• Gold is universally recognized as a store of value
• Investors look upon it as a hedge against inflation and political upheaval, as well as an asset that enjoys a low correlation to mainstream asset classes
• However, there are a number of considerations to ponder before adding it to an investment portfolio
A favored asset from time immemorial, gold is universally recognized as a reliable store of value. The precious metal is also considered one of the safer havens for wealth during turbulent economic times. Investors often employ it as a hedge against inflation and political upheaval. Gold can also be a useful portfolio diversification tool, owing to its low correlation to mainstream asset classes.
With that in mind, there are five primary ways to invest in gold today. These are purchasing bullion, gold futures, exchange-traded funds (ETFs) tracking gold, gold mining stocks and mining stock ETFs.
Derived from the French word bouillon, which translates to “boiling” in English, the term bullion refers to any non-ferrous metal that has been heated and refined to near purity. Most often applied to precious metals such as gold and silver, the purity of bullion is determined using the fire assay technique, along with an examination using spectroscopic instruments. The purity standard for investment quality gold bars is 99.5% (995 pure gold). The remaining .5% is typically silver or copper, which enables the smelting of the metal.
Profiting from the ownership of gold bullion is dependent upon the movements of the commodities market for the material. Gold bullion is most commonly purchased through dealers in either one-ounce or 10-ounce bars, although it can also be had in bars as light as a few grams as well as those weighing up to 400 ounces.
As of this writing, (November 2022) the price of an ounce of gold is roughly $1,700.
Owning physical gold, while psychologically satisfying, does come with a couple of drawbacks — securing it and selling it. Although stocks of gold can be insured, ownership is largely based upon possession. It is pretty much gone, should it be stolen. The other issue with owning bullion is that dealers want to sell at higher prices than they buy, so getting the full value from a cache of it might be difficult to achieve should an investor need to liquidate it quickly.
Using futures to invest in gold frees investors of the need to store and secure it, while also enabling them to profit from fluctuations in its price. Another advantage of futures trading is the leverage one can apply, in that a large quantity of gold futures can be held for relatively small amounts of money.
Because of this, profits can be made rather quickly when the market moves in an investor’s favor. Of course, the converse is true as well. Investors stand to experience significant losses should the market move counter to expectations. In that event, the investors must come up with the cash to cover their positions — or take the losses.
Perhaps the least volatile means of investing in gold, buying into a gold tracking exchange-traded fund, eliminates the need to secure a cache of the precious metal. ETFs also sidestep much of the volatility, and eliminate the margin requirements of the futures market.
Another advantage of a gold ETF is liquidity. Shares are readily traded for the prevailing market price anytime the market is open. In that respect gold tracking ETFs behave just like publicly traded stocks. On the other hand, ETFs also track the ascents and descents of the price of gold. And, like stocks, the price of gold is subject to a degree of volatility.
It is possible to own a piece of a gold mine. Moreover, it is a good way to benefit from increases in the price of the commodity. There are a couple of key advantages to this strategy. Profits rise along with the price of gold and production can be tailored to the price as well. In other words, miners can raise and lower production in concert with the potential for profitability.
With that said, it is important to carefully review the fundamentals of a gold mining company before purchasing its shares. Small operations, as well as those who have yet to make a strike, are generally the riskiest investments. Moreover, as is true for all other types of publicly traded equities, the risk factor is ever present. Investors must also consider the potential volatility of the market in general. The values of mining stocks can rise and fall with the price of gold.
The advantage here is that an investor’s capital is spread across multiple operators, so if one falters the others could well pick up the slack. Moreover, these funds invest in the largest, most successful players, which further mitigates — though not eliminates— the potential for risk.
However, any malady affecting the industry as a whole will impact mining ETFs as well. A sustained lull in the price of the commodity will drag down the value of an investment in the fund. Investors should also be careful to select funds based upon the miners they index. Some focus on established companies, while others focus on less established mining operations, which often entail more risk.
Generally looked upon as more of a haven than an investment per se, gold tends to be an effective hedge against inflation and economic catastrophes engendered by factors such as political unrest. The commodity’s track record for consistent returns, liquidity and typically low market correlation can also make it a useful portfolio diversification tool.
Gold has outperformed the market in certain instances, though it doesn’t always. Moreover, many types of gold-based assets can be readily converted into cash and gold tends to move opposite the market.
On the other hand, predicting the price of gold can be difficult. It doesn’t produce cash flow, so forecasting the price of gold can be difficult. Additionally, an investor must rely on finding a buyer willing to pay more than they did to realize a profit from a sale. Given these considerations, limiting the allocation of gold as an alternative asset to no more than 10 percent of an investment portfolio is a good idea.
As mentioned above, alternative investments such as gold can be useful tools for portfolio diversification, which is generally agreed upon to be a smart investment strategy. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of this magnitude, should these investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Treating gold as a safe haven for wealth can be a good idea. However, looking at gold as an asset class for investment purposes entails a rather steep learning curve. The gold market has a number of idiosyncrasies, and owning physical gold is fraught with a number of potential liabilities.
On the other hand, it is hard to argue with gold’s stability and lack of direct market correlation. Investors seeking to take advantage of those qualities will likely be best served by gold ETFs and mutual funds.
All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.