One of the constants in the world of investing is that there is always someone somewhere telling everyone to buy gold as an investment. The “everything bubble” is about to collapse, they might say. Or maybe central banks printed too much money and were about to enter hyperinflation. Or maybe something like “gold is the only true form of silver.”
Most investors outside of the “gold bug” will dismiss these calls, and that’s fair enough. There have been little chickens obsessed with gold since the world abandoned the gold standard in the 1970s.
But is there any truth to these concerns? Maybe the golden cheerleaders are right?
So today, let’s discuss whether it would be wise to buy gold as an investment.
Does gold make sense as an investment?
At its core, gold is a precious metal. It earns no returns and, in fact, it will probably cost you money to own it one way or another (more on that later). However, no one can deny that gold does not retain its value. In fact, the value of gold has continued to increase over time.
In 2004, you could buy an ounce of gold for around US$400. Today, that same ounce will cost you US$1,940. This trajectory has not always been “up and to the right.” In fact, the price of gold almost halved between 2012 and 2016. But the long-term trajectory is undeniable.
This is one of the reasons why some investors are crazy about this yellow metal. Given its relatively scarce supply and limited industrial uses, most gold enthusiasts believe that this precious metal has inflation protections.
Gold has other uses that can also make it useful in a portfolio. Its value often increases when there is fear in the markets and other assets like stocks fall. It cannot go bankrupt like a business and is universally accepted around the world as having intrinsic value.
However, as we discussed earlier, gold alone cannot make you rich. It cannot produce cash flow or compound value. It’s only worth what someone else is willing to pay for it. And if no one wants to buy it, you’re stuck with a piece of metal.
An insurance policy
But here’s the problem. I continue to believe that gold has a role to play in a modern investment portfolio. Personally, I have money invested in gold. Not because I think it’s a quick ticket to wealth or because I believe it will double in value in the next two years.
But I respect the fact that gold has been used to store wealth for thousands of years. It predates all current currency and even stock markets and corporations. If, for whatever reason, the global financial system comes under pressure, I am confident that owning gold will prove useful.
Of course, I don’t want that to happen any more than I want my house to burn down. But I still have a fire insurance policy and I still have a small gold allocation in my investment portfolio. Gold, for me, is insurance.
How to buy gold as an investment?
So maybe you also want gold in your investment portfolio. There are several ways to do this. The first is to own physical gold bars, which usually come in the form of bars or coins.
Some investors like to own gold and be able to physically touch it if they want. The idea of keeping it out of anyone’s reach and on private property also appeals to a certain demographic.
But many investors don’t like investing in gold this way. You need to store it securely and moving it is expensive and time-consuming.
A much simpler way to invest in gold is to use a exchange-traded fund (ETF). There is a lot of Gold-backed ETFs on the ASX. Two popular options include the Global X Physical Gold ETF (ASX: GOLD) and the VanEck Gold Bullion ETF (ASX:NUGG).
These funds own a stack of physical gold bars, which are normally locked away in a bank somewhere (usually in London). Thus, the owners of the shares of these ETFs own gold by extension. Unit prices fluctuate based on changes in the price of gold, without the individual investor having to worry about storage costs, etc.
Of course, these ETFs are not free. The Global X GOLD ETF charges a management fee of 0.4% per year, while the VanEck NUGG ETF charges 0.25% per year.
Don’t forget the gold prospectors
Another option for investors wanting to get some exposure to gold in their portfolios is to buy shares in a gold mining company. Gold miners obviously own the gold contained in their mines, and its shareholders are entitled to the profits the miners obtain from extracting and selling their gold.
This is a much riskier method of investing in gold. Gold can’t go bankrupt, but a gold miner certainly can. However, it also provides potential leverage on any gold price appreciation, given that a miner’s costs are relatively fixed.
So those are the different ways that ASX investors can buy gold as an investment. It’s not for everyone, and that’s okay. But for those who want to incorporate this precious metal into their investment strategy, you now know what it entails.
