Gold has been valuable for a long time, and even now, it’s worth a lot, with one ounce costing over $1,900 on January 20, 2023. People like to keep gold to preserve their money and protect against inflation. But it’s not easy to store big amounts of physical gold because it can be stolen, and securing it is costly.
Thankfully, there are ways to benefit from gold price changes without investing in physical gold.
Gold Receipts
Long ago, goldsmiths used to store people’s gold and give them paper receipts in return. These receipts could later be exchanged for the deposited gold. Since not everyone would claim their gold simultaneously, the goldsmiths would issue more receipts than the actual gold they had, creating a credit system.
Even today, you can invest in gold receipts that can be exchanged for physical gold. Some private “mints” like the Royal Canadian Mint offer electronic tradable receipts backed by their stored gold. These ETRs can be traded on an exchange or privately, and their value follows the price of the gold they represent.
Gold Funds
Gold funds provide a way to invest in gold without directly buying it. Derivatives markets are a more efficient and cheaper option, but they may not be available for regular investors. Instead, people can use mutual funds or ETFs that trade like stocks on exchanges to invest in gold.
The SPDR Gold Trust ETF (GLD) is a popular option that aims to match the performance of gold prices. There are also leveraged gold ETFs like ProShares Ultra Gold (UGL) that provide double the exposure to gold prices, and Goldcorp (GG) that offer double the opposite exposure (short).
Derivatives
Derivatives are contracts that use gold as the main thing they are based on. They let you agree to buy or sell gold later for a set price.
Forward contracts are customized agreements between two people to buy gold in the future at a certain price. They are traded directly between the two parties. Futures contracts work similarly but are traded on an exchange, so their terms are fixed and not flexible. That makes futures contracts safer because they don’t have the credit risk of the other party not delivering.
Call options are another way to invest in gold using derivatives. They give the owner the right to buy gold in the future but not the obligation. If the price of gold goes up, the owner can make money, but if it doesn’t, they lose the premium paid for the option, which is like a deposit for the right to buy gold at a set price later.
Gold Mining Stocks
Buying stocks of companies that mine and sell gold, like Kinross Gold (KGC) or Barrick Gold (ABX), might not be the best way to get indirect exposure to gold. These companies are more focused on profiting from gold mining than speculating on its price. They often protect themselves from gold price changes using derivatives, so owning their stocks doesn’t always give you the gold exposure you want. Instead, it mainly reflects the company’s profitability.
However, if you still want to include gold stocks in your investment to diversify your portfolio, you can consider a gold miners ETF like Market Vectors Gold Miners (GDX). This ETF includes many gold mining companies, which could give you a better mix of gold-related stock in the form of an investment in non-physical gold.
How Can You Invest in Gold Without Keeping It Physically?
- Gold mining stocks: You can buy stocks of companies that mine gold, which gives you a share in their profits.
- Gold mutual funds or ETFs: These funds invest in a mix of gold-related assets like gold stocks or futures without owning physical gold directly.
- Gold-based savings plans or certificates: Some banks offer plans or certificates that let you invest in gold without holding it physically.
- Gold futures contracts: You can invest in gold via futures contracts, which let you buy or sell gold at a set price in the future. But remember, they can be complex and not suitable for all investors.
- Options on gold futures: These give you the right (but not the obligation) to sell or buy gold futures at a set price on or before a certain date. They are also complex and may not be right for everyone.
Can You Invest in Gold Mining Stocks? Is There a Difference in Investing in Physical Gold?
Gold mining stocks signify ownership in a gold mining company, and they can make you part of the company’s profits. Investing in these stocks can have some benefits over buying physical gold. One advantage is using leverage, which means you might get higher returns on your investment compared to owning physical gold. However, using leverage also brings more risk, making potential losses bigger.
Gold mining stocks can also help diversify your overall investment portfolio. They might not move in the same way as other assets like stocks or bonds so that they can be less affected by changes in those markets.
But remember that investing in gold mining stocks comes with risks. The value of these stocks can change with gold prices and how well the mining company is doing financially and operationally. They might be more sensitive to economic and political risks, like changes in rules or taxes, compared to physical gold.
Investing in gold mining stocks can be more complicated and potentially riskier than buying physical gold. It’s important to consider the advantages and risks carefully before deciding which option is best for you.
Final Thoughts
Having gold can help protect your money’s value and act as a defense against sudden inflation. But having physical gold can be a hassle and expensive. Luckily, there are other ways to own gold without needing to keep it physically. Gold receipts, derivatives, and mutual funds/ETFs are all good options for this exposure. However, be cautious with shares of gold mining companies because they might not give you the direct gold exposure you’re looking for. These companies often protect themselves from gold price changes using derivatives markets.
