Investing in gold. An introduction

Investing in gold. An introduction

Gold has been used as a means of payment for centuries. The value of gold is difficult to determine. Nowadays the price of gold is quoted in American Dollars, where the value is indicated per troy ounce, or 31.10 grams. At the beginning of May 2020 the gold price stands at $ 1,700 per troy ounce.

Why is gold actually so popular and why do people like to invest in gold? There are a few reasons for this. First of all, gold, like other precious metals, does not perish. Gold requires no maintenance and is relatively easy to store.

Secondly, people, and therefore investors, see gold as a safe haven. Especially in (economically) uncertain times many investors flee into gold and the price rises. When stock markets fall, the price of gold often rises. However, this is not a given and there are many historical examples where things have turned out differently.

In this article we describe the most important factors that determine the gold price and we explain in which ways you can invest in gold.

Gold price

What’s moving the gold price?

The price of gold is determined by supply and demand. When the demand for gold rises, or the supply of gold falls, the price will rise. In a reverse situation, the price of gold will fall. If we want to assess the current gold price (or a future gold price), we need to know what influences the supply and demand of gold. These are the following:

Stocks of central banks

Most countries have their own gold reserves, which are managed by the local central bank. The central bank has the possibility to increase or decrease the available gold stock. Especially in economically bad times we often see reports that central banks are expanding their gold stock. This often results in a rising gold price. Central banks are usually very cautious about selling large amounts of gold. Since central banks are large gold owners, they want to prevent too much pressure on the gold price.

Gold as an industrial application

Gold is an excellent conductor. When mixed with other metals, gold is widely used for industrial applications and in devices such as mobile phones. You can imagine that the worldwide growth in the use of smartphones creates an increasing demand for gold.

Discoveries new gold mines

You can imagine that the discovery of a new gold mine could put pressure on the price of gold. However, finding new gold mines is not easy and there is no guarantee of success. Various mining companies are listed on worldwide stock exchanges. Especially in Australia, Canada and the United Kingdom.

The American Dollar

We’ve already indicated that the price of gold is quoted in American Dollars. For example, if you hold your money in Euros, there may be a currency risk. When for example the Dollar rises in value compared to the Euro, then gold becomes more expensive for people who hold Euro. Because of this the demand for gold from the Eurozone will probably also decrease. A consequence of this is that the gold price will probably also fall. The opposite can of course also be the case. When the Euro rises against the Dollar, gold will become cheaper for people holding Euro’s. The connection between the Dollar and the gold price is very strong. So it is possible that a fall of the gold price is immediately neutralized by a rise of the Dollar.

Emerging economies

Emerging economies increase disposable income. You can imagine that this will increase the demand for gold, or products containing gold. Economic developments in emerging economies therefore have an influence on the price of gold.

Speculation

We have already mentioned that many investors see gold as a so-called safe haven. So the price of gold is also related to economic sentiment. Investors who buy or sell gold often try to respond to the developments of the gold price. We will now look at the different ways to invest in gold.

Ways to invest in gold

There are various ways to invest in gold. Below is a list of these ways, where we immediately look at the characteristics and risks.

Buying physical gold

Physical gold is easy to buy online these days. There are even providers where you can store gold at a certain rate. Gold bars are available in different sizes and weights. Of course, there are also trading companies in precious metals that have physical branches where you can buy and sell gold.

You can buy gold online, but make sure you do so with a reliable and transparent provider. Check whether a provider is well known and whether the provider is registered with the applicable financial authority. Be wary of providers who approach you directly, for example by phone. Also look at the pricing that a provider uses for buying and selling gold. Is the pricing in line with the market? Keep in mind that gold does not generate direct income, such as dividends, and fluctuates in price. It can therefore happen that the gold price is a lot higher or lower than the purchase price at the desired moment of sale.

Buying gold shares

Investing in gold shares or gold mine shares is very popular. These are shares of companies involved in gold mining, or the search for new gold mines. Most companies active in the gold mining sector are listed in Australia, Canada, the United States or the United Kingdom. It is important to distinguish between companies that actually mine gold, and companies that have plans to mine gold and try to attract capital for this purpose. The latter category is of course much more speculative than a share of an already producing company.

The development of the gold price will have an impact on the share price of gold shares. However, the relationship between the gold price and the price of gold shares is relative. So it does not necessarily have to be that a higher gold price automatically results in a higher price of gold shares. The differences in return between the different gold stocks can also be high. So it is important to look at what a company does exactly and what the money is made from.

Gold trackers

What is a tracker or ETF? In short, a tracker is an investment fund that “tracks” or replicates the performance of an index or other underlying asset. The price of a tracker is obtained by dividing the price of the underlying asset by 10. When the gold price is $ 1,700, the price of the gold tracker will be $ 170. This makes the tracker affordable and offers the possibility to invest in gold with smaller amounts of money, without having to take possession of gold directly. Please note that a tracker on the gold price does not generate a dividend. Furthermore, you will have to deal with costs charged by the provider of the tracker.

Trackers are better known under their English name ETF, which stands for Exchange Traded Fund. Most trackers are tradable on the stock exchange. The annual costs which providers of ETF’s charge are about 0,4 percent. ETFs are therefore a simple and cost efficient way to invest in gold. As ETFs are tradable on the exchange, buying and selling is easy.

Investing in gold with leveraged products

Besides physically buying gold or investing in gold with trackers, it is also possible to invest in gold with so-called leveraged products. These are products derived from an underlying asset, as a result of which they are also referred to as derivatives.

Leverage products are known for their leverage effect. Leveraged products are those in which the value of the position reacts more strongly to a change in the price of the underlying asset than if it were invested directly in the underlying asset. In the case of a leveraged product, the investor only finances part of the total underlying asset or position size. The greater part of the position size will be financed by the provider, who will charge a financing fee for this. The major advantage of leverage products is that relatively large results can be achieved with a small amount of money.

Profits and losses are based on the total value of the position. It is therefore important to deal responsibly with leveraged products. In addition, it is important to always provide positions with a so-called stop loss. A stop loss is an automatic order that an investor uses to limit the maximum loss of a current position. In this article you can read how to use a stop loss in online trading.

A number of products where you can invest in gold with leverage:

  • Gold options
  • Gold Turbos, Gold Sprinters and Gold Speeders
  • Gold futures
  • Gold CFDs

It goes without saying that the use of leveraged products to invest in gold requires some knowledge and will not be the first choice for a novice investor.

Conclusion

We have seen that there are several ways to invest in gold, each with its own characteristics and risks. This is not for nothing. Gold still appeals to the imagination and this will continue to be the case in the future. Try to determine which way of investing in gold is best suited. In general we can say that a gold investment should at least be part of a diversified investment portfolio.

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