- Gold prices are driven by several factors including interest rates and geopolitical events.
- Even though gold is perceived to be a haven, its price is still volatile and can move in unexpected ways.
- Various gold investments have pros and cons. It’s important to understand them when you’re investing in the metal.
Gold is an alternative to stocks and bonds that many investors use as a safe haven: an asset that can hold its value during times of market volatility or economic uncertainty. There are several different ways you can invest in gold from futures contracts to exchange-traded funds, and many on Wall Street recommend having at least a small portion of your portfolio invested in the metal through one of these methods.
What does it mean to invest in gold?
When investors say they own gold, that typically means they hold one of the following assets: physical gold bars or coins; gold exchange-traded funds; gold futures; or shares of gold miners. There are nearly 200,000 metric tons of gold above ground in the world worth more than $11 trillion at today’s prices, according to the World Gold Council.
Why should I invest in gold?
A main reason to consider buying gold as an investment is to cushion your portfolio from volatility and economic uncertainty. But because so many different factors can move prices, gold prices are often surprisingly volatile despite the metal’s reputation as a haven.
Gold prices tend to rise when investors are worried about the economic outlook or geopolitical shocks, helping offset possible declines in stocks during times of market turbulence.
You can also use gold to hedge against rising inflation. Higher consumer prices mean it would take more dollars to purchase the same amount of gold, boosting the metal’s price. Climbing inflation also means the dollar would weaken. A weaker dollar makes it easier for someone overseas to purchase dollar-denominated assets like gold.
Gold can also be used to bet on falling interest rates. Lower rates make gold more appealing by diminishing the returns you would expect from government bonds. That gives gold a boost because the metal is a haven alternative to bonds and unlike bonds doesn’t offer regular payouts to investors simply for holding it.
For these reasons, those who follow gold track inflation-adjusted interest rates as a gauge of how prices will move over time.
How to buy physical gold
You can buy standardized physical gold bars and coins, often called bullion, through dealers all over the world like APMEX and JM Bullion. Many of these orders are now placed online through dealer websites.
These dealers take steps to verify the authenticity of the gold they sell and often work with coin agencies like the U.S. Mint,
Royal Canadian Mint
and Perth Mint. Those agencies also often sell their own gold products to consumers directly. Prices for these products tend to move with the price of gold, so typical one-ounce coins have generally cost between $1,500 and $1,900 in recent months because of the volatility in the gold market.
How to buy gold funds
Exchange-traded funds are also an increasingly popular way to buy gold, allowing you to hold an asset that tracks the price of gold without needing to hold any physical material themselves. They can also be easily purchased through various brokerage accounts.
When you buy shares of an ETF like the
SPDR Gold Shares,
the largest gold fund, they are typically buying a stake in a trust. The assets held by that trust are gold bars, meaning the price of the ETF generally tracks the price of gold. The funds charge you an annual fee for holding them.
While most large gold ETFs hold physical metal, others invest in gold futures contracts that give buyers the right to buy the metal at a certain price on a certain date. There also are funds that use a combination of debt and derivatives to track gold’s price.
How to trade gold futures and options
You can also trade gold futures—contracts that give buyers the obligation to buy or sell the metal at a certain price on a certain date. Futures are commonly used to speculate on the direction of prices. Gold miners can also use them to protect against future price declines.
When futures contracts expire, the holder must normally take ownership of a certain quantity of physical gold. To avoid that scenario, many traders sell contracts before they expire and buy a future month’s contracts instead in a process called “rolling.” Some futures are also settled with cash instead of actual gold.
Options are similar to futures but grant the holder the choice to buy or sell gold at a specific price on a date in the future without making them obligated to do so. Both futures and options are commonly traded through platforms at brokerages around the world like
and TD Ameritrade.
How to invest in gold mining stocks
You can also buy shares of gold miners like
Barrick Gold Corp.
through brokerages. Gold mining stocks tend to move up and down with the price of gold but have historically been more extreme.
That means that when gold prices rise, shares of miners tend to climb even more quickly. And when gold falls, mining stocks often lose value even faster. Some investors also buy ETFs and mutual funds containing shares of gold miners.
- Which Way to Buy Gold: The Metal or the Companies?: A look at the pros and cons of owning gold directly or shares of gold miners
- What You Need to Consider When Buying a Gold ETF: Factors to prioritize when buying a gold ETF
- The Case For Gold: The main reasons investors hold gold
- Does Gold Protect Your Investment Portfolio? Think Again: Streetwise columnist James Mackintosh explains why gold isn’t a good replacement for Treasurys in a standard 60% stock, 40% bond portfolio.
- A Golden Rule From a Golden Fool: Investing columnist Jason Zweig examines gold’s big runup since he called it a “pet rock” in 2015.
- Q&A: Why Gold Prices Rose to All-Time Highs: A look at the forces driving up gold prices earlier in 2020 and how the gold market works.