Gold! It captures the imagination, evokes images of grandeur, and you might even have some in your home in the form of jewelry. But to invest in gold is another element (forgive the pun) altogether. Most investors are better off investing in gold mining ETFs.
Gold, like many other precious metals, has intrinsic value due to its finite availability and its usage in consumer products. Investors look towards the resource like this as a hedge against inflation.
Of course, there are various ways to invest in gold, including buying gold coins and bullion. One of the easiest ways to invest in gold, however, is through ETFs. There are benefits to gold mining ETFs, including lower fees and a more straightforward method for investing.
Discover two main reasons why investors choose gold mining ETFs over other types of gold investments
The two biggest reasons to invest in gold mining ETFs come from the inherent structure of many ETF investments. Most ETF investors look for the passive management traditional ETFs. These ETFs track an index, like the S&P/TSX Global Gold Index, and don’t make many trades. Fewer trades leads to a lower management expense ratio (MER), leading to a cheaper investment than other stocks.
Furthermore, many gold mining ETFs come with internal diversification. These ETFs will involve holdings of gold mining production companies throughout the world. Top gold mining ETFs will include gold miners operating in politically and environmentally stable areas with successful mines already in production.
The lower expenses and diversification of ETFs can benefit many investors. It is also necessary to realize the costs associated with other types of gold investments. Investors who choose to buy gold coins or bullion will rarely, if ever, generate income from these investments. However, they will continue to pay into the management of these investments, like paying to manage, store, or insure the gold.
Determining if gold mining ETFs are right for your portfolio
Investing in commodities in the resource sector can come with volatility. For this reason, it is essential to invest in well-established companies that have produced profits, as well as limiting your investing amounts accordingly. Conservative investors should avoid allocating more than 20% of their portfolio to the resource sector, while more aggressive investors can dedicate up to 30% of their portfolio to this sector.
It is best to invest in gold ETFs that include holdings of companies with steady production and reliable reserves. Top mining companies are beyond the planning stage, although they may have some associated junior mines, and they may also have hidden assets in the form of research and development. Positive cash flow and a sound balance sheet are necessary to see from targeted mining investments. It’s also best to avoid penny mines and junior mines if they aren’t connected to a major mine that is already producing. Penny mines and junior mines sound attractive to some investors, but most of these investments will never show a profit.
In addition to the above qualities, look for gold investments with a market cap that is not more than half the value of the gold.
Looking for investments with these characteristics will provide a degree of protection to your portfolio while allowing you to enjoy the benefits of investing in gold.
Do you have greater interest in precious metal investments that do not involve gold?