Is gold a good investment? It is a common question among precious metal investors. Gold is considered the most popular precious metal for investors. Many investors assume gold is a good investment without ever truly considering all of the ways to invest in gold.
Investors look towards gold as a way of holding value within their portfolio while providing a hedge against possible unanticipated inflation. Some methods for investing in gold are better than others, which we address further in this article.
Recognize that some gold investing opportunities can lead to a cash drain
Investors have a tendency to consider gold bullion or gold coins as a means for investing in gold. This is often the case for those who want to own physical gold. The problem with gold bullion or gold coins is that they can have other expenses associated with them that drain your cash reserves. For instance, gold bullion needs storage, management, and insurance, all of which cost additional money. These added expenses make it harder to generate income from gold bullion or gold coins.
Gold futures and gold options are other investing opportunities, but they too can be costly. These investments come with additional commissions and trading costs, again making it harder to profit from the gold investment. In order to profit from investing in commodity futures or options, you need the ability to out-guess professional options traders. These pros likely have more experience and resources available to them, making it harder for you to profit over time.
Investing in gold bullion, futures, or options is more of a gamble than an investment as it involves more luck than anything else to make money.
Is gold a good investment? Shares of gold mining companies and ETFs can provide more safety
The best chance to profit through gold investing comes from gold receipts, derivatives, gold mining company investments, or gold exchange traded funds (ETFs).
Gold receipts trade on an exchange like stocks or ETFs. These receipts act as proof that the investor owns physical gold. There is a monthly fee for holding gold exchange traded receipts (ETR), and the ETRs can be redeemed monthly for either cash or gold bullion.
Investors like gold ETFs because they provide a greater level of diversification, often at a lower cost. Gold ETFs are made up of assets backed by gold, which means that the investor does not own the physical commodity itself. The lower cost of the ETFs make them favorable to investors who want to benefit from the gold market while saving money in the process. However, holding a Gold ETF over long periods of time can lead to relatively high capital gains taxes. Furthermore, if an ETF’s management chooses to sell gold, each sale will cost the shareholder.
Investing in gold mining companies provides some additional ways to profit. For instance, the investor may receive capital gains in addition to profiting from increases in the price of gold. Investing in gold mining companies also involves lower brokerage fees and commissions than some other gold investing methods, like buying gold bullion.
Gold is a volatile commodity so that reality should be considered before investing. Conservative investors should hold only a small amount of volatile stocks, whereas aggressive investors may feel more comfortable with bigger holdings.
Would you have more confidence investing directly in gold bullion over investing in a gold mining company? Why or why not?