In this article, we will discuss whether gold is a good asset or not. If yes, then how to invest in gold. To understand this, let’s have a look at some previous data.
| Year | Average Closing Price |
|---|---|
| 2001 | $271.19 |
| 2021 | $1805.24 |
Here you can see that the price of gold in 2001 was $271.19 and, in 2021, it is $1805.24. It means the price has increased 6.69 times in the last 20 years. If we calculate the annual return on investment (RoI), it comes to be 9.94 per cent which is approximately 10%. This return is almost 5 times more than what you get in the certificate of deposit (CD).
Why Investing In Gold Is Important
Before paper currency, almost everything traded was based on gold. When paper currency came into existence, its value was based on the weight of gold. Government reserves were made where you can submit your gold, and in return, get a stamped note worth the amount of the gold you submitted.
For example, you submitted gold worth $100 in a government reserve, in return, the government reserve will grant you a stamped note worth $100. Now to buy anything with the $100 bill, you don’t need to carry any physical gold. The government fragmented these bills into different denominations. This new bill allows you to buy any product worth less than or equal to the bill amount without cutting the gold into smaller fragments.
These government reserves take gold and convert it into currency. Therefore, gold is a valuable asset because the value of the currency is based on gold. That is why investing in gold is so important.
How to invest in gold
Gold can be described as a hedge against inflation. People invest in gold because they believe inflation is just around the corner. The economy is suffering, and the unemployment rate is high in nearly every major economy. So it is better to invest in gold.
The data chart shows whenever the market has crashed, the gold has gone up except for two occasions. By analysing the chart, we can clearly say, adding gold to our investment can make our portfolio much safer.
Smart investors invest about 10-20 per cent of their investment into gold. You must also invest a small percentage of your investment into gold depending upon how much confident you are in the stock market.
The more confident you are with the stock market the less gold you need, and the less confident you are with the stock, the more gold you need.
As we have seen gold is a good investment to diversify your portfolio, now let’s see the best ways to invest in gold.
- Physical gold
- Gold ETFs
1. Physical Gold – How to buy physical gold
Buying gold from an authorized jewellery shop is the best way to buy physical gold. You can buy gold in the form of jewellery, bars and coins. Some retailers give discounts for using a credit card and while others do it for wire transfers. So choose a payment method that is more cost-effective for you. But there are certain limitations of buying physical gold.
Limitations of buying physical gold
- You can buy physical gold in the form of jewellery, bars and coins. But you have to pay additional making charges.
- Storing physical gold at home is risky. And storing in a locker would cost you additional charges.
- When you buy physical gold, you have to pay the amount as per the weight of gold. There is no investment flexibility.
- When you buy physical gold it is generally 22 K and, still, there is a trust issue with the purity of the gold.
2. Gold ETFs – Invest money in gold online
What are gold ETFs?
Gold ETFs are unit representations of physical gold that can be held in the form of digital gold in your broker account.
When you invest in a gold ETF, your broker holds the gold on your behalf and, in return gives you a receipt. Whenever you wish to sell that gold, you can sell it and get your money back. So investing in gold ETF is like buying gold stock, where there is no involvement of physical gold. With the advancement in technology, you can invest money in gold online from your smartphone, just with a simple click of buttons.
Benefits of investing money in gold online
Buying digital gold is the best way to invest in gold.
- You don’t have to pay for any making charges.
- Assurance of 24K gold with 99.99 per cent purity.
- It gives you the freedom to buy as per your budget rather than the weight of the gold.
- Your gold is 100 per cent secure in a locker by a third party.
- You can sell or purchase it at any time. There is no time limit as in the stock market.
How to invest in gold ETFs
A gold ETF allows you to buy digital gold at the price of gold. If the price of gold increases, your investment will also increase, and if the price of gold falls, your investment will reflect that too.
Best gold ETFs
- SPDR Gold Shares (GLD)
- iShares Gold Trust (IAU)
- Aberdeen Standard Gold ETF Trust (SGOL)
1. SPDR Gold Shares (GLD)
The term SPDR is an acronym for Standard and Poor’s Depository Receipt. It is the first and the largest ETF that started in January 1993 in the United States.
The SPDR Gold ETF Shares is designed to spot the price of gold bullion. It then allocates 100% physical gold in HSBC’s vault in London. So it really securitizes your gold.
GLD was introduced on November 18, 2004, and today it has a net asset of $60 billion. Unlike any physical market where you buy and sell in the marketplace, GLD represents a secondary market through shares. You can buy and sell gold like any other share quickly and efficiently. The downside of GLD is that it has the highest expense ratio of 0.40%.
The custodian is responsible to the Trust for losses and damage to gold under limited circumstances. However, for losses due to cause beyond the control of the Custodian such as nuclear fusion or fission, war, invasion, the act of God etc, the Custodian will not be responsible to the Trust. Therefore, read the terms and conditions before investing.
2. iShares Gold Trust (IAU)
The iShares Gold Trust is a collection of exchange-traded funds (ETFs) that are managed by BlackRock and not under the Investment Company Act 1940.
For iShares, the Trustee is The Bank of New York Mellon and the Custodian is JPMorgan Chase Bank, the London Branch.
To empower investors with the right resources, they offer high quality and performance to their investors. They offer services like Portfolio Construction, Investment Risk Management and Designing Efficient Trading Strategies.
The ETF has a low storage charge of 0.25%.
3. Aberdeen Standard Gold ETF Trust (SGOL)
The Aberdeen Standard Gold ETF allows you to track the price of physical gold bullion. These shares are backed by 100 % physical gold in Switzerland wallet. With a $2.5 billion net asset, the SGOL is the largest active manager in the U.K. and the second largest in Europe. The brand has a significant global presence. The brand has a low expense ratio of 0.17 %.
Comparison chart for Gold ETFs
| ETF Name | ETF Symbol | Total Asset ($MM) | Storage Charges |
|---|---|---|---|
| SPDR Gold Shares | (GLD) | $59,828.50 | 0.40% |
| iShares Gold Trust | (IAU) | $28,964.6 | 0.25% |
| Aberdeen Standard Gold ETF Trust | (SGOL) | $2,389.46 | 0.17 % |
Conclusion
Investing in gold is important as it acts as a hedge against inflation. But investing in physical gold is not as beneficial as investing in gold stock. Investing in gold-stock not only give you security against inflation but also provide you with the freedom to buy gold as per your budget. You can easily buy and sell gold just like any other stock with a gold ETF.
FAQs
You can buy gold stocks through Gold ETFs. The top three gold ETFs are
1. SPDR Gold Shares (GLD)
2. iShares Gold Trust (IAU)
3. Aberdeen Standard Gold ETF Trust
The best way to invest in gold is through Gold ETFs. Buying physical gold costs more because you pay the making charges and, also storing it is risky. Therefore, investing in gold ETF is a better option.
To buy a gold ETF, you have to open a brokerage account online with an online ETF investment platform. These ETFs charge expense ratio from 0.15% to 0.40%. The expense ratio is much lesser than the commission that you pay for storing the gold in a wallet.
