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Lesson 4: Investing in Gold

Lesson 4: Investing in Gold

There are several types of gold assets available for you to invest in, depending on your holding period, risk-appetite, and available funds.

In the past, investing in gold was difficult for individual investors. You could buy the actual spot commodity in the form of coins and bullion, or you could speculate in the futures market. Both alternatives were unpopular and expensive for most individual traders. However, investors now have access to gold investments – here is HOW to invest in gold online!

Should You Invest in Gold?

Imagine the surprise of the world’s first circumnavigator, Ferdinand Magellan, when upon arriving on the sandy shores of the present-day Philippines in March 1521 after the first-ever Pacific crossing, he was offered a gold bar and some spices by the native king. Gold – it was a store and show of wealth, even there, even then – in the uncharted, uncivilized territory, halfway around the world, half a millennium ago.

Magellan should not have been so surprised. Gold had been “money” for more than 2000 years prior to his time. The first gold coins were struck in about 700 B.C. in modern-day Greece. Throughout recorded history, other assets like weapons, spices, art, metals, and even food have had their day as leading stores of wealth, but gold has endured as the supreme evidence of wealth across all cultures and time.

Little has changed today. Gold competes with other assets – stocks, bonds, real estate, and paper currency among others as stores of wealth. But in today’s changing and ever more volatile world, the value of these other assets may fluctuate more than ever. What is more – paradoxically – in response to volatility, the policies of governments and central banks, to dampen economic downturns and prop up asset prices, may, in fact, make gold more valuable relative to these other assets. The real purchasing power of gold, over the long term, may arise.

Like most assets, the price is determined by demand and supply. Going forward the demand for gold may continue to rise, while supply will remain constrained as it has since the beginning of time.

Follow the steps below to start investing in Gold:

  • Learn how to invest in gold through your brokerage
  • Understand what moves the price of gold
  • Research the gold assets you can trade
  • Trade Gold CFDs with CAPEX demo account
  • Create a live account when you are ready to invest in Gold through CFDs

How to Invest in Gold Online

There are several types of gold assets available for you to invest in, depending on your holding period, risk-appetite, and available funds.

Investing in Gold through Gold Mining Stocks

Barrick Gold
Source: CAPEX WebTrader

There are a plethora of listed gold stocks. Be aware that while a gold company’s stock price is linked to the price of gold, as it represents a major revenue stream, it is not a “pure play” on gold; it’s unlikely that a company’s value will directly replicate the price of gold.

Gold companies can be divided into two generic groups: “Juniors” and “Majors”. Each category has company-specific characteristics that impact its value. Juniors focus on exploration and are riskier than Majors, which typically are already in the mining and production phase. A Junior gold mining stock can be thought of as an option play on the likelihood of striking gold and getting bought out by a gold Major. Junior gold mining stocks do, however, typically rely heavily on credit, a key risk when credit markets are under duress. In comparison, gold Majors offer the possibility of operational leverage through gold price appreciation. The theory is that costs to produce gold are fixed, such that gold price appreciation expands margins and the bottom line. Such costs have not been fixed – many stakeholders have wanted a piece of the pie, from increased taxation to increased wages. Gold production is also extremely energy-intensive, meaning costs are closely tied to the price of natural resources, such as oil, which has been elevated.

Complicating things further, many companies may not focus exclusively on gold. Some may also focus on other precious metals or minerals, such as silver, palladium, or diamonds. If you invest in these companies, you may end up with a wider exposure to precious metals and minerals than just gold. Like any company, management will also have a significant impact on the value of a gold mining company’s stock price. Good and bad management decisions can have a larger impact than the price of gold and in some instances may make or break your investment. Make sure you know enough about a company to make an informed decision before investing.

If these reasons have you interested in adding gold mining stocks to your portfolio, a few top companies to consider are:

>> How to Invest in Stocks

Do not have the time to research, but still want to invest in gold mining stocks?

ThematiX blends the world’s top trending stories & topics of interest into stock portfolios.

