Gold Investment Guide: How to Invest in Gold?

From jewelry to trading, gold has been a symbol of wealth and prosperity throughout history. Today, gold is still highly valued, but its uses have expanded to be more than just a high-status symbol.

For example, did you know that the device you are reading this from likely uses gold? Although it’s a very small amount, gold can be found in something as small as a microchip to something as large as an electric vehicle.

Why is gold used in modern-day electronics? Gold has incredible conductivity, meaning it can carry electricity better than other metals, such as copper and silver.

Beyond its usefulness in electronics, gold ownership makes for a great defense against economic uncertainty. As the market slows or experts start signaling an incoming crash, you’ll see plenty of investors scramble to gold.

Whether it’s gold stocks, physical gold (bullion), or gold ETFs, smart investors know that gold is gold no matter how bad things get. It always has value and can be cashed in on a rainy day—or quarter.

Let’s take a look at the ways other investors have made their fortune on gold.

Read this gold investment guide to better understand the market, gold investment strategies, and how to become a smarter investor overall.

Why Gold Matters

Have you ever wondered why gold has been so highly valued? Here’s a hint—it’s not just because it’s shiny. Gold is a rare metal, although it is categorized as a precious metal.

The attractive look and the fact that it was hard to find made it great for trading for goods and services throughout history. In modern times, gold has become one of the best defenses against economic uncertainty.

Consider at times when paper currencies, bonds, and stocks lose their value due to inflation, gold often shines. You can’t print more gold like you can money, so there is unlikely to be an oversupply of gold, helping it stay valuable.

Even when things are looking up, investing in gold is a great way to expand your portfolio. And if the market crashes, you can fall back on your gold investments to keep yourself afloat.

What Moves Gold’s Price?

Before investing in gold, you need to understand what moves the price of gold. As you’ve read, when times are hard, investors flood gold markets.

When Inflation Goes Up, Does Gold?

As you would expect with rising demand, the price of gold rose. So is that to say that gold prices rise with inflation? Some studies show that to be untrue.

In a paper titled “The Golden Dilemma”, the authors argue that gold has positive price elasticity, meaning that its price rises with demand. In other words, they found that no matter how the economy was doing, whenever the demand for gold went up so did the price.

Right now, some economists ringing the alarm on inflation, but that doesn’t mean that gold is your best bet.

Current & Future Gold Supply

With how rare gold is, it’s no surprise new gold mined each year doesn’t add much to the overall supply. And because gold isn’t consumed, the same supply will always exist.

On top of that, think about all the pieces of gold jewelry or coins that may just be sitting around collecting dust. That gold is effectively off the market because it is not typically traded. When was the last time you’ve seen someone pay for anything with gold?

Yet, people seem to always be on the lookout for opportunities to buy gold in any form. After all, despite the supply level, it retains value in the long run.

The Washington Agreement On Gold

One of the biggest influences on the price of gold is central banks. When economies are moving smoothly, the job of a central bank is to sell its gold because it doesn’t generate returns.

However, when the economy is buzzing, few people are purchasing gold. It’s a bit of a paradox for central banks, and the lack of buyers (or demand) causes gold prices to drop.

Let’s say economic times were bad. To keep the market from being flooded with gold, central banks abide by a non-binding agreement called the Washington Agreement on Gold. In summation, the agreement says that no one bank can sell more than 400 metric tons of gold in a year.

Although there is no contract, there would be consequences for all if anyone did sell over the agreed-upon amount. Putting too much gold on the market would work against the interest of all the banks.

Two Reasons to Invest in Gold Now

For the past two years, two big things related to gold have emerged—and all investors should keep an on them.

COVID-19 Part 2?

The first is the ongoing pandemic. During the first year of it (yes it’s been that long) the market as a whole took a major dive. Yet as 2020 progressed, the price of gold went up.

While the distribution of vaccines has returned most people to a resemblance of life before and confidence in the market, a cloud looms over our heads.

Health experts have warned that the delta variant of the virus may trigger new restrictions and shutdowns.

 If what we know happened to the price of gold during the first round of shutdowns happens again, you could be looking at a sizeable return if you get in now.

Some may say this is betting on the worst outcome, but you should look at it as protecting yourself from a bad outcome.

The Green Revolution

The other major story from the past year, and past decades, has been the climate change crisis. To meet this crisis, whether you believe in climate change or not, many believe we need a green revolution.

As part of the revolution, combustion engines and other polluters will need to phase out for green, clean technologies. Say goodbye to gas guzzlers and say hello to practically noiseless electric vehicles (EVs).

A lot of the new technologies including EVs will rely on conductive metals, such as gold, to operate. Although it’s not likely to be used as heavily or widely as other cheap metals like copper, manufacturers will still need it for their products.

Ways to Invest in Gold Stocks

When you’re ready to invest in gold, you’ll need to carefully consider your options. You have three options for investing: gold mining stocks, gold ETFs, and physical gold.

Gold Mining Stocks

Going with this type of gold stock means that you are investing in a company that mines for gold. Gold mining stocks can be tricky but well worth the investment.

Not every company that mines for gold is going to strike it, or at least enough of it to profit. If the company you invested in goes under, then there goes your investment.

However, over the last several years, gold mining stocks have outperformed the price of gold bullion. Some experts believe the outperformance is due to gold equities, such as mining stocks, being overlooked.

As investors sense rough times ahead, they’ll typically flock to gold bullion rather than mining stocks. What those investors aren’t thinking about—and what you should be thinking about— is how gold miners will sell their gold on a market where the demand is high.

In terms of return on investment, you could be looking at a larger gain from mining stocks.

Gold ETFs

Similar to any other stock, gold ETFs are traded on a market. Think about gold ETFs as you would investing in an index.

Instead of staking a claim in a single gold mining company, your investment in an ETF would be invested into several at the same time.

This investment route is great for spreading out your risks of a company going under and anyone more comfortable with a passive strategy.

Gold Certificates

To have a gold certificate means you don’t physically own gold, but rather you hold a piece of paper from a certifying company that says you own it.

These certificates are typically held until the owner decides to cash them in. The problem with gold certificates is that if the certifying company goes bankrupt, your certificate is next to meaningless.

Gold certificates lost their popularity around the same time the US dollar was no longer backed by gold. Even today they remain fairly unpopular.

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