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From time to time, invest in gold becoming popular on the ASX. Like stocks, cash, bonds and real estate, gold is a distinct asset class that offers its own advantages and disadvantages. Today is one of those times when interest in gold is increasing, thanks to recent geopolitical uncertainties and violence in the Middle East.
But investing in gold may not be the right decision for everyone. So today, let’s discuss the pros and cons of investing in this yellow precious metal.
Why should investors buy gold?
Gold has many attributes that investors like to see in an investment. On the one hand, it is a physical asset with legitimate scarcity and high perceived value. There is a reason why people have searched for and accumulated gold throughout human history. It is rare, beautiful to look at and wear, and will not rust or corrode.
Gold also tends to retain its value over time. This makes it an attractive investment for investors concerned about inflation, deflation, or currency depreciation (money printing).
The precious metal is also considered a safe haven investment. Whenever there is a global financial crisis or geopolitical instability, investors often turn to gold as a sort of safe haven. This tends to make gold-based investments inversely correlated to other asset classes (like stocks), which many investors also like.
The arguments against owning precious metals
While some investors seek out gold or other precious metals like silver and platinum, others avoid them altogether. This latter group notably includes Warren Buffett. Buffett’s main criticism of gold is that it doesn’t actually work as a suitable investment because it doesn’t generate any cash flow. In this way, gold cannot be relied upon to compound in the same way as quality actions.
Unlike stocks, bonds, or real estate, gold won’t pay you to own it. In fact, it will probably cost you money if you buy physical bars, due to insurance and storage costs. Even if you own gold indirectly, for example through a exchange-traded fund (ETF)you will still pay for this privilege via fees.
How to buy gold on the ASX?
If you want to hold gold in your portfolio, there are many ways to do so. You can of course own the physical metal through bars, coins, and other bullion.
Although many investors who appreciate the “physical value” of gold might choose this choice, it is certainly the most expensive method of doing so. You will generally pay a spread wherever you buy or sell the bullion itself. And then there are the storage and insurance costs of holding the bullion that we’ve already talked about.
This is why many investors choose a gold ETF instead. The ASX is home to a few gold ETFs.
Some, like the Global X Physical Gold ETF (ASX: GOLD), give investors indirect exposure to gold bars stored in a bank vault somewhere.
Others, like the VanEck Gold Miners ETF (ASX: GDX), allow investors to invest indirectly in gold by holding shares of gold mining companies.
Gold miners as an investment
A gold miner owns the gold contained in his mines, and as a shareholder, so do you, by extension. However, gold miners You also have to pay money to extract, purify and sell this gold. So some miners are profitable, while others may not be, depending on the price of gold at that time.
This makes investing in these mining companies inherently riskier than owning the metal yourself. There is a risk of bankruptcy here that is not present by owning gold bullion or a bullion-backed ETF.
The benefit of this increased risk is that a gold miner can pay you to own it, just like any other ASX stock. A gold mining company can pay dividends and franking credits to its shareholders, carry out share buybacks and grow its stock price over time.
As such, many gold investors like to own miners or ETFs that track gold miners relative to the gold bullion itself.
But ultimately, gold investors should opt for the assets they feel most comfortable with and that suit their individual needs and goals.
