Gold Investment: Five Ways to Own and the Risks Involved

Investors frequently look to gold as a safe haven when economic times are difficult or international conflicts, like in the current case in Russia and Ukraine.

In such cases, most investors prefer a safe asset with a proven track record of gains. Without any doubt, gold fits the bill because inflation is on the rise and the stock market is trading far below its highs.

Yellow metal is popular among investors for many reasons, and it has qualities that make it a useful alternative to conventional securities like stocks and bonds. Despite the fact that it is an asset that doesn’t generate cash flow, they still view it as a store of value.

Because of the Fed’s actions to boost the economy, such as cutting interest rates close to zero, and government spending, some people view gold as a hedge against inflation.

Gold prices have been on an upward trend since the war elapsed. As of 5^th September 2022, the gold price in Kenya is 6,611.8 shillings per gram, while 10 grams gold rate is 66,118.2 shillings. This could, however, change in favor of the metal or weigh it down due to several factors.

If you are looking to get into the lucrative gold investment, here is a list of five ways you can own the yellow metal and a look at some of the risks that come with each.

1. Gold bullion

Gold is in its purest form, usually in the form of ingots or bars, and is regarded as a raw material. It is investment-grade, pure gold, which may be smelted into gold coins or gold bars.

You’ll enjoy the satisfaction of seeing it and touching it, but one of the biggest drawbacks of owning a large amount of physical gold is the hard task of protecting and insuring it, one of the biggest drawbacks.

As you are purchasing, take note of its spot price, which is the price per ounce that is currently being offered in the market. To avoid paying more for a coin’s collector value than its actual gold content, you might want to trade in bars rather than coins.

Risks

If you don’t keep your holdings secure, someone might physically take them.

When you have to sell your gold, you run the second-largest risk. Receiving the full market value for your holdings can be challenging, especially if they are coins and you require cash immediately. Therefore, you might have to be content with selling your assets for much less than they would otherwise fetch on the open market. 

2. Gold futures

Gold futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of gold at a predetermined price on future delivery date.

The ability to use such high levels of leverage when investing in gold through futures is by far its biggest benefit. For a relatively small investment, you can own a substantial number of gold futures, and quickly make a large sum of money if the futures move in the direction you anticipate.

Risks

Investors in futures contracts face a double-edged sword when it comes to leverage. If the price of gold moves against you, you’ll have to put up a sizable amount of money to keep the contract open (this is known as margin), or the broker will close the position and you’ll lose money.

The futures market is typically only for experienced investors, and you’ll need a broker who supports futures trading, not all of the big brokers do.

3. ETFs that own gold

A great alternative to owning physical gold is to purchase an exchange-traded fund (ETF) that tracks the commodity if you don’t want to deal with the hassle of doing so or the frantic pace and margin requirements of the futures market.

IShares Gold Trust (IAU), SPDR Gold Shares (GLD), and Aberdeen Standard Physical Gold Shares ETF are three of the biggest ETFs (SGOL). These types of ETFs aim to match the price performance of gold less the annual expense ratio of the ETF.

The ease with which an ETF can be converted into cash at market value is another major advantage over owning bullion. Similar to selling a stock, you can trade the fund on any day the market is open for the going rate. 

Risks                          

ETFs give you exposure to the price of gold, so whether it increases or decreases, the performance of the fund should be similar, again minus the fund’s operating expenses. Gold can occasionally be volatile, just like stocks.

4. Mining stocks

Investing in the mining companies that create the gold is another way to benefit from rising prices for the metal.

Given that they can profit from gold in two different ways, this alternative may be the best one for investors. First off, the miner’s profits increase along with the price of gold. Additionally, the miner can gradually increase production.

Risks

You should thoroughly understand the business before investing in individual stocks. There are a lot of extremely risky miners out there, so you should be careful to choose a reputable participant in the market.

Avoid small miners and those who don’t yet have a mine that is producing as much as possible. Finally, mining stocks can be volatile, just like all stocks.

5. ETFs that own mining stocks

Don’t want to learn too much about specific gold companies? Then investing in an ETF might be a good option. You can gain exposure to the largest gold miners on the market by using gold miner ETFs.

You won’t be significantly harmed by the underperformance of any one miner because these funds are widely diversified across the industry. iShares MSCI Global Gold Miners ETF is one good example of the larger funds in this industry.

Risks

While the diversified ETF shields you from any individual company failing, it won’t shield you from something that harms the entire sector, like persistently low gold prices.

Additionally, keep in mind that not all funds are created equally when choosing your investment. While some funds invest in senior miners, which are less risky, others do so with junior miners.

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