Gold has been a valuable substance for millennia, and its value remains solid till today, with the cost of one ounce of the metal standing at $1760. Many investors prefer to store gold for its value and protection against inflation; however, it can be challenging to store the precious metal in large amounts. In such scenarios, the owners of the stored gold usually have to beef up their security which can be pretty pricey. Fortunately, there are various ways to hold gold in possession without having it physically. Therefore if you feel like the economy is unstable and diversifying your portfolio is essential, then you can invest in non-physical gold. Here are a few ways to carry out these investments.
The gold receipts investment is a case of history repeating itself, seeing as gold historians believe that gold receipts are the oldest banking method. Whereby, goldsmiths would give receipts to members who deposited their gold with them and redeem them later. This is still possible today where you can invest in gold receipts and redeem them later. Several private mints give these opportunities to those who want to invest in gold.
Receipts are backed by gold and can be redeemed for physical gold, depending on the demand. On the other hand, derivatives markets use gold as an underlying asset, and the contracts made in this market allow for gold to be delivered after an agreement has been made. If a forward contract is made, it allows the owner of the contract to buy physical gold in the future at the same price range as when the contract was being made. Forward contracts are made between the seller and the buyer on the price of the physical gold, expiry of the contract, ounces of gold to be delivered, and the delivery location.
Future markets operate similar to forwarding contracts, only that futures are traded on an exchange, and the exchange determines the contractual terms, unlike the forward markets that have customizable terms. The over the counter nature of forwarding contracts exposes each side to risks such that each party may not keep their end of the bargain. But with exchange-traded futures, such risks are eliminated. Future and forward contracts are mostly not kept until expiration; instead, the contract is closed by selling the gold, a new deal is made with a new buyer, and new expiry date is set.
Call options also lie under derivatives whereby it is used to give the gold exposure. Call options give the owner the right to buy the said gold in the future. However, it is not obligatory. Call options are executed when gold prices are favorable, and if the prices drop, they are left to expire. The price paid for the option is also known as premium or deposit made to buy gold later at a price that has been set today. Therefore, when the gold price exceeds the specified price in the future, the buyer automatically makes profits. On the contrary, if the price drops or remains the same, the deposit is lost.
Derivative markets are the best place to start to give the gold exposure and are generally cost-efficient, and they also have some good leverage. However, for an average investor, it’s pretty hard to access derivatives. Therefore a typical investor can go for gold exchange-traded funds or gold funds. The main aim of gold funds is to make wealth through the potential of gold as a chattel. It is convenient to hold gold through gold funds instead of owning it physically. The net asset value of gold is determined by the general price shift of gold in the market. Each gold fund should have a manager who takes investment bets according to the objectives of the gold fund. ETFs and gold funds have almost the same amount of returns.
Gold Mining Stocks
Gold mining stocks are where investors buy shares in gold mining companies. The stocks in gold mining companies correlate with the price of gold in the market. However, the stock returns depend on the company’s earnings in the future and not solely the value of gold. When planning to buy gold mining stocks, you can consider the following factors.
- Production costs
- Management of the company
- Hedging activities
- Mining exploration
- Project development
Owning gold is a store of value and also offers protection against inflation. However, holding physical gold can be pretty tiresome and costly since you have to heighten your security. You can also endanger your life because gold is a precious metal, and people would do anything to get hold of it, including harming you. Fortunately, you can use either of the above strategies to invest in gold without having to hold it physically.