While the bitcoin phenomenon may have stolen some of the lustre away from gold, the shiny metal remains one of the world’s most sought-after metals. One of the oldest and most reliable forms of currency, gold remains a desirable investment option today, particularly in times of share market turbulence.
So, why does gold retain such an eminent place in our global economy? Here is an absolute beginner’s guide to investing in gold.
Elemental Gold
Gold is a metallic element classified in chemistry’s periodical table under the symbol Au. Incredibly soft and malleable, a single ounce of gold can be beaten into a thin metal sheet of gold leaf the thickness of a human hair five square meters in size.
This prodigious malleability is one of the reasons gold is the cornerstone of jewellery. Gold is also a brilliant conductor, making it a major component in the manufacture of mobile phones and spacecraft.
Every ounce of mined gold is essentially the same as every other ounce of gold ever mined. This explains why gold is a commodity traded on many exchanges based on simple supply and demand.
Physical gold is typically traded as bullion, which is a gold bar, ingot or coin stamped with the amount of gold it contains and an assay attesting to the gold's purity.
How Scarce Is Gold?
Gold is comparatively abundant in nature but is difficult to extract. At any one time, there is a sizable difference between the availability of gold and how much gold there is. Estimates by the World Gold Council put the currently available volume of extracted gold at around 190,000 metric tons, while the amount still believed to be lurking underground is about 54,000 metric tons.
How Do We Get Our Hands On The Shiny Stuff?
While gold can be found in nugget form on the ground or panning for in creek beds, most of it is mined commercially in vast industrial quantities. It is commonly found comingled with silver and copper.
What Drives Global Demand For Gold?
The gold extracted by miners today is sought by several different industries. The largest market for gold is jewellery, which absorbs around 50 per cent of gold production. Another 40 per cent is physically invested in the gold commodity sector in the form of coins, bullion, medals, and gold bars. This demand is a mix of individuals, central banks, and exchange-traded funds such as EFTs that buy gold on behalf of other investors. The remaining gold demand comes from industry, for use in dentistry, heat shields, and technologies such as computing, and phones.
What Makes Gold So Valuable?
So why is that shiny yellow metal so sought after and expensive? In ancient times, was also a lot harder to mine meaning it was difficult to obtain, leading to its premium value.
Even early paper-based currencies were backed by gold, with every printed note matching an amount of gold held in a vault, which it could, technically, be exchanged. Today, our currencies are fiat currencies and not linked to a gold standard.
Consumers still love gold, hence the heavy demand by the jewellery industry. However, a sizable demand stems from people looking to own gold in its physical form either coins, bullion or bars. That stems largely from the economic view of gold as a safe-haven investment.
Safe Haven Asset
Gold is more or less transportable and if the value of paper money comes under pressure people could fall back on something of value such as gold to facilitate trade. This is one of the primary reasons investors often push up the price of gold when financial markets are experiencing turbulence and volatility.
One situation, which can prompt gold prices to increase, is economic and political turmoil. Gold’s core value never really decreases thanks to its comparative rarity. Hence, investors often include it in their portfolio as a hedge against investment risk.
If assets are declining during an economic downturn, gold often holds its value or even increases in value.
How Is The Gold Price Determined?
Gold for all its storied history remains a commodity, much like copper or iron ore. The interplay between supply and demand for gold ultimately determines the spot price of gold at any given point in time.
Jewellery demand is comparatively constant, although economic downturns can temporarily suppress this demand. In contrast, the demand from investors, as well as central banks, ebbs and flows with the state of the global economy and investor confidence.
So, as investors become increasingly concerned about the economy, they often purchase gold, which in turn ramps up demand, pushing gold prices higher.
How Do I Invest In Gold?
There are five mainstream means of investing in gold as part of a diversified investment strategy.
1. Physical Gold
The first option in any beginner's gold investment strategy is physical gold. This is one of the most popular investment forms and probably the safest for someone still learning about how the investment world works. You can purchase bars of varying sizes and gold coins from gold traders, gold shops and private dealers.
2. Gold Mutual Funds
Another solid investment option for those interested in the gold market is putting some of your funds into gold mutual funds. Investing in gold mutual funds gives you ownership of various gold points rather than owning actual physical gold. Mutual funds consist of a range of investment types such as gold mining securities, ETF exchange-traded funds and gold stocks.
3. Gold Jewellery
Gold jewellery retains much of its value if it is kept in good condition. If your jewellery also has some historical relevance or an attractive, in-demand design, it's market rate can be quite stable.
4. Gold Mining Stocks
Buying stocks in gold miner stocks is another option for investing without having the hassle of owning physical gold. The value of mining stocks fluctuates on the share market in line with the prices of gold in the market. Hence, this investment can come with more underlying volatility.
5. Streaming And Royalty Companies
The final option for investing in gold is to buy stock in a streaming or royalty company. Streaming and royalty companies provide gold miners with cash upfront in exchange for the right to buy gold and other metals from nominated mines at a reduced rate in the future.
These businesses are similar to specialty finance companies but are paid in gold, allowing them to avoid many of the headaches and risks attached to managing a mine. For many investors, this is one of the best all-around options for investing in gold.
Final Observation
As one of the most valuable commodities in the world, gold is an enduringly popular investment option for those seeking to diversify their portfolio and mitigate their risk. In particular, when capital markets are volatile and the economy enters a downturn, gold often performs comparatively well compared to other investment options as investors look for safe-haven investments.