Gold Rush ThematiX is a basket of selected shares from companies that engages in the acquisition, exploration, and development of gold worldwide. The weight of each share, (percentage allocation) to the ThematiX is determined based on their market capitalization. You can trade these Companies' shares as a single CFD product with the Gold Rush ThematiX

Gold Rush ThematiX is comprised of a group of shares as below:

  • Barrick Gold 23%
  • Newmont 20%
  • Franco Nevada 18%
  • Silver Wheaton 12%
  • Agnico 10%
  • Kirkland LG 10%
  • Kinross Gold 7%

Most could benefit if gold prices rally, so open a brokerage account to learn more about them and start investing.

Investing in Gold through Gold Mining Funds

Like gold stocks, gold mining mutual funds and gold mining Exchange-Traded Funds (Gold Mining ETFs) are not a “pure play” on gold, but rather invest in a broad basket of gold mining companies. This makes it easier to access a wide range of gold mining companies with one investment. Many will focus specifically on gold Juniors or Majors, as described above. Most Gold Mining ETFs and mutual funds are easy to purchase directly through an online broker.

The manager of the Gold Mining ETF or mutual fund makes all the investment decisions independently, so there is no need to research companies. For this convenience, Gold Mining ETFs and mutual funds charge an expense ratio. The expense ratio is lower for Gold Mining ETFs because they often aim to track a static basket of gold stocks. On the other hand, mutual funds typically offer active management, rotating in and out of select securities as the manager deems appropriate. For this reason, mutual funds’ expense ratios are typically higher, and some may also charge front-load and/or back-load fees in addition to an annual expense ratio. As with any investment product, make sure you are aware of all fees before investing.

Overall, when considering an investment in gold stocks or gold stock funds, you should understand that neither will give you direct exposure to the price of gold. Instead, you will gain exposure to a company or companies that operate in the gold mining industry.

Traders can play individual gold miners profitably if they do their homework, but sector exchange-traded funds (ETF) offer an easier alternative, with broad exposure to the industry at different capitalization levels.

A few top mining funds to consider are gold bullion ETF:

>> How to Invest in Mutual Funds

Investing in Gold through Gold ETFs

By owning shares in an exchange-traded opened gold trust, you have fractional ownership in the underlying gold. The trusts are called open-end because gold shares are issued and redeemed to accommodate investor demand. As a result, open-end trusts closely track the price of gold. There are several options available with low expense ratios. Different funds may hold physical gold in various locations – from London to New York, even Singapore.

If a key priority of yours is to invest in physical gold, but like the convenience of investing in gold through an exchange, make sure that is clearly stipulated in the fund’s prospectus to ensure the trust uses no derivatives. If you are interested in taking delivery of the physical gold, make sure you are aware of any limits imposed before you invest, as some funds may set high requirements that could preclude you from accessing the underlying gold you own. These details can be found in any fund’s prospectus.

Overall, open-end gold trusts may offer an effective and inexpensive way to invest in gold.

Some of the most popular Gold ETFs are:

  • SPDR Gold Shares ETF (#GLD)
  • iShares Gold Trust ETF (#IAU)
  • Physical Swiss Gold Shares ETF (#SGOL)
  • Goldman Sachs Physical Gold ETF
  • VanEck Merk Gold Trust

>> How to Invest in ETFs

Investing in Gold through Spot and Futures Markets

How to invest in Gold
Source: CAPEX WebTrader

Of all the ways to invest in gold, the riskiest is trading the spot and futures prices, a form of speculative investing.

Spot markets have low spreads but overnight fees. They don’t expire. Futures markets have higher spreads but no overnight fees. They expire on a set date in the future. This makes spot markets more attractive to day traders, and futures markets more attractive to longer-term traders.

You can trade both spot and futures with CFDs (contracts for difference). You do not actually own the underlying asset. Instead, you buy or sell a number of contracts according to whether you believe the price of gold will climb or fall in the future.

Both are traded using leverage, which means you will put down a deposit (percentage of the value of the trade, usually 5% for Gold) to get started. This deposit is called margin.

Every point the price of Gold changes in your favor, you gain multiples of the number of CFD units you have bought or sold. In the reverse scenario, you will lose money if the price moves against you. See here a Gold trading example.

With CAPEX, you can trade CFDs on a variety of financial instruments including Gold spot prices:

  • Spread: 0.64 pips
  • Overnight Rollover – Long: -0.0076 %
  • Overnight Rollover – Short: -0.0063 %
  • Initial Margin: 5.0000 %
  • Leverage: 1:20

>> Learn more about CFD Trading

Why Invest in Gold with CAPEX?

