In ancient times when the ‘green notes’ didn’t exist, people used to trade precious metals like gold in exchange for goods and services. We have come a long way since then. However, the one factor that still remains valid is the prominence of cold.
Whether it is an Indian family giving gold jewelry to her daughter on her wedding or a savvy investor indulging in gold investments for diversifying his portfolio- the importance of the precious metal has remained undeterred all these years.
Now, if you are looking to dip your toes into gold stock investments, the guide gives you thorough methods on how to invest in gold for beginners.
Why Invest in Gold?
Gold has always been a precious metal, difficult to dig and harder to find. Up until the 20th century, before our fiat currencies existed, even our paper currency was backed by gold. Till today, gold is used as a safe-tool for financial emergencies. Why has it always held such a notable position in economies?
Unlike paper currency or other assets, gold has always held a stable price throughout the ages. Especially, in the last 10 years, the prices of gold have steadily increased. Moreover, in the face of economic crises like hyperinflation or rising tensions like trade wars between countries, investors have always turned to gold. Be it the 2008 economic meltdown all over the globe or the recent 2019 trade war between US-China, gold has always been viewed as a ‘safe house’.
The steady price and increase in demand for gold in the advent of a crisis has quickly turned the attraction of investors. Alongside S&P500, mutual funds, and now cryptocurrencies, the portfolio of an investor also includes gold investments.
The question of how to invest in gold for beginners has now become more relevant than ever before.
How to Invest in Gold in UK
Now that we understand the prominence of gold, you can choose to invest in it for either of these reasons. To use it as a tool in case of economic emergencies or as an option for you to diversify your portfolio.
So, all you have to do is buy the gold from a vendor and keep it in a locker, right? Well, no. While buying physical gold and safely tucking it away is a prominent practice even today, there now exists number of different methods in the market today.
Then, what are the options available and how to invest in gold in UK?
In UK or Great Britain, there are different ways of owning gold, either in physical form or in paper form.
Physical form refers to gold coins, gold bars, jewelry- something that you can actually hold it in your hand. A direct method of buying physical gold is through gold bullions, which are basically bars of gold. You can further use these gold bars to make jewelry or you can even choose to sell it in exchange for money.
Physical gold, till today, has a higher relevance because you can physically hold and see your investments. However, you will also need a bank locker or safe in order to store them safely. A significant disadvantage of physical gold is that you will need to pay a higher price than the actual gold price. The premium rests anywhere between 3 to 10%.
Paper gold refers to gold exchange-traded funds (ETFs) or mutual funds. These funds essentially mean contracts, which are backed with gold as an underlying asset.
Paper-based ETFs represents gold, however, you do not need to store real gold. It is a pure form of investment, similar to investing in bonds or company shares. Unlike physical gold, investors need not worry about storing gold at a safe place. Additionally, since they are contracts, it is relatively easier to buy and sell them.
The paper gold has a number of alternatives available in the market for investing. Furthermore, over the years, the dynamics of investing in a commodity like gold have also changed. Taking an example, in the UK, trading in gold is now available even through a CFD broker like Monfex for taking advantage of the volatility in gold prices.
Another dynamic option available for investors is by investing in mining companies and stocks, which mine gold among other commodities.
Basically, in the UK, you can either choose to invest in a physical form of gold or through such paper-based gold stocks.
How to Invest in Gold Stocks
Now that we have covered upon how to invest in gold UK, we are going to detail-in on the paper-based gold methods available.
Investing in gold stocks like ETFs and mutual funds do not ensure the same sort of physical insurance, but they are comparatively easy to keep, manage, and trade/sell.
There exist a number of methods of buying gold stocks through ETFs, futures contracts from a CFD broker like Monfex, or through mutual funds.
Here’s a look at how to invest in gold stocks with different options available on the market.
Exchange-Traded Funds (ETFs)
An easy way of engaging in paper gold is through Exchange Traded Funds or ETFs. A gold ETF is much like a commodity with the underlying asset being gold. In an ETF, you receive shares of gold, which you can further sell on stock exchanges.
The advantage of an ETF is that, unlike physical gold like jewelry, you don’t need high liquidity for buying. Thus an ETF opens up for a wider audience who wants to leverage the profits in gold prices. Another significant benefit over physical gold is the transparency in the pricing of gold.
If you want to invest in a gold ETF, you will need a trading account and a stockbroker. You can even start by buying small amounts like 10 grams of gold, thus removing the need for higher liquidity. Normally, there are 2 ways. You can either buy a lump sum amount or you can further invest in a specified amount triggered at regular periods of time.
One of the costs associated with a gold ETF is that of a stockbroker. You need to pay a fraction of money every time you buy and sell gold ETF. The second cost that you need to take into consideration is an expense ratio. The expense ratio differs from one ETF to another, however, as compared to other investments, the ER of a gold ETF is substantially low.
A good example of a good gold ETF is SPDR Gold Trust.
Another method of indulging in gold stocks is through future contracts. However, if you are a beginner, it is a risky investment. As the name suggests, a futures contract is essentially an agreement to sell the gold at a pre-defined price in the future.
The advantage of a futures contract, with leveraged trading, is that you can basically trade more than you have invested. Firms like Monfex offer leveraged trading as high as 50 times. In other words, once you put in a minimum investment, you can trade 50 times of that value. Leveraged trading with futures contracts substantially gives you higher returns.
This approach does provide more profits as compared to other methods. But, you also must know that as a beginner, leveraged trading can be a bit risky as you also stand to lose more money.
Gold Mining Stocks
Many investors also choose to invest in firms that are engaged in mining of precious metals including gold.
There are mining-focussed ETFs that provide exposure to gold mining firms. Currently, the low-cost ming ETFs include VanEck Vectors Gold Miners ETF.
Alternatively, over direct exposure, you can invest in mutual funds to create a more diversified portfolio of multiple mining stocks. A good example of mutual funds focussed mining includes Fidelity Select Gold Portfolio.
In this guide on how to invest in gold for beginners, we have given you a basic understanding of gold, its fluctuations, its importance and the different methods available in the market today.
Gold has and perhaps always will be one of the most valuable investments for an individual. The precious metal represented value, even historically. But moreover, throughout the years, it has been a safe haven for people to turn, in face of wars and economic crises. This factor alone guarantees that the prices of gold will not dip more than a certain value, at least until a better option is not available insight.