In the past, investing in gold was difficult for individual investors. You could buy the actual spot commodity in the form of coins and bullion or you could speculate in the futures market. Both alternatives were unpopular and expensive for most individual traders. However, investors now have access to gold investments – learn HOW to invest in gold online through your brokerage account.
Should You Invest in Gold
Imagine the surprise of the world’s first circumnavigator, Ferdinand Magellan, when upon arriving on the sandy shores of the present-day Philippines in March 1521 after the first-ever Pacific crossing, he was offered a gold bar and some spices by the native king. Gold – it was a store and show of wealth, even there, even then – in the uncharted, uncivilized territory, halfway around the world, half a millennium ago.
Perhaps Magellan shouldn’t have been so surprised. Gold had been “money” for more than 2000 years prior to his time. The first gold coins were struck in about 700 B.C. in modern-day Greece. Throughout recorded history, other assets like weapons, spices, art, metals and even food have had their day as leading stores of wealth, but gold has endured as the supreme evidence of wealth across all cultures and time.
Little has changed today. Gold competes with other assets – stocks, bonds, real estate, and paper currency among others as stores of wealth. But in today’s changing and ever more volatile world, the value of these other assets may fluctuate more than ever. What’s more – paradoxically – in response to volatility, the policies of governments and central banks, in an effort to dampen economic downturns and prop up asset prices, may, in fact, make gold more valuable relative to these other assets. In our opinion, the real purchasing power of gold, over the long term, may arise.
Like most assets, the price is determined by demand and supply. Going forward the demand for gold may continue to rise, while supply will remain constrained as it has since the beginning of time.
Steps to Invest in Gold Online
Are you ready to invest in gold? Take your position in just few steps:
- Learn what gold investing and trading are
- Understand what moves the price of gold
- Decide how you want to trade or invest in gold
- Make your first gold trade
1. Learn what gold investing and trading are
There are several types of gold assets available for you to trade or invest in, depending on your holding period, risk-appetite and available funds.
Striking Gold through Gold Mining Stocks
There are a plethora of listed gold companies. Be aware that while a gold company’s stock price is linked to the price of gold, as it represents a major revenue stream, it is not a “pure play” on gold; it’s unlikely that a company’s value will directly replicate the price of gold.
Gold companies can be divided into two generic groups: “Juniors” and “Majors”. Each category has company-specific characteristics that impact its value. Generally, Juniors focus on exploration and are riskier than Majors, which typically are already in the mining and production phase. A Junior gold mining stock can be thought of as an option play on the likelihood of striking gold and getting bought out by a gold Major. Junior gold mining stocks do, however, typically rely heavily on credit, a key risk when credit markets are under duress. In comparison, gold Majors offer the possibility of operational leverage through gold price appreciation. The theory being that costs to produce gold are relatively fixed, such that gold price appreciation expands margins and the bottom line. In reality, such costs have not been fixed – many stakeholders have wanted a piece of the pie, from increased taxation to increased wages. Gold production is also extremely energy-intensive, meaning costs are closely tied to the price of natural resources, such as oil, which has been elevated.
Complicating things further, many companies may not focus exclusively on gold. Some may also focus on other precious metals or minerals, such as silver, palladium, or diamonds. If you invest in these companies, you may end up with a wider exposure to precious metals and minerals than just gold. Like any company, management will also have a large impact on the value of a gold mining company’s stock price. Good and bad management decisions can have a larger impact than the price of gold and in some instances may make or break your investment. Above all, make sure you know enough about a company to make an informed decision before investing in stocks.
If these reasons have you interested in adding gold mining stocks to your portfolio, a few top companies to consider are Barrick Gold Corp (#ABX), Randgold Resources (#RRS), Newmont Mining (#NEM), Royal Gold Inc. (#RGLD) and Goldcorp Inc (#GG). All four could benefit if gold prices rally, so open a brokerage account to learn more about them and start investing.
>> How to Invest in Stocks
Gold Mining Mutual Fund – Basket of Golden Eggs
Don’t have the time to research, but still want to invest in gold mining companies? Similar to gold stocks, gold mining mutual funds and gold mining Exchange-Traded Funds (Gold Mining ETFs) are not a “pure play” on gold, but rather invest in a broad basket of gold mining companies. This makes it easier to access a wide range of gold mining companies with one investment. Many will focus specifically on gold Juniors or Majors, as described above. Most Gold Mining ETFs and mutual funds are easy to purchase directly through a stockbroker.
The manager of the Gold Mining ETF or mutual fund makes all the investment decisions independently, so there is no need to research companies. For this convenience, Gold Mining ETFs and mutual funds charge an expense ratio. The expense ratio is generally lower for Gold Mining ETFs because they often aim to track a static basket of gold stocks. On the other hand, mutual funds typically offer active management, rotating in and out of select securities as the manager deems appropriate. For this reason, mutual funds’ expense ratios are typically higher, and some may also charge front-load and/or back-load fees in addition to an annual expense ratio. As with any investment product, make sure you are aware of any and all fees before investing.