  • All markets in one place: More than 2.100 instruments enable you to stay active on the global markets with a CAPEX account. Choose from a wide range of CFDs on gold assets and other popular instruments (Indices, Forex, Cryptocurrencies).
  • Trading on margin: Providing trading on margin (1:20 for Gold Spot and 5:1 for Gold Stocks and Gold ETFs), CAPEX gives you access to the hottest gold assets with the help of CFDs.
  • Trading the difference: When trading gold assets, you do not buy the underlying asset itself, meaning you are not tied to it. You only speculate on the rise or fall of the gold asset price.
  • All-round trading analysis: The browser-based platform allows traders to shape their market analysis and forecasts with sleek technical indicators. CAPEX provides live market updates and various chart formats, available on desktop, iOS, and Android.
  • Focus on safety: capex.com is operated by Key Way Investments Ltd and is authorized and regulated by the Cyprus Securities and Exchange Commission (CySEC) (license no. 292/16).

What moves the price of gold

Unlike almost any other asset, gold is typically neither safety nor a risk asset, though the popular financial media have often called it both over the years (depending on how gold has been performing in recent months). Instead, it’s a currency hedge for which demand rises when there are concerns about inflation diluting the purchasing power of fiat currencies (particularly those most widely held, like the USD and EUR). In other words:

  1. In times of optimism (aka risk appetite), gold can either appreciate if markets believe growth will lead to inflation, or it can fall if the desire for higher yields overrides inflation concerns and investors move into more classic risk assets which they believe will provide better returns.
  2. In times of pessimism (aka risk aversion) gold can either rise if markets believe that stalling growth will lead to rising deficits and/or money printing that could cause inflation, or it can also fall on fears of deflation or of a market crash that feeds demand for cash. In times of panic, traders seek cash either to cover margin calls or other obligations or to be ready to go bargain hunting.

    If pessimism turns to panic, then gold could either:
    – rise if markets are more concerned about the USD or EUR losing their purchasing power than about near-term liquidity needs, as was the case at times from 2009 through 2011.
    – fall if markets are more concerned about liquidity than the loss of purchasing power, as was the case in late 2011.

When markets are not concerned about fading purchasing power, the major currencies tend to gain against gold. That can happen due to:

  • Low inflation expectations, as we saw starting in late 2011. Concerns about the global economy kept inflation fears low, and so gold began a multi-month downtrend.

  • Panic periods when markets fear a financial crisis, and liquidity becomes the top priority. We saw gold sell-off during times of peak anxiety about the US or EU. During these periods, investors tend to sell gold to raise cash.

The final word on investing in gold

Even though the price of gold has quadrupled since the late 1990s, factors suggesting a strong future are there. No asset should comprise most of your portfolio, but it may be hard to argue against owning at least some of the precious metal going forward.

Turns out, Magellan’s Pacific Island friends knew what they were doing.

When investing in gold, first ask yourself whether you want to track the price of gold or whether you would prefer to have exposure to gold-related companies. Gold mining stocks and gold mining funds provide exposure to the value of gold companies, not directly to the gold price. The other options discussed aim to track the price of gold. Once you have decided, weigh the pros and cons of the various available options, and start investing in gold.

Final nugget of wisdom from an old English proverb: “when we have gold we are in fear, when we have none, we are in danger.”

FAQ

Is investing in Gold a promising investment?

Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term.

What are the disadvantages of investing in Gold?

The disadvantages are that (1) it may not provide sufficient flexibility in the supply of money, because the supply of newly mined gold is not closely related to the growing needs of the world economy for a commensurate supply of money, (2) a country may not be able to isolate its economy from depression or inflation.

Is it better to buy gold or gold stocks?

Gold stocks are typically more appealing to growth investors than to income investors. Gold stocks rise and fall with the price of gold, but there are well-managed mining companies that are profitable even when the price of gold is down. Increases in the price of gold are often magnified in gold-stock prices.

How to do trade in Gold?

You can trade in gold by buying and selling spot gold, gold futures, gold options, or gold stocks and ETFs. To open a position, you will need a CFD account.

What moves the gold price?

The price of gold is moved by the forces of supply and demand. Factors that can play a role include mining production, inflation and interest rates, political insecurity and safe-haven flows, and the value of the US dollar.

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You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.

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