For decades, gold has been a controversial metal. On the one hand, there are famous investors like Stanley Druckenmiller and David Einhorn who strongly believe in the metal as a good investment. They have bought and stored vast amount bars of gold in a number of vaults. On the other hand, there are investors like Warren Buffett, who have been skeptical about the metal. In an investment letter, he wrote that:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
In the past five years, it seems like people critical of gold have prevailed. In this period, the value of gold has fallen by 2.3% while the SP has returned more than 57%. When you add dividends and share buybacks, the total shareholder return has been much bigger.
Why Invest in Gold
Is investing your money in gold good or bad? Well, investors who believe in gold do so for a number of reasons.
Consistent value. Gold investors argue that the value of gold has been consistent over the years. Indeed, gold has been a valuable resource for centuries. The oldest manuscripts, including religious books like the bible have talked about the value of gold. Therefore, the assumption is that this value will remain in future.
Hedge against recession. Second, they believe that gold is a hedge against a recession. This is a theory that has been promoted for years. However, a closer look at the price of gold shows that it tends to fall when there is a recession. The chart below shows the price of gold in the past 100 years. As you can see, its price has tended to fall whenever there is a recession.
Security in case of major global catastrophe. Third, proponents of gold argue that gold will be a better thing to hold in case of a major global catastrophe. If such a thing happens, they believe that people who will be owning gold will be the key beneficiaries because fiat currencies like the US dollar will be worthless.
Central banks. Fourth, proponents also say that gold is a great investment because it is owned by many central banks. The Federal Reserve owns more than 7000 tons of gold. Other countries like Russia and China too hold vast reserves of gold.
Scarcity of gold. Finally, the supply of gold is diminishing. In economics 101, when the supply of a commodity diminishes, it leads to higher prices. Therefore, gold investors believe that the price will rise as world reserves get diminished.
How to Invest in Gold
There are a number of ways you can invest in gold. These are:
Buying physical gold
Like with other commodities, it is possible for you to buy gold bars