Whether they hedged against inflation or worried about the market crashing, investors regularly resorted to gold to offset risk. There are many ways to invest in gold, including gold mutual funds. Read on to discover how to invest in specialized gold ETFs and gold mutual funds; and what to look for in a fund.
What is Gold?
For centuries gold has been used to make jewelry and coins. It was once the world’s preferred currency. Because gold is challenging to dig up and find, the precious metal had a high value. Over time, precious metals amassed and became the method of storing wealth. Additionally, some of the early paper currencies substantiated their backing in gold. An equivalent amount of gold remained in a vault somewhere, for safe storage. This allowed people to exchange their paper currency for gold.
Why People Invest In Gold
There are three main reasons why investors choose to invest in gold.
Firstly, gold is a hedge against a decline in currency, typically the U.S. dollar. As the value of the currency decreases, it yields higher prices in imports as well as increased inflation. Therefore, gold is also a good hedge against inflation. For example, between 2002 and 2007 the price of gold more then doubled from $347.20 to $833.75 per ounce. Meanwhile, the dollar, whose value is comparably measured alongside the euro, dropped about 40% during the same span.
Secondly, gold protects investors against a catastrophe. That said, many investors often purchase gold during a recession such as the 2008 financial crisis. Many investors sought protection from the possible U.S. economic crash. Due to this uncertainty, gold prices doubled once again. They rose from $869.75 to $1,895 per ounce from 2008 to 2011.
Finally, many investors invest in gold to reap the profits from the increase in gold prices. They purchase gold now as a direct investment to take advantage of future prices. Other investors see gold as a finite material with many uses. They believe that supply and demand for gold will force a rise in the prices at some point in the future.
Gold Mutual Funds and More
You can invest in gold in several ways. The best-known way to invest in gold is to buy gold bullion. While many assume gold bullion is a form of large gold bars, it’s actually any pure or near-pure form of gold. Gold bullion must have a certification identifying it as such, according to its weight and purity. An alternative to a bullion gold investment is a gold coin.
Another alternative to investing in gold bullion is to purchase a share of a gold exchange-trade fund (ETF) such as PDR Gold Shares (GLD). Investors can also invest in gold mutual funds such as Tocqueville Gold (TGLDX) and Gabelli Gold Load-Waived (GLDAX.LW). Each share of the fund represents a portion of gold. For instance, each share may equate to one-tenth of an ounce. You can buy a fund just like you would a stock, in a brokerage firm or other financial institution that sells gold ETFs and gold mutual funds.
Many investors choose this route because it’s more cost-effective to invest in a fund rather than owning gold bars or coins. Since these funds are less expensive they can be a good investment for beginner investors. In fact, the expense ratio is often less than 0.5%, which is lower than the fees you may see from a mutual fund.
Indirect Gold Investment
Keep in mind, many mutual funds have gold investments and gold companies as part of their portfolios. However, there are very few funds that solely focus on gold as a whole. If you choose to invest in gold funds, there are several advantages. These advantages include low cost, low minimum investment requirements, diversification among companies, simple ownership, and no research required.
Also noteworthy, is that some funds invest in indexes of mining companies, while others may either tie their fund directly to gold prices or choose to take an active role in managing the fund. This makes investing in gold ETFs and gold mutual funds a potentially good option for the average investor, and explains why gold ETFs are a staple of gold-based individual retirement accounts (IRAs).
Before you roll your 401(k) into a gold IRA, however, consider how gold behaves over time.
The performance of gold depends on many different factors here are a few factors that contribute to its value:
The rising price of goods and services tends to impact the price of gold. Sometimes the rising inflation will increase the value of gold. When inflation occurs, it’s often a sign that the economy is expanding and growing. Therefore, it’s common for the Federal Reserve to increase the money supply, which, in turn, dilutes the value of any monetary note in circulation. This makes it more expensive to purchase assets that store value such as gold.
Supply and demand
As is the case with any other good or service, when there’s an increase in demand with a corresponding low supply, prices tend to rise. On the other hand, if you have a surplus, the value of gold may decrease.
When the U.S. dollar falls, it tends to increase the value of other currencies and commodities around the world. Conversely, when the dollar rises, the price of gold may fall. This is due to the fact that gold and the U.S. dollar have an inverse relationship.
The jobs report, GDP growth, manufacturing data, and wage data can influence the Federal Reserve’s monetary policy. This can then impact the price of gold. For example, gold prices tend to decrease when the U.S. economy is strong, there is a low unemployment rate, and the GDP grows 2%. On the other hand, weaker job growth, rising unemployment rates, and minimal GDP growth can increase the price of gold.
Exchange-traded funds (ETF)
While ETFs are a smaller influencer to the price of gold, they are still worth mentioning. ETFs allow investors to increase their liquidity and minimize risk exposure by spreading funds across many different assets. As a demand for gold changes, the value of gold can fluctuate based on purchasing and selling activities of ETFs.
The Bottom Line
While gold may diversify your portfolio and help you hedge inflation, you may not want to use it as the sole vehicle for your retirement savings. Carefully consider how gold fits in your financial plans and ultimate goals.
Those who’ve only recently entered the investing game may be more comfortable sticking with gold ETFs and gold mutual funds. These investments provide protections through indices and professional management, respectively.
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