Gold is always a tempting investment opportunity. Knowing that you own a chunk of that precious metal – even if you never actually see it – is a very alluring prospect, which makes gold stand out among other investments such as stocks and shares.
Some investors get so bullish about keeping plenty of gold in their portfolio that they earn the title ‘gold bug’. But without getting caught up in a gold mining frenzy, it can still be a good way to diversify your portfolio and protect yourself against inflation.
Different ways of investing in gold
The first, perhaps most obvious way of investing in gold is simply to buy some. You can buy gold bullion, either as bars or coins, from many reputable dealers. This will mean that you actually own the physical product, and will need to insure it and have it locked away. Gold jewellery is also an option if you want something that you can display – but it’s not considered a particularly savvy investment, as the retail price is usually more than the actual value of the gold.
Having bars of gold stashed away in a safety deposit box somewhere is a cool idea, but for a lot of us it’s not really that practical. Instead, you could consider investing in an exchange-traded fund (ETF). ETFs let you buy shares that represent a certain quantity of gold. These can then be traded similarly to stocks. ETF prices are typically a little more volatile than actual gold prices, rising and falling at a faster rate.
There’s also an option to invest directly in the gold mining companies themselves by buying up stocks. Of course, in this case you would be dependent on the success of the individual business as much as on the price of gold itself.
‘A hedge against inflation’
When people recommend gold investment, they often cite it as ‘a hedge against inflation’, So what does that actually mean? The idea is that, since gold rates typically rise alongside inflation rates, an investor can hope that the value of their gold will counterbalance the negative effects that inflation may have on their portfolio.
Compare a chunk of gold valued at £100 to £100 of sterling cash. Over the years, the cash is likely to depreciate in value, as inflation is going to strip it of its buying power. Meanwhile, the gold is likely to increase in value.
Recently, though, investors have pointed to gold’s volatility as an indication that it might not be the best guard against inflation. There are still benefits to owning it, though – not least the fact that diversifying your investments can help protect you in the event of a market crash.
Unique risks and challenges
Like any investment, the value of your gold could go down as well as up – as we have seen over recent months, with gold prices slumping. Gold is also quite difficult to predict, and it’s not always clear how much price appreciation is available to it.
If you’re planning to buy gold bullion then there are some additional challenges unique to the product. Storing and insuring a precious metal can be tricky, and will cost you money before you ever see a return on your investment. You’ll also need to verify the coins, which can be a difficult and time-consuming task.
Ultimately, gold offers an interesting investment opportunity, but not necessarily one that you should rush into. Think about what specific value gold will bring to you as an investor before jumping in.