Overall, when considering an investment in gold stocks or gold stock funds, you should understand that neither will give you direct exposure to the price of gold. Instead, you will gain exposure to a company or companies that operate in the gold mining industry.
Traders can play individual gold miners profitably if they do their homework but sector exchange-traded funds (ETF) offers an easier alternative, with broad exposure to the industry at different capitalization levels.
A few top mining funds to consider are gold bullion ETF VanEck Vectors Gold Miners ETF (#GDX), or Direxion Daily Gold Miners Index Bull 3X Shares ETF (#NUGT).
>> How to Invest in Mutual Funds
Gold ETFs – Fractional Ownership
We’re talking about SPDR Gold Shares ETF (#GLD), iShares Gold Trust ETF (#IAU), and Physical Swiss Gold Shares ETF (#SGOL) to name a few. By owning shares in an exchange-traded opened gold trust, you have fractional ownership in the underlying gold. The trusts are called open-end because gold shares are issued and redeemed to accommodate investor demand. As a result, open-end trusts closely track the price of gold. There are a number of options available with relatively low expense ratios. Different funds may hold physical gold in different locations – from London to New York, even Singapore.
If a key priority of yours is to invest in physical gold, but like the convenience of investing in gold through an exchange, make sure that is clearly stipulated in the fund’s prospectus to ensure the trust uses no derivatives. If you’re interested in taking delivery of the physical gold, make sure you are aware of any limits imposed before you invest, as some funds may set fairly high requirements that could preclude you from accessing the underlying gold you own. These details can be found in any fund’s prospectus.
Overall, open-end gold trusts may offer an effective and relatively inexpensive way to invest in gold.
>> How to Invest in ETFs
Gold Derivatives – The Best Risk/Reward Potential
Derivatives traded on exchanges settle in a central clearinghouse that matches buyers and sellers. Gold derivatives are bilateral contracts that have more flexible structures and fractional investment requirements.
Derivatives trade on margin. The initial margin – or cash deposit paid to the broker – is a fraction of the price of the underlying contract. Consequently, investors can achieve notional gold value considerably greater than their initial cash outlay. While this leverage can increase return-on-investment, it also increases the chance for significant losses in the event of an adverse price movement in gold.
Gold margin trading offers some of the best risk/reward opportunities of any ﬁnancial market IF (big if here) you know how to exploit it. The availability of leverage, meaning the use of borrowed funds to control large blocks of troy ounces and thus magnify gains and losses, creates the unmatched proﬁt potential for those with limited trading capital IF (again, really big IF here) they learn how to control the downside risk.
For example, with 100:1 leverage, a 1 percent move means 100 percent proﬁt. It also means a 100 percent loss.
Understanding and controlling this risk, and knowing how much is appropriate in a given situation, is what distinguishes the winners and professionals from the losers on whom they feed.
>> What is CFD Trading and How Does it Work
2. Understand what moves the price of gold
Unlike almost any other asset, gold is typically neither safety nor a risk asset, though the popular financial media have often called it both over the years (depending on how gold has been performing in recent months). Instead, it’s a currency hedge for which demand rises when there are concerns about inflation diluting the purchasing power of fiat currencies (particularly those most widely held, like the USD and EUR). In other words:
- In times of optimism (aka risk appetite), gold can either appreciate if markets believe growth will lead to inflation, or it can fall if the desire for higher yields overrides inflation concerns and investors move into more classic risk assets which they believe will provide better returns.
- In times of pessimism (aka risk aversion) gold can either rise if markets believe that stalling growth will lead to rising deficits and/or money printing that could ultimately cause inflation, or it can also fall on fears of deflation or of a market crash that feeds demand for cash. In times of panic, traders seek cash either in order to cover margin calls or other obligations or to be ready to go bargain hunting.
If pessimism turns to panic, then gold could either:
– rise if markets are more concerned about the USD or EUR losing their purchasing power than about near-term liquidity needs, as was the case at times from 2009 through 2011.
– fall if markets are more concerned about liquidity than the loss of purchasing power, as was the case in late 2011.
When markets aren’t concerned about fading purchasing power, the major currencies tend to gain against gold. That can happen due to:
- Low inflation expectations, as we saw starting in late 2011. Concerns about the global economy kept inflation fears low, and so gold began a multimonth downtrend.
- Panic periods when markets fear a financial crisis, and liquidity becomes the top priority. We saw gold sell-off during times of peak anxiety about the US or EU. During these periods, investors tend to sell gold in order to raise cash.
>> Reading Inter-market Correlations and Divergences
3. Decide how you want to trade or invest in gold
You might want to trade gold if:
- You want to speculate on the price of gold rising or falling
- You want to leverage your exposure
- You want to take shorter-term positions on gold
- You want to hedge your portfolio
- You want to trade without owning the underlying asset
- You want to start with as little as $100
>> Choose the best CFD broker
You might want to invest in gold if:
- You’re interested in buying and selling gold stocks and ETFs
- You’re focused on longer-term growth
- You want to build a diversified portfolio
- You want to take ownership of the underlying asset
- You want to gain voting rights and dividends (if paid)
- You want to start with at least $1.000
>> Choose the best stockbroker
If you’re not ready to trade live gold markets, you can build up your confidence in a risk-free environment by creating a demo account.
