- As fears over economic volatility and deficits grow, investors and central banks are buying gold.
- Gold is often seen as a safe-haven asset among investors.
- Two gold experts share four ways investors can get exposure in their portfolios.
Now is looking like a golden opportunity to invest in gold.
For decades, the yellow metal has been considered a safe-haven asset, serving as a hedge against high inflation and economic uncertainty due to its low correlation to stocks and bonds.
And there’s certainly no shortage of economic uncertainty right now. The US presidential election is right around the corner, inflation concerns remain elevated, geopolitical tensions are high, and the US national debt is reaching untenable levels.
Investors and central banks alike have been snatching up gold. The asset’s price hit another record high earlier this week at $2,739.40 per ounce after rising over 30% this year, and some analysts are setting a price target of $3,000.
Investing in gold is slightly different from putting money into stocks or bonds. Below, two gold experts share four ways investors can add gold to their portfolios.
4 ways to invest in gold
For starters, investors can purchase the metal directly.
You can buy gold coins online. You can buy gold bars at Costco. Those strip mall stores with a big “We Buy Gold” sign? You can buy gold there, too.
Buying the physical commodity is a tangible way to invest in gold, but it does have some drawbacks. Jeff Muhlenkamp, portfolio manager at Muhlenkamp & Company, points out that there are transaction costs when buying directly from a gold dealer. The investor also has to ensure the gold is certified regarding purity and weight. Buyers must also consider secure storage solutions and insurance for their physical assets.
In general, physical gold is a less liquid way to own the asset and is quite costly. “Most of the time when people go and buy gold coins, they’ll pay a big premium upfront, and they’ll probably suffer a discount when they come to sell at the end,” George Milling-Stanley, chief gold strategist at State Street Global Advisors, said.
Investors can avoid the complications of investing in bars and coins by buying a gold ETF instead.
Physical gold ETFs can be bought through a brokerage account and are directly backed by gold bullion held in bank vaults, meaning that investors don’t have to worry about storage or liquidity issues. Examples include the iShares Gold Trust fund (IAU) and the SPDR Gold Shares fund (GLD).
Synthetic gold ETFs don’t hold physical gold, investing instead in gold derivatives such as futures and options. These ETFs can be cheaper than physically backed ones since they don’t need to store the metal, but they have counterparty risk, or the risk of loss from a contract participant not fulfilling their obligation. Examples include the SPDR Gold MiniShares Trust (GLDM) and the ProShares Ultra Gold fund (UGL).
For investors who want to get as close to the real thing without buying bars, physical gold ETFs tend to track changes in the price of gold more accurately than synthetic ones, Muhlenkamp said.
Mining companies are another option for more indirect exposure. These can vary wildly in risk, so Milling-Stanley advises that investors approach these stocks with discretion. The multi-billion-dollar market-cap mining companies offer the most liquidity and stable business models. Smaller mining companies, known as junior miners, are in the exploration phase of looking for mineral deposits and might not be generating revenues, Muhlenkamp said.
Mining stocks are less directly correlated with the price of gold than ETFs and may lag trends in gold prices by several months, Muhlenkamp said.
In Milling-Stanley’s opinion, investing in mining stocks instead of directly investing in gold erodes some of the metal’s portfolio protection, as mining stocks behave more in line with the general equity market.
This area of investment is definitely higher in risk, but if enthusiasm for gold continues to surge, more speculative mining stocks will enjoy the biggest upside, according to Muhlenkamp.
Examples of mining stocks include Agnico-Eagle Mines (AEM) and Newmont Mining Corp (NEM).
Gold royalty and streaming companies are yet another way to add gold to a portfolio. These companies finance gold mines and receive a percentage of the gold produced.
Royalties limit the holder’s exposure to the risks associated with directly investing in mines, such as exploration, development, and regulatory compliance. Royalty and streaming companies are a good way to gain exposure to junior mines but still retain liquidity, especially for investors who don’t have the ability or resources to conduct due diligence, Muhlenkamp said.
Examples of gold royalty companies include Franco-Nevada (FNV) and Wheaton Precious Metals (WPM).
