Gold is a popular investment for its relative long-term stability and its potential to retain value during times of financial or geopolitical uncertainty. There are many ways to invest in gold, including purchasing the physical metal (although storing and insuring it can be costly) or buying stocks of companies that engage in gold mining.
Safe-Haven Asset
When a market goes through a period of turbulence, many investors seek out safe haven assets that can protect their portfolios. Gold is typically the first asset that comes to mind, and for good reason – this precious metal has been valued by mankind for centuries. It is also one of the most popular options for hedging, as investors often reallocate equities into gold to protect against losses.
However, it’s important to remember that safe haven investments don’t always behave the way you expect them to during a crisis. In fact, a number of popular assets that were expected to rise during the financial crisis actually fell.
Using an intraday dataset from the COVID-19 pandemic, this paper evaluates whether assets such as gold and soybean futures have strong safe-haven properties. Sequential monitoring procedures are used to detect changes in the left-quantile of the return distribution, and results are robust to alternative hedging and risk-adjusted specifications.
Invest in Gold ETFs
Gold ETFs are a popular option for individual investors because they track the price of physical gold and reflect its performance. However, you should carefully consider the investment objective of each fund before making a purchase. This will ensure that the funds are in line with your financial goals.
The first step to learn more in investing in Gold ETFs is to create a trading account with an online broker. This will enable you to buy and sell units of a Gold ETF on the stock exchange. The value of your holdings will rise and fall depending on the underlying gold price or company stock price.
Gold ETFs are also a good way to diversify your portfolio. This is because they are backed by gold of the highest purity, and there is no storage cost or risk of theft. Additionally, a Gold ETF can function as collateral for loans. However, you should be aware that Gold ETFs are volatile and can lose value quickly if the market turns down.
Invest in Gold Mutual Funds
Gold is often viewed as a safe-haven asset during times of economic turmoil and equity market corrections. The price of gold typically shoots higher during these periods, as investors seek to invest their capital in a safer asset class. However, these gains do not last very long, as risk-taking appetite picks up and gold prices fall again. Purchasing physical gold involves several costs like transaction, processing and storage fees, which can reduce your overall return.
Investing in gold mutual funds provides you with the opportunity to add precious metals exposure to your portfolio without these additional costs. These funds are actively managed and invest in companies that mine, process or sell gold.
Adding gold to your investment portfolio helps diversify your assets, which can help lower your overall market risk. Choosing the right option depends on your investment goals and risk tolerance. Make sure you choose a fund that aligns with your investing objectives and has a long-term time horizon.
Invest in Gold Through Options or Futures Contracts
Gold may be a popular asset class to consider as part of a diversified portfolio, but figuring out how best to invest in it comes with unique challenges. For one, purchasing physical gold can come with expensive overhead costs such as storage and insurance.
Another challenge is that investing in physical gold requires you to rely on a dealer’s judgment when it comes to pricing and quality. The National Futures Association’s Background Affiliation Status Information Center can help you identify dealers who have been properly vetted. But the leverage that investing in futures contracts provides can also work against you; if you are wrong about the direction of gold prices, your losses can be substantial quickly.
Whatever investment strategy you choose, it’s important to diversify and not overinvest in gold. Most financial advisors recommend no more than 2 to 10 percent of your portfolio be invested in the precious metal. You should always consult with your own financial adviser to ensure that any gold investments fit within your overall portfolio goals and risk tolerance.