Gold as an Investment
Investors, whether private individuals, financial institutions or governments invest in gold for two primary reasons. The first is as calculated speculation on the price of the precious metal, the same was as investors and traders buy and sell any commodity, from precious metals to industrial metals, oil and even soft commodities such as cocoa, coffee, sugar and soybeans. They are buying a commodity because they believe that its price will increase due to a shift in supply and demand over the coming days, weeks, months or years and hope to make a profit by subsequently selling the commodity at a higher price.
Unlike other commodities, investors also buy gold as a safe haven investment, a hedge against economic turmoil or a financial crash. Historically gold has been considered as a store of value, a safe place to park money so that it is not lost in the event of cash currencies losing value due to inflation or devaluation. Gold’s price has also historically shown little correlation to global equity markets. It often increasing in value inversely to equities plummeting during stock market crashes as capital seeks a safe haven during times of trouble.
Different Ways to Invest in Gold
Investors have several options when it comes to investing in gold and the best option largely depends upon the investment motives.
For investors whose primary motive is purely profiting from price fluctuations in the precious metal, the easiest way to invest in gold is via derivatives via CFDs or other similar online trading instruments such as spread betting. When an investor buys a CFD or opens a spread bet, they do not actually buy physical gold but take a position on whether the price of the underlying asset, gold, will go up or down over a certain period. If their prediction is correct, whether the price goes up or down (referred to as shorting), the investor will profit on the difference in the price. When buying derivatives investors may also take advantage of leverage, increasing profits where they are realised, but also multiplying losses if they are wrong.
Gold Mining/Exploration Stock
Another option is to buy stock in gold mining and exploration companies. The stock price of gold mining companies is of course heavily influenced by the price of gold, though with a delay. The advantage is that gold mining stock will still reflect the wider stock market to a large extent, going up when the stock market is generally healthy, though probably less than other stocks, and suffering less when stock markets go down. Some bigger mining companies may also pay dividends providing an income stream that investors will not receive via other forms of gold investment. The disadvantage is that the stock price of gold mining companies also reflects not only the price of gold but the general success of the company which is influenced by management decisions and the productivity of their particular mines.
Gold Coins and Bullion
For investors looking at gold as a safe haven against financial markets turmoil, their favoured gold investment vehicle is often the purchase of physical gold, whether they actually take possession of it or keep it in a specialist storage facility without ever actually seeing it. The disadvantage of physical gold is that it provides no income in the way company stocks, bonds, property or other investment asset classes do. The advantage is in its perceived safe haven status. Worries over money printing by central banks or potential national or global financial crashes mean that investors still see value in holding physical gold as a safety net. National banks and major financial institutions around the world still all hold significant gold reserves for this purpose.
Physical gold comes in the form of bars and coins. For smaller private investors, small bullion bars and coins are the popular choice due to being easy to hold and transport if necessary. Gold coins are either collectables, where their value is a combination of their status as rare collectables and their gold content, or standard issue gold coins whose value is a direct reflection of the volume of gold they contain.
Canadian Gold Maple Leaf Coins
Private investors who would like to add some physical gold to their investment portfolio as a hedge or ‘safe haven’, would probably be best advised to keep it simple and go for standard issue gold coins produced by several national mints around the world. The most common gold bullion coins include the American Gold Eagle, South African Gold Kruggerand, the British Royal Mint’s Gold Sovereign and Canadian Gold Maple Leaf.
With a 24 carats gold content of .9999 fineness, up to .99999 for some special issues, the Canadian Gold Maple Leaf is one of the purest regular issue bullion coins in the world. The British Sovereign, for example, is 22 carats and .9167 fineness. The purity of the gold makes the Maple Leaf a favourite with gold investors internationally and not only in Canada.