You have probably heard many well known figures advocating the wisdom of investing in gold. But you are wondering how. What are the types of gold investment and what is the difference.
This article will show you the 5 types of gold investment which you can make, their pros and cons. You can assess each type and see which is more suitable for you. The 5 types of gold investment are :-
Physical gold is simply what it says. It is physical, which means you can hold it in your hands. This can be subdivided further into the following :-
a. Wearable Gold
This constitutes all your jewellery like gold rings, gold necklaces. This is a most popular way with the older generations. The good thing about this type of gold investment is that it has a utility function in the meantime. Another good thing about this type of investment which is not talked about much is that of anonymity. You just go into a jewellery shop and purchase your jewellery and there usually is no record.
However, what is not very good about this form of gold investment, is the huge discount being applied. You see, when you buy gold jewellery, the jeweller usually charges a fee called workmanship, which can be as high as 20%. Similarly, when you want to sell your gold jewellery, they will also apply a discount for your jewellery.
b. Gold Bullion
Gold bullion is normally what is recommended for investors interested in investing in physical gold. By defination,
Bullion refers to physical gold and silver of high purity that is often kept in the form of bars, ingots, or coins. Bullion can sometimes be considered legal tender, and is often held as reserves by central banks or held by institutional investors.
By Investopedia, 3 Nov 2019
While gold jewellery investment suffices for those who wanted something that can keep its value whilst enjoying using the jewellery at the same time, gold bullion is the way to invest in physical gold for serious investors who are primarily looking to gains.
What is great about gold bullion is in times of extreme crisis when the financial system breaks down in your country, whether due to war or whatever, you can instantly get access to your gold.
You will find that it is also this characteristic that many has cited as its disadvantages. This is namely, storage of the gold. By storing in your own home, means that it is open to loss through theft and robbery. Storing it in safe deposit boxes incurs a charge. What is more, if there is a financial collapse in your country, you also cannot take out the gold from the safe deposit box as the bank may be closed.
2. Paper Gold
Paper Gold refers to gold investments which you owned but do not hold physically. It is basically an IOU that you have purchased from a third party, which is usually a bank or a fund. This can be your gold certificates, which is just like fixed deposits but denominated in gold. Alternatively, this can be your gold etfs. How gold etfs works is investor will put their money in a fund manager who will then total up the amount and goes out to buy the physical gold to be stored in a secured facility. In return, the fund managers makes a management fee which covers administration cost, storage and insurance costs. Investors would then be buy and sell their etfs units on a exchange.
The advantages of investing gold in this way is that it does away with having to ensure its safe keeping. In case of etfs, it also allows you to buy smaller quantities at one-tenth of one ounce.
Disadvantages is that you have to pay management fees to the fund. Another disadvantage is that at times, may be difficult to execute the trade. In the case of extreme financial markets, you may not get access to it although this is a very unlikely occurrence.
3. Digital Gold
Digital Gold has certain similarities to both physical and paper gold. It allows customer to buy even tiny amounts of gold that is stored at secured vaults in the platform that the customers bought from. You can then slowly accumulate the physical gold in small amounts. This is about the only advantage that I see for this way to invest in gold.
The disadvantages on the other hand is numerous. I have listed some below :-
a. This is all done online through the platforms, therefore due dilligence have to be made to ensure the financial stability and strength.
b. Certain platforms allows you only to keep it in their vaults for 5 years, after which you have to either take delivery of the gold coins or sell them back at a loss.
c. If you choose to take delivery of the gold coins, there are cost associated with it and you can’t properly determine your profit as you have to factor in this costs.
4. Gold as Forex
Forex Gold is basically betting on the price of gold against major currencies. Therefore, you can have Gold against US$ (XAUUSD), japanese yen (XAUJPY) etc etc. In this instance, if you are of the view that gold is generally bullish and that the Japanese yen would be devalued due to certain crisis unique to Japan, then your best bet would be to bet on XAUJPY because you would be profiting from both the rise of gold price in general and the devaluation of the Japanese Yen in particular.
Advantages of trading Gold as forex pair is 3 fold, it can be done 23 hours a day Mondays to Fridays when the exchanges are open. It has also the tightest of spread amongst all the other ways and there is leverage your capital investment to make outsize gains.
However, due to the leverage nature of trading in forex, it is also riskier and online trading platforms have placed the number of money losing accounts at more than 70% . Therefore, it would only be advised for experienced traders who have a firm grasp of the markets and risk management and mitigation.
5. Stock of Gold Miners
You could also invest in gold by buying stocks of gold miners. The rationale is when the price of gold goes up, these companies who mines the gold and sell would be able to make more profits. You would then own companies reporting higher profits which attracts a higher stock price.
Advantages of this is that your returns could potentially be greater than investing in the physical gold itself.
The disadvantage is you are buying into a company stock and therefore its management. You can make more money or you could lose money too even when the price of gold is up. This is because the company you buy may not be managed well. Therefore, to pick the winner, you would need to do your homework.
Moreover, i feel that this is not so much investing in gold but investing in the equity markets and therefore does not really fit in to what are the types of gold investment. However, I have included this so that your are aware of this route.
In conclusion, I still make the case for buying physical gold bullion is the best option if you intend to slowly accumulate gold.
Personally, I buy physical gold for the long term, accumulating whenever the price of gold is low. Get your free gold investment kit and start on your gold accumulation journey today.
On the side, I would trade the forex pair XAUUSD for the short term.
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