Why Invest In Gold
So whats the deal with the shiny metal anyway? There are so many exciting investment opportunities by now, why would people still go back to something as archaic as gold? Well, one of the main reasons why gold is still a popular asset is because of diversification. By having a range of investments that cover different areas, youre less likely to lose all of your money if one sector happens to take a nosedive. Gold is one of those sectors that it can be useful to keep money in.
Piggybacking off of that, gold has historically performed well during times of market turmoil, since its a commodity that tends to maintain its value even when as other commodities like paper currency decrease. Its why investors tend to choose gold when currencies start to decline, as well, which in turn causes the price of gold to rise, which in turn attracts even more investors.
Its also seen as a good investment to have during times of geopolitical instability . Gold is also seen as a good hedge against inflation, since its price tends to rise alongside rising costs of living.
Another argument made by gold lovers? As emerging markets across the world are producing more investors, the demand for gold will supposedly continue to grow, while the fact that it takes a while for gold supplies to be replenished and its a finite resource means that demand willagain, supposedlycontinue to outpace supply.
Go For Gold Not For Broke
No matter your view of whether the price of gold is a good bet, it makes sense to subject investment decisions in gold stocks or an ETF tracking gold or gold stocks to the same rigorous process as regular stock buys. That means waiting for a proper buy point and a buy signal.
The charts of gold stocks like NEM and GDX no longer look constructive. While FNV, IBD’s top-rated gold stock, looks more solid, all gold stocks are pretty closely tied to the fortunes of GLD, which has fallen well below its 200-day moving average. Prospects look somewhat brighter for the iShares Silver Trust ETF that tracks the silver price. SLV has bounced above its 200-day line and is about 6% below its recent buy point. Silver has both precious metal and industrial metal characteristics.
To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
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Drawbacks Of Physical Gold
- Expensive to hold. Storing gold at home carries enormous risks of theft or loss. Keeping it in a commercial facility incurs storage costs, often based on the size and value of the holdings . If you’re not using a professional storage facility, you’ll want to insure your gold, too another ongoing charge.
- Illiquid. Physical gold can’t be sold with a press of the button or a call to a broker. Even with dealers acting for you, a sale can get days or weeks to settle, plus you have to arrange for shipping.
- Does not produce income or profit. A $1,000 investment in bullion buys $1,000 period. Physical gold doesn’t generate interest or dividends. The only potential for appreciation is if there’s a jump in prices that lets you sell at a profit .
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Learn How To Buy A Stock On Your Brokerage
So finally, at step 6 of this guide on buying stocks, we’re ready to actually buy.
Many online brokerages have different interfaces and nuances to go about buying a stock, but the core method of doing so will be the same.
In my eyes, the best online brokerage in terms of simplifying the buying and selling process is Qtrade. Here is Qtrade’s order page below:
Discount brokerages tend to offer cheaper commissions, but it’s very important we don’t get focused on commissions only, and instead choose the best online brokerage that is going to help us succeed.
We need to now go over some terminology that is going to help you narrow down exactly how to place an order with your brokerage and actually buy your first stock.
Why Investors Like Gold
Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier, says Juan Carlos Artigas, director of investment research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain stretches, though it doesnt always beat them.
- Liquidity: If youre buying certain kinds of gold-based assets, you can readily convert them to cash.
- Low correlations: Gold often performs differently from stocks and bonds, meaning when they go up, gold may go down or vice versa.
In addition, gold offers other potential advantages:
- Diversification: Because gold is generally not highly correlated to other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
Those are a few of the major benefits of gold, but the investment like all investments is not without risks and drawbacks.
While gold performs well sometimes, its not always clear when to purchase it. Since gold by itself doesnt produce cash flow, its difficult to determine when its cheap. Thats not the case with stocks, where there are clearer signals based on the companys earnings.
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Investing In Gold In Canada Is Not Hard To Do But Make Sure You’re Buying For The Right Reasons
In this day and age, you can have physical gold shipped to your house from your bank in a matter of a week. Or, you can go online and gain instant exposure to a trust that holds gold bullion with a single click of a button.
This makes investing in gold in Canada extremely easy. However, it can also breed a trading-like mentality when it comes to trying to take advantage of gold prices.
In our opinion, if you are looking to purchase gold as a hedge to uncertainty or rapid inflation, it is best to deploy a long-term buy and hold strategy.
Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.
Dylan Callaghan
About the author
Dylan is the co-founder of Stocktrades.ca and an avid self-directed investor. He holds a portfolio of Canadian growth and dividend growth stocks, and believes that anyone, regardless of financial status, stands to benefit from investing in the stock market. His ultimate goal with his writing and the continual development of Stocktrades.ca is to create a resource that helps Canadians, and investors from around the world, make more money and retire earlier.
Top Stocks
Real Interest Rates Are Key Factor
The gold price hit bottom at the end of 2015, just as the Fed hiked its benchmark interest rate for the first time since the financial crisis. But the gold price and gold stocks didn’t really begin to shine until the fall of 2018, when the Fed’s plan to keep hiking interest rates triggered a sharp stock market sell-off.
Gold’s persistent strength starting in late 2018 was driven by a fundamental change in the Fed’s thinking about inflation. Even as unemployment fell to a 50-year low, inflation pressures were a no-show. After slashing its benchmark overnight lending rate close to zero, the Fed has said it won’t hike interest rates until inflation is firmly above its symmetrical 2% target.
Based on the most recent Fed projections, the first hike isn’t expected before 2024. However, the Fed could alter that outlook based on incoming economic and inflation data.
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How Much Should You Invest In Gold
Gold can be a volatile investment, so you shouldn’t put a large amount of your assets into it — it’s best to keep it to less than 10% of your overall stock portfolio. The real benefit, for new and experienced investors alike, comes from the diversification that gold can offer. Once you’ve built your gold position, make sure to periodically balance your portfolio so that your relative exposure to it remains the same.
Derivatives Cfds And Spread Betting
Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange and Euronext.liffe. In India, gold futures are traded on the National Commodity and Derivatives Exchange and Multi Commodity Exchange .
As of 2009 holders of COMEX gold futures have experienced problems taking delivery of their metal. Along with chronic delivery delays, some investors have received delivery of bars not matching their contract in serial number and weight. The delays cannot be easily explained by slow warehouse movements, as the daily reports of these movements show little activity. Because of these problems, there are concerns that COMEX may not have the gold inventory to back its existing warehouse receipts.
Outside the US, a number of firms provide trading on the price of gold via contracts for difference or allow spread bets on the price of gold.
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How Do I Invest In Gold Mining Companies
You can choose to buy shares in those companies involved in the mining and exploration of gold or invest in financial instruments that base their performance on the future value and changes in gold prices. These include products such as options, futures and spread betting. You do not own any gold in these examples.
Bottom Line: Is Gold A Good Investment
Gold has been a commodity for thousands of years. Its value has been relatively stable historically, and it tends to perform better when stocks are down. For these reasons, gold is a popular investment strategy for many people who want to diversify their portfolios. However, most financial advisors dont recommend putting more than 10% of your assets in gold.
If youre looking to invest in gold for retirement, you might consider a gold IRA. Gold IRAs are investment retirement accounts that are backed by gold. They work similarly to a traditional or Roth IRA but hold bullion or coins instead of paper assets. To learn more, research how to find the best gold IRA company.
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What Is An Etf Of Etfs
An ETF of ETFs is an exchange-traded fund that itself tracks other ETFs rather than an underlying stock, bond, or index. Like a fund of funds, this approach provides investors with a method for investing in multiple strategies with a single product. It combines the cost and transparency advantages of the traditional ETF structure with the research and analysis of an actively managed fund.
Many well-established providers like Vanguard and Direxion have hopped on the ETF of ETFs bandwagon through new product offerings that combine different asset classes or rotate between sectors.
Do I Pay Capital Gains Tax On Gold Coins
Gold coins minted in and after 1837 that are legal UK tender at the time they were purchased or sold should be exempt from Capital Gains Tax . They also need to be in Sterling to qualify, so a Sovereign that is a £1 sterling-based gold coin, would qualify for the exemption, while Kruggerrands would not as these a form of South African currency. Those buying gold coins minted before 1837 should be aware these are not classed as legal tender and are treated as chattels. There is the possibility that these could be exempt from CGT, if the gain does not exceed certain values set out in HRMC guidance.Investors also need to bear in mind the rules for the selling of sets of coins and again should refer to HRMC guidance.Gold that is not deemed to be legal tender will have CGT applied at the appropriate rate for profits over a set amount.
Read the Moneyfacts Taxfacts to find out the current rates and limits for CGT.
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Investing In Gold Etfs Or Gold Unit Trusts
A gold Exchange Traded Fund allows you to invest in gold, without having to buy the physical gold assets. It is a fund that holds a range of different gold-backed assets. Some gold ETFs simply track or mimic the price movements of physical gold, whereas others may include shares in gold miners, or various gold-backed derivatives. The underlying asset is what dictates the value of the ETF and will therefore be the determining factor for its performance.
Gold ETFs can be traded like stocks, making them liquid and easy to sell off as and when required. They are also oftentimes cheaper to own for new investors, as you do not have to purchase actual gold, albeit you should check with a qualified broker for the spot price. This allows you to include gold in your portfolio, with a smaller commitment of capital.
A gold unit trust is also a fund, which consists of gold-related assets and derivatives. Similar to gold ETFs, some gold UT invest directly in physical gold, while some gold-related UTs invest in stocks of gold miners, other precious metals and bulk commodities. The main difference is that the unit trust is more actively managed there are managers who handle the buying and selling of gold-related assets or derivatives in the fund. Ideally, the full-time professionals running the fund will be able to get better returns than an ETF, which simply mirrors gold price movements.
Gold ETFs and unit trusts can be conveniently purchased through a bank or licensed broker.
Drawbacks Of Gold Securities
- Volatility. Just as with any company, a miner’s operating costs, reserves, and management all play a factor in its performance. As a result, shares prices tend to be more volatile: If bullion sinks 10%, gold stocks often plummet 15%. Miners definitely “have a higher speculative aspect to them,” says investment strategist Lyn Alden, who follows precious metals and currencies.
- Systematic risks. A gold mining company’s share performance also reflects in political and economic conditions in its native country. Some of the biggest operations are in Africa, Russia, and Latin America places that have known their share of turbulence and are often avoided by socially responsible and institutional investors.
- You don’t own gold. Gold securities are less of a pure play. They represent physical gold but you don’t have the right to redeem them for the actual metal. So they don’t provide the protection against a paper currency or financial market meltdown that the metal itself does.
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Learn What Gold Investing And Trading Are
Gold investing and trading are two different ways to take a position on the future price movement of gold markets.
When you invest in gold, youd take ownership of the asset upfront and profit if the precious metal rises in price. When you trade gold, youre taking a position on the underlying price rising or falling meaning you wont be taking ownership of the asset itself.
There are several types of gold assets available for you to trade or invest in, depending on whether your interest is in the physical asset or not. These include:
- Gold bullion
Physical gold in the form of coins and bars is commonly used as a store of value, for both individual investors and banks. But the expensive safekeeping and insurance requirements often deter more active investors from buying the metal outright
- Spot gold
The spot price of gold is how much it would cost to buy upfront or on the spot. It is usually the price of one troy ounce of gold. Trading spot gold is a popular means of getting exposure to bullion without having to take ownership of the precious metal
- Gold futures
Futures contracts enable you to exchange gold for a fixed price on a set date in the future. Youd have the obligation to uphold your end of the deal, whether thats through a physical or cash settlement. Futures contracts are standardised for quantity and quality only their price is driven by market forces
- Gold options
- Gold ETFs
- Gold stocks
How Do We Get Gold
Although panning for gold was a common practice during the California Gold Rush, nowadays it is mined from the ground. While gold can be found by itself, it’s far more commonly found along with other metals, including silver and copper. Thus, a miner may actually produce gold as a by-product of its other mining efforts.
Miners begin by finding a place where they believe gold is located in large enough quantities that it can be economically obtained. Then local governments and agencies have to grant the company permission to build and operate a mine. Developing a mine is a dangerous, expensive, and time-consuming process with little to no economic return until the mine is finally operational — which often takes a decade or more from start to finish.
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Physical Gold Vs Gold Stocks Whats The Difference
There is a major difference between investing in physical gold vs. gold stocks. Generally, when you are investing in gold, you are investing in bullion, and youre directly purchasing the precious metal itself in the form of gold bars or coins. On the other hand, when you invest in gold stocks, youre purchasing a stock like any other.
Generally, gold stocks can be related to the price of physical gold, but gold stocks are also susceptible to other types of risk, as well as the broader stock market.
So which of these methods of investing in gold is better? Well, that really depends on your particular circumstances for example, your investment goals and your risk profile.
Lets take a look at each of the ways you can invest in our favorite shiny yellow metal.