4. Make your first trade
To understand which way the market is likely to move, it’s important to do thorough research – both technical and fundamental analysis.
Whichever gold market you decide to trade, it’s important to think about whether you’ll go long or short, what position size you’ll take and how you will manage your risk. Our Online Trading Masterclass offers step-by-step guidance for risk management, including stop-losses and limit orders – these are used to close trades at predetermined levels of loss and profit respectively.
Choose whether to go long or short on gold
When you start trading gold or gold-linked assets via CFDs, you’ll be able to choose between buying and selling the market – also known as going long or short. You’d buy if you expected the asset’s price to rise in a given timeframe, and you’d sell if you thought its price was going to decline.
With CFD trading, you’re always offered two prices based on the value of the underlying instrument: the buy price (offer) and the sell price (bid).
The price to buy will always be higher than the current underlying value and the sell price will always be lower. The difference between these prices is called the bid-ask spread.
- The Buy price (offer) is the price at which you start, or open, a long position
- You close your position when you Sell
- The Sell price (bid) is the price at which you open a short position
- You close your position when you Buy
For example, if you expect the price of gold to increase you may want to open a position with a CFD on gold. Imagine the quoted price is $1,200/$1,205 (this is the bid/ask spread) and you buy 100 CFDs on gold (taking a long position). The size of the position taken (the contract value) is illustrated below.
Monitor your trade and close your position
Once you’ve opened your position, you can monitor your profit and loss in the ‘positions’ section of your platform (MT4, MT5, or any other trading platform).
While your position is open, you should keep up to date with news and continue performing technical analysis so that you can identify key turning points in the market.
Now imagine that the price of gold increases as expected, the profit from this trade is illustrated below.
When you decide it’s time to close your position, you can click ‘close’.
How much should you invest in Gold?
CFD trading democratizes the markets by providing a low entry-level. For example, with Admiral Markets you can open a Gold trade with less than 10$, while the minimum deposit to activate a trading account is $100.
The final word on investing in gold
Even though the price of gold has quadrupled since the late 1990s, factors suggesting a strong future are there. No asset should comprise the majority of your portfolio, but it may be hard to argue against owning at least some of the precious metal going forward.
Turns out, Magellan’s Pacific Island friends knew what they were doing.
Ultimately, when investing in gold, first ask yourself whether you want to track the price of gold or whether you’d prefer to have exposure to gold-related companies. Gold mining stocks and gold mining funds provide exposure to the value of gold companies, not directly to the gold price. The other options discussed aim to track the price of gold. Once you have made a decision, weigh the pros and cons of the various available options and start to invest in gold.
Final nugget of wisdom from an old English proverb: “when we have gold we are in fear, when we have none we are in danger.”
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term.
The disadvantages are that (1) it may not provide sufficient flexibility in the supply of money, because the supply of newly mined gold is not closely related to the growing needs of the world economy for a commensurate supply of money, (2) a country may not be able to isolate its economy from depression or inflation.
Gold stocks are typically more appealing to growth investors than to income investors. Gold stocks generally rise and fall with the price of gold, but there are well-managed mining companies that are profitable even when the price of gold is down. Increases in the price of gold are often magnified in gold–stock prices.
You can trade in gold by buying and selling spot gold, gold futures, gold options, or gold stocks and ETFs. To open a position, you’ll need a CFD account.
The price of gold is moved by the forces of supply and demand. Factors that can play a role include: mining production, inflation and interest rates, political insecurity and safe-haven flows, and the value of the US dollar.
1. Internet Investment Gold: https://www.gold.org/what-we-do/investing-gold/how-buy-gold/internet-gold
2. Five things you need to know about gold – https://www.barclays.co.uk/smart-investor/news-and-research/investing-insights/five-things-you-need-to-know-about-gold/
3. Gold as an Investment: Should You Buy It? – https://www.thebalance.com/should-you-buy-gold-3140477
4. Management of Gold Trading – https://www.sbv.gov.vn/webcenter/portal/en/home/sbv/fagm/gtm
5. Gold ETF Report – https://www.etf.com/GLD
6. SPDR Gold Trust (GLD) Latest Prices, Charts & News – https://www.nasdaq.com/market-activity/funds-and-etfs/gld
7. World War I – Battles, Facts, Videos & Pictures” – http://www.history.com/topics/world-war-i 8. A Gold Play on the Dollar’s Demise [SPDR Gold Trust (ETF), iShares Gold Trust(ETF), CurrencyShares Euro Trust] – https://web.archive.org/web/20070706155619/http://gold.seekingalpha.com/article/16299