All You Should Know Before Buying Gold
Gold is the most popular precious metal with a rich history of acceptance and an asset class considered as a safe haven against inflation. Gold has historically gone up in value when other asset classes have gone down, making it an ideal investment during times of economic uncertainty.
Most of us know that gold is an asset but do not really understand the underlying technicalities of it such as the different forms they come in, how the price of gold is determined, different ways of investing in gold and why they are considered a safe investment. In this article, we will explore what defines the value and price of gold and what effects it, and discuss about the different ways that you can invest in gold.
Understanding the Value & Price of Gold and what might effect it.
If you’re planning to buy gold, you should know that many things can influence its price.
The Spot Price of Gold
The most important thing to consider is the spot price of gold. This is the current wholesale price of gold in its most pure, unrefined and raw form.
The spot price of gold is determined by supply and demand. As there is more demand for gold or buy it as an investment, the price will go up because there is only a limited amount available for sale. Conversely, if the demand drops with consistent supply, there will be more gold available for purchase and the price will go down.
Historically, Gold prices has a direct co-relation with inflation. When inflation rises in an economy, people prefer buying gold and accumulating it instead of holding onto cash because it retains its purchasing power over time and the cash devalues. This means that investors who want to hedge their investments against inflation will buy gold, and when the majority of sentiments are such, they drive the price of gold up as there is more demand to the limited supply of gold.
Karat of Gold
The karat refers to the purity level of gold. 100% pure gold is 24 karat. If there are other metals mixed in with the gold, it will lower its purity or karat rating.
During manufacturing gold jewellery, gold is mixed with other metals or alloys to give it a certain shape or form. The amount gold used with other metals or alloys to collectively create a piece of jewllery determines the karat of the jewellery. So a 9 karat gold chain consists of only 37.5% of gold amongst other metals. There is seldom gold jewellery that is 24 karat. Most often, gold jewllery are available between 9-22 karat. (37.5% – 91.6%). The higher the karat number, the more valuable your investment becomes over time. Lower-karat gold costs less because it consists of less gold and has therefore overall, the item significantly lower intrinsic value than higher-karat gold.
For example, 24-karat gold is 99.9% (~100%) pure gold, while 18-karat gold is 75% pure and 14-karat gold is 58% pure. The difference in price between these two types of gold can be significant and this will also impact the price when selling or buying gold from gold dealers
However, if you’re planning to buy gold purely as an investment, then it makes sense to buy 24 karats of gold in the form of bullion bars, gold coins or minted bars to cost-effectively hold gold to achieve high returns in the future. Investing in gold jewellery pieces of different karat can be a costly investment that provides little to no return as jewellers always charge additional fees such as making charges and other overheads which drives the prices up several folds on top of the gold value.
Different Ways of Investing in Gold
1. Physical Gold
The most popular way to invest in gold is by purchasing physical gold coins or bullion cast bars or bullion minted bars from gold dealers. Physical gold is available in various sizes and weights and can be bought from bullion dealers. The price of the gold you choose to invest will vary based on the size and weight of the piece that you choose to buy. You can also choose to store your physical bars with the gold dealer if personal storge is scarce. This is by far the most secured way to invest in gold because you actually hold possession of the physical gold. This gives you total control over your gold assets and you can choose to liquidate it whenever you want it in anyway.
2. Pool allocation
If you don’t want to deal with storing physical gold, then you can invest in pool allocation instead. Pool allocation, also known as Gold certificates in certain parts of the world constitutes of you owning a certain amount of gold bullion in any size that is stored or in possession with the gold dealer. This is a cost effective if you decide to buy gold and store it with the gold dealer anyways as pool allocation will mean you are not charged for the separate storage fees for the specific sizes of gold bullion or gold coins that you would have otherwise bought and stored with the dealer.
You may choose to sell at any time just like you would with your physical bars. While you maybe able sell the physical bars that you hold anywhere, with pool allocation, you will be able to sell only to the gold dealer you purchased from. While this may sound like a limitation, the upside is that you know that you can cash out your investment almost instantly without the need to find and evaluate who you need to sell to. However, on the other hand, if you wish to sell your pool allocation investments or hold on to it physically, you can also choose to withdraw your gold into physical bars which are usually subjected to barring fees.
3. Gold ETFs
An ETF is like a mutual funds, except that they trade like stocks on an exchange. These funds can be highly liquid, meaning that they can be bought or sold at any time during market hours without affecting the underlying value of the fund or its holdings.
A gold ETF (Exchange-Traded Fund) is basically just like a normal stock except for one big difference: you’ll trade/hold gold either as a finished product or/and as stocks of gold mining companies. The biggest advantages being that it is arguably the easiest gold investment to liquidate and allows you to diversify your gold related investments. However, there are also some drawbacks using an ETF. You might have to pay a commission and/or management fee to trade in gold ETFs. You also do not actually own any gold in its physical form. Moreover, your investments may not directly be in gold itself but in the companies that extract and process them, basing your investment returns not only on the gold value but also on the performance of the companies that mine and process them.
4. Gold Futures
Gold futures contracts allow you to speculate on the price of gold without actually owning any physical gold. A gold futures contract is an agreement between two parties to buy or sell gold at a specified price at a specified future date. The cost of the contract depends on the supply and demand of gold at that time and interest rates and other factors affecting supply and demand.
If the gold price drops, you could lose money on your investment before it’s ever delivered. Plus, trading futures can be tricky because they’re so volatile, making them very risky for inexperienced investors.
5. Gold Mining Shares
This is a specialized type of investment fund that buys and sells shares of publicly-traded gold mining companies. You can invest directly in gold mining companies with shares of stocks listed on public exchanges. Instead of directly investing in gold, you’ll be investing in gold mining companies, whose share values often track the rise or fall of gold rates.
However, there are a few risks associated with investing in gold mining shares as the quality of management or a political turmoil could impact the performance and hence affect your investment returns. You should also be aware that when you buy shares in a company, you’re buying a stake in its future profits. If a company makes losses or has no profits, its share value will likely decline even if the price of gold appreciates.
While there are several ways of investing in gold, the best and safest way is to invest in physical gold like gold bullion bars, gold coins and minted bars as you will physically own them and know that they can be liquidated conveniently. They also almost guarantee that you will have healthy and positive return on your investments in the long-term. Several gold dealers in Australia provide high-quality gold bullion, like Gold Secure’s Bullion Store in Brisbane. They offer a range of products with varied brands from around the world. They have bullion bars and coins of different weights that will suit every investor to enter the market at their desired budget. They pride themselves in their customer service with a customer-centric approach offering the right level of privacy, price and peace of mind to their investors.
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