If we ask you what is the main safeguard asset, what is the first that comes to mind?
Perhaps you have thought of gold … And it is not surprising. This golden metal has been seen as a safe harbor for centuries.
You probably know someone who has a small reserve of gold at home or who has already offered gold to a family member as a symbolic gesture. This happens because we recognize value in that raw material.
Historically, gold has played an important role in the economies of many nations. Although it is no longer a primary form of currency, gold is still a solid long-term investment and can be a valuable addition to the portfolio, particularly in a bear market.
Gold was considered a universal currency for hundreds of years. Due to its recognized value throughout the world, a gold standard was used since the Byzantine Empire more than 1,500 years ago. Until recently, in fact, gold was used as a world reserve currency.
But what if you are only thinking of investing in gold? What is the best way to do this? Buy a gold bar or invest in a mutual fund? What is the most likely way to achieve returns?
In this article we answer those questions and explain what are the best ways to invest in gold today.
Why Is Gold More Valuable?
It’s safe to say that no other metal has played such a significant role in human history. The cult of gold has long been ingrained in society.
The first evidence of human interaction with gold dates back to 3,000 BC, by the Egyptians, who used it in the construction of pyramids and in the elaboration of artifacts to idolize their pharaohs.
But more interesting than the use of gold for ornamental purposes is that at that time the Egyptians were responsible for the first relationship between the value of gold and silver: 1 part of gold was equal to 2.5 parts of silver.
This shows that even then, gold was worth more than silver, something that endured throughout history. From ancient Greece to the Inca and Aztec civilizations, gold was always seen as a valuable commodity, used to distinguish the higher classes from the rest.
But the importance of gold goes far beyond the financial value that can be attributed to it. It is because it is a symbol of wealth and security that, throughout history, it also had several uses in the definition of monetary systems , coming to be used as a currency of exchange.
When To Invest In Gold?
We know you are wondering. After knowing the advantages of investing in gold, you want to try it, but when is the best time to invest in this asset? The best time to invest in gold is when inflation is expected to take over and reduce the value of the national currency. The sooner you can detect such drops, the more room you have to make a profit.
Leading indicators, such as the stock market crash and political turmoil, may indicate a future devaluation of your country’s currency. Similarly, when the central bank announces that it is printing more currency, this can be a good indication that it is a good time to invest in gold.
On the other hand, when the monetary value is strong and inflation is not expected in the short term, there is not much scope for the price of gold to rise. That said, if there are expectations of higher demand from markets that require gold, such as jewelry and electronics, consider investing in gold to take advantage of potential price pressure.
In practical terms, however, a passive buy and hold investment strategy may be the best for the regular gold investor. Since economies tend to be cyclical, buy when the price of gold drops. This way, you don’t have to worry about buying when everyone else buys and the price goes up.
How to Invest in Gold?
Thanks to the emergence of new digital investment platforms, today it is very easy to invest in gold.
Of course, you can invest in gold even buying a bar or jewelry, but if you think that these are the best options, you are wrong, since they are generally very expensive and impractical .
We started with an increasingly popular form and, imagine, you don’t even have to leave the house to apply it!
1.Investment funds / gold ETFs
An ETF ( Exchange-Traded Fund ) is an investment fund admitted to trading on the stock market and that can be purchased from a broker, such as stocks.
The appearance of gold ETFs came to change this type of investment, making it much more practical and accessible !
Therefore, you can easily invest in gold with comfort and without worrying about storage fees.
An investment fund can be made up of several assets from the most varied sectors. When you buy an ETF, you are exposed to the assets in which that fund invests.
ETFs are becoming increasingly popular precisely because they allow investors to participate in a pool of various assets by making a single investment. This generally means that with fewer resources , you will achieve greater diversification .
Best Gold ETFs
In the case of gold, ETFs are generally divided into two groups:
- Investments only in gold;
- Investments also in gold mining companies.
SPDR Gold Shares was the first fund with its own gold reserves to emerge in the United States and is listed on the New York Stock Exchange . This fund holds more than 740 tonnes of physical gold in its vaults at HSBC’s London warehouses.
When you buy units of a fund like this, you are investing in a portion of the accumulated gold. The value of this gold directly accompanies the movement of the metal in the markets.
If you want to invest in SPDR Gold Shares, you can do so on an online platform such as eToro , which has the advantage of simplifying investments and making other ETFs and assets available to you, such as stocks, Forex or Bitcoin .
Another popular option, and certainly the oldest, is to buy a gold bar. However, it is much less practical .
First of all, you must find a financial institution authorized by the Central Bank and by the CVM of your country, to sell gold in physical format to individuals. Then you will have to register with the institution and, if you want to invest more than $ 500, prove your income.
Once you have purchased the gold, you will need to find a bank to store the metal, with a monthly escrow fee.
If you keep the gold at home , you do not pay the custody to the bank, but you have less security and greater difficulty in selling it.
It is worth mentioning that, in any of these solutions, you will always have less liquidity when selling than if you had an ETF, since, in that case, you would have buyers at any time and throughout the world.
On the other hand, if you like to “feel” your wealth, buying a gold bar is the most direct way to go.
The CFDs ( Contracts for Difference ) in Spanish “Contracts for Difference” are instruments linked to the price of an asset. You are not the direct owner of the gold, but you have a right to the variation in its price.
One of the advantages of CFDs is that it does not depend solely on the rise in the price of an asset to profit from it. If you think the price is going to fall, you can trade on that assumption and profit from the falling price of gold.
Where to invest in Gold CFDs?
The brokers that we recommend to buy CFDs are eToro and IQ Option.
This type of instrument is indicated for those who are thinking of trading more frequently, since it allows you to benefit from both the increase and the fall in the price of gold.
However, we do not recommend that you trade the gold with CFDs only. For example, in brokers like eToro, as we have shown, you can choose to open a buy position without any commission, since you invest directly in the ETF.
That is to say:
In that case, trading gold through CFDs would be a missed opportunity as it would have higher costs . Use this instrument only if you want to win from falling gold prices.
If that is the case, you can open a position to sell any of the ETFs mentioned or the commodity itself.
Like CFDs, they are a more suitable solution for the short / medium term. The futures contracts are traded on the Stock Exchange of different countries in the region through registered brokers can find:
Standard Lot of 250g (OZ1D);
10g Fractional Lot (OZ2D).
We are talking about a very liquid market and more recommended for advanced users, since there is more room for price speculation .
A future contract is an agreement between two parties for the purchase and sale of a certain asset on the date that is agreed.
It is generally used to manage the risk of changes in the price of raw materials, since it helps buyers and sellers to have a previously agreed price on a product that will only be sold later.
In this case, the custody of the gold is in charge of the brokers, since the investor only pays the brokerage fees.
Advantages of gold as an investment
Although it is no longer a primary form of currency in the developed world, gold remains a popular investment for several reasons.
Gold can be easily converted to cash anywhere in the world. Besides real cash, the liquidity and universality of gold has no competitor.
It maintains its value. Gold tends to maintain its value over time. Economists consider that even the price of gold is not indicative of its value. That is, even if the price goes down, the underlying value of gold doesn’t change much. This is mainly because there is a fixed amount of gold due to the fact that it is a commodity, while the US dollar, which is a form of fiat currency, has no inherent value.
- Hedging Against Inflation
Gold increases in value when inflation takes hold. Since gold is priced in euros, any deterioration in the euro will logically lead to a higher price of gold. As a result, during times of inflation, gold offers a much more stable investment than cash.
Adding different stocks to your portfolio is an essential way to diversify and reduce the overall risk of your investments. Also, because gold often moves inversely to money and stock values, it provides an especially effective way to diversify.
- Universally desired investment
Gold remains a universal commodity. Although countries sell their currency futures, Treasuries, and other securities around the world, unlike gold, they are subject to political chaos.
Gold is used as an input in products . Since gold is used in the production of various products, including jewelry and electronics, there is a reliable demand that further stabilizes the price of gold. Also, in times of increased demand, these markets can force the price of gold higher.
Disadvantages Of Investing In Gold
While gold can be a great investment for the number of reasons outlined above, you should also be aware of some disadvantages of investing in gold before venturing into it. They are the main ones:
- Gold does not generate passive income
Other investments, such as stocks and bonds, can derive a portion of the value from passive income in the form of interest and dividends. However, the only return you can get from gold is when it increases in value and you decide to sell it.
- Gold can create a bubble
When the economy is unstable, many people start investing in gold, but when investors start to panic, gold can be too expensive. This, in turn, means that your investment could lose value once the price corrects.
- You need physical and secure storage
If you choose to buy real physical gold, you will not only need to store it, but you will also need to insure it. Otherwise, you will not be able to replace it if it is damaged or stolen.
- Tax rates on capital gains are higher on most gold investments
The tax rate on capital gains is around 28%, which is much higher than the ordinary capital gains rate of 15%. That said, companies that don’t invest in gold directly are still taxed at the ordinary rate.
Increase in the value of gold coincide with the devaluation of the local currency. Many economists argue that gold only increases in value when the euro depreciates or inflation is strong. As a result, critics of investing in gold feel that gold does not offer adequate returns in other markets.