1,000 per ounce (fictional price, for illustration), you could invest US$ 10,000 to buy 10 CFDs. If the price of gold were to rise by $100, you could net a US$ 1,000 profit (excluding any charges your broker may levy).
CFDs are popular with investors like you because they allow you to significantly increase your profit through gearing, also known as leverage. CFDs brokers only require that you invest an initial margin, which can be as low as 1% of the trade's size, because they will lend you the difference. If your initial margin is 1% and you were to invest US$ 10,000, you could buy 1,000 CFDs (instead of 10, without leverage). A US$ 100 rise in the price of gold could deliver a US$ 100,000 profit.
In practice, leverage is a double-edged sword that can increase your gains and losses. If prices move against you, your broker may ask you to make further deposits or close your position altogether. This is why gold CFD brokers that provide negative balance protection are popular with investors.
2. Gold ETCs: Exchange Traded Commodities
You could also speculate on the price of gold without taking physical delivery through Exchange Traded Commodities (ETCs). ETCs can track the performance of a single commodity or a commodity index. Gold and precious metal ETCs are often backed by the physical commodity itself, held with a custodian. Because ETCs are listed on exchanges, you can buy and sell them in the same way you invest in shares.
ETFS Physical Gold (PHAU) is a Sharia-compliant ETC that tracks movements in the spot price of gold, less a management fee and any charges your broker may levy. It is backed by physical gold held with HSBC Bank, the custodian. Only metal that meets the London Bullion Market Association's (LBMA) rules for Good Delivery can be accepted by the custodian. Each physical bar is segregated, individually identified and allocated.
3. Shares in gold mining companies
Last but not least, you could trade the shares of gold mining companies to get exposure to the price of gold. However, this would not give you as clean a read on the price of gold, as stock prices are driven by many factors above and beyond the price of gold. You should carefully assess the companies you plan to invest in on their own merits. A company's management team, the strength of its balance sheet and operations are some of the factors to consider.
4. Gold bullions: gold bars or coins
If you're new to investing in gold, you're probably familiar with the gold bars (or ingots) held in vaults by central banks. These gold bricks weigh a standard 400 oz (troy-ounce) or 12.4 kg. However, gold bars come in many different sizes and shapes, from just 1 gram to 1 kilogram.
You could also purchase gold coins. Examples include the American Golden Eagle, the Australian Gold Nugget, the British Sovereign, the Canadian Maple Leaf and the South African Krugerrand. Some of these coins, called numismatic coins, are more expensive than other because they have rarity value as collectibles.
Together, gold bars and coins are known as bullions. You can purchase them online from a number of reputable websites. You'll also need to decide whether to keep your gold at home, or store it securely in a bank's safety deposit box for example. You should also consider specialised insurance to protect your investment from loss or theft.
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