The Best Way to Invest in Gold

For starters, the price of gold is determined by a combination of three main factors: demand, supply, and interest rates. Gold has limited supplies, which makes it more valuable compared to other commodities.

The demand for gold is also driven by investors who are looking to invest in a safe haven asset. This means that when the stock market and other investments are unstable, gold prices tend to rise as people seek for more reliable ways to preserve their wealth.

Interest rates also affect gold prices since they influence how much money is circulating in the economy. When interest rates are low, it tends to create more demand for gold because people can afford the precious metal.

While there is no guarantee of returns, gold is typically considered a low-risk investment. Compared to other investments like stocks and bonds, gold has less volatility, and its value doesn't depend on the performance of any company or government. This makes it an attractive option for those looking for an investment with minimal risk.

For beginner investors, it's best to start with a small portion of your overall investment portfolio. To determine how much you'd invest in gold, you need to decide how much of your portfolio you'd like to allocate to commodities in general. Afterwards, you should decide how much of the commodities portion of your portfolio should be allocated to gold specifically.

The exact figure you need to start investing would depend on how you choose to invest. If you're buying physical gold, such as coins and bars, then the cost would depend on the weight of your purchase, which is usually high. ETFs or stocks, on the other hand, are generally more affordable for beginner investors.

Inflation is the gradual devaluation of the currency, and gold investments can be a great way to hedge against it. Since gold has limited supplies and strong demand, its value tends to remain relatively stable despite changes in the economy, without being significantly affected by inflation.

Gold is often seen as a safe haven asset, meaning it remains stable during economic and geopolitical volatility. Compared to other assets that fluctuate with the country's economic outlook, such as stocks or bonds, gold is not affected by the country's monetary policy or money supply.

This qualifies it as a safe haven and explains why its demand surges during times of political uncertainty. For example, when tensions in Ukraine escalated in 2023, gold demand surged, taking prices to a near-record high.

Diversifying your investments helps to reduce risk, and gold can provide an ideal way to do this. By adding some gold investments to your portfolio, you can protect yourself from diversified market fluctuations.

Gold also tends to move differently than other assets like stocks or bonds, so adding it provides another layer of diversification that could help balance out any losses in the event of a bear market.

In the United Kingdom, the Royal Mint's gold bullion coins are exempt from capital gains. However, gold bullions obtained from other sources will be subject to taxation (depending on your tax bracket) whenever they’re sold.

Note that you would have to pay capital gains tax if you choose to invest in gold CFDs instead of physical gold. This is because CFDs, like gold futures, are considered financial derivatives.

Here are the key disadvantages of investing in gold.

Price falls

The price of gold is subject to fluctuations like any other commodity, so investors face risks with their investments. Gold prices tend to increase when there are economic or geopolitical uncertainties, but can also rise and fall due to factors such as supply and demand.

One way to stay on top of these changes is to keep an eye on the news and to keep track of market movements.

No yield

Unlike dividend stocks or bonds, gold does not produce any income for investors. This means that investors have to rely on the sale of their investments to generate returns. So it’s important to consider how much return you wish to make before investing in gold, and whether other types of investments may be more suited towards achieving this goal.

If you're looking for steady income, you may want to consider other fixed-income investments like bonds or dividend stocks.

Costs

When buying physical gold, there are some costs associated with it, such as storage and insurance. To ensure its safety, physical gold must be stored in a secure location, such as a safe deposit box or home vault. Additionally, as the gold is subject to theft or damage, investors may need to purchase insurance policies to protect their investments from such risks.

Fewer ways to diversify

Investments like stocks or bonds can be diversified across industries and regions. Gold investments, on the other hand, are more limited in terms of diversification.

Investors looking to diversify their gold investments may want to consider buying different types of gold coins or bars, investing in ETFs that track the price of gold, or purchasing shares in mining companies.

Gold coins and bars are one of the simplest ways to invest in gold. You can buy these from jewellery retailers, bullion dealers, or online shops. One benefit here is that you get full ownership of the physical metal and can sell it at any time.

However, there are some drawbacks to consider. The cost of purchase can be high, and you need to factor in storage and insurance costs when buying physical gold.

If you're looking to benefit from gold’s price increase without actually having to buy physical gold, you may want to consider trading derivatives such as gold futures and options.

Gold futures are agreements between two parties where one agrees to buy or sell an asset at a predetermined price and date in the future. With gold futures, investors are able to speculate on the direction of the market without actually having to own any physical gold.

Gold options, meanwhile, represent the right (but not obligation) to buy or sell a particular quantity of gold or other precious metals at an agreed-upon price. The easiest way to access these investments is through a brokerage account.

Investors can also buy gold through mutual funds or exchange-traded funds (ETFs). Funds like these are collections of investments that follow a specific strategy. Gold funds, for example, include stocks and bonds related to gold production or services.

Investing in gold funds is less risky than investing directly in physical gold and can be simpler since the fund is managed by professionals. However, there are fees associated with these types of investments, and the fees will vary depending on the fund.

You can also buy shares of gold mining companies as another way to invest in gold. Gold mining companies are companies that focus on finding, extracting and processing gold. By investing in these stocks, investors can benefit from the company’s success as well as from increases in gold prices.

However, it’s important to remember that there are risks associated with investing in mining companies. These include fluctuations in commodity prices, commodity cost inflation pressures, operational issues, and more.

If you want to sell your gold, the steps to take will depend on the type of gold and how you obtained it. If you own a physical form of gold, such as coins or bars, then you will likely need to use a local pawn shop or precious metals store. ETFs and options contracts are easier to sell, as these are traded on exchanges and can be sold through your brokerage account.