What are the various ways for investing in gold?

In most parts of the world, gold has been one of the key assets in many portfolios that did well in the last year or so. For years, gold has been a preferred means to invest and protect purchasing power. Yet, there are many investors who do not know or are not aware of different ways of investing in gold. For these, this blog is a must read. Let us understand a few avenues through which you can invest in gold. Here are various ways in which you can invest in gold in today’s fast-paced digital world:

Bullion

Traditionally, gold or the yellow metal as it is widely known, is a thing one owns and keeps in her custody. Jewellery and gold nuggets have been popular means to invest in gold. In the last one century or so, bullion gold – the standardised form of physical gold emerged as a preferred means to own gold. Gold bars, gold coins with a certain degree of purity and grammage have been favourites with many metal traders. Standardisation has made bullion a liquid asset in the secondary market for gold as a metal trader preferred to transact in a ‘standard asset’ than ‘a-made-to-order-piece-of-jewellery’ which may have purity issues. In some countries jewellers and financial institutions offer regular savings plans that help individuals buy gold over a period of time.

Gold ETF

As online means of investing catch up many investors prefer to invest in Exchange Traded Funds (ETFs) investing in gold. Units of these mutual fund schemes are listed on stock exchanges and they can be bought and sold like any other stock. The units track the price of gold and in some countries are backed by physical gold. In some countries, fund managers use gold futures to obtain exposure to gold. If a scheme takes exposure in gold futures, then mutual fund schemes can offer leveraged exposure to the underlying too. The leverage can be two or three times depending on schemes’ investment mandate.

An investor must have a demat account to invest in the units of gold ETFs. In some countries financial market regulators also allow feeder funds that invest into units of gold ETFs. These are useful for those who do not have a demat account./p>

Gold-mining stocks

This may be an indirect but effective means of investing in gold. When gold prices go up, profit margins of gold-mining companies go up. These stocks can give multifold returns when gold prices are doing well. Some investors buy stocks of gold-mining companies; and some investors buy units of dedicated gold-mining equity mutual funds.

Derivatives

While all these alternatives are good for metal traders the best way to take advantage of movement in gold trading prices is to trade gold online using derivatives. Smart traders also do silver trading. However, many metal traders restrict themselves to gold trading. Futures and options can be used to trade gold in large quantities with the help of small sums. Derivative trading in gold wherein lot sizes range between 100 gram to one kg ensure that a metal trader benefits significantly when gold price moves up.

Institutional traders in gold such as gold miners, pension funds and even family offices taking exposure to gold prefer to trade in yellow metals using derivatives on the global stock exchange. They can also hedge their positions in the yellow metal using derivatives. Many speculators also transact using derivatives. All these participants ensure that there are large volumes in gold derivatives. These gold futures and options are liquid in nature as hundreds of contracts change hands every day. There is little impact cost as the spread between gold buying price and gold selling price is minimal. Large quantities of gold can be traded with a click of button ensures convenience for the traders. Small differences in gold trading price can move thousands of dollars for traders transacting in gold derivatives.

Conclusion

As a safe haven, gold continues to create demand in a recessionary environment. Gold is likely to remain as one of the preferred investment assets for many investors. Even central banks in many countries have been on the buying spree to bolster their gold reserves. This can be seen as an important step in the de-dollarisation drive, wherein central banks are trying to convert their dollar reserves into non-dollar assets. Gold, being the ultimate tender in the world, is expected to emerge brighter in many successful investors ‘trade plans’ going forward.