Of all the ways to invest in gold, the riskiest is to trade futures or options contracts, a form of speculative investment. Futures and options are derivatives, meaning that their value is based entirely on the price of an underlying asset. There are many ways to invest in gold. You can buy physical gold in the form of jewelry, ingots and coins; buy shares in a gold mining company or other gold-related investment; or buy something whose value derives from gold.
Each method has its advantages and disadvantages. This can make it overwhelming for beginning investors to know how best to expose themselves to this precious metal. Buying gold mining stocks is relatively simple, through a brokerage account with an online broker or investment application. Once you add funds to your account, you can choose a gold stock and place an order.
Gold stocks are simply shares of gold mining companies. You can buy shares of these companies on the stock markets. Many people prefer gold mining stocks to gold coins and ingots because of their greater upward potential to produce cash flow. However, mining stocks do not offer direct exposure to the price of gold.
Mining companies are individual companies with their own financial situation, so factors that go beyond the price of gold can affect their value. Some retailers consider buying more than 100 gold bars (or 500 gold coins) a “wholesale purchase”, but this will largely depend on the seller. Speculators and large commercial interests use them to “bet on the price of gold” or to hedge their position in gold. You can buy an option to bet on whether gold rises or falls and, if the market moves in the opposite direction, all you have lost is the small amount you paid for the option.
Gold mutual funds, which pool the money of several investors and manage it on their behalf, usually invest in the shares of mining or gold refining companies, although some also have small amounts of ingots. Owning physical gold is not a “magic formula” or a panacea for financial challenges, but it is wrong to suggest that gold has no benefits as a safe haven asset. Meanwhile, gold transmission and royalty companies provide capital to gold miners to develop and expand mines. You can also buy smaller gold bars, ranging from half a gram to 100 grams, at specialized numismatic stores, pawn shops or some jewelry stores.
Buying gold jewelry is usually the first thing that comes to mind when most people plan to buy physical gold. Cost overruns, mismanagement, and excessive debt can cause gold mining stocks to underperform the price of gold. Gold mining can have a significant impact on the environment and mining practices have raised human rights concerns, as many gold mines are located in areas affected by conflicts. Contracts move with the underlying price of gold or the shares of gold-related stocks, exposing the investor to gold without owning the underlying investment.
While investors should weigh each option to determine the best method for their circumstances and their risk tolerance, gold price ETFs and streaming and gold royalty companies are often ideal options for beginning gold investors. Options contracts also allow the holder to buy or sell shares in a gold ETF or a gold mining stock at a specific price and date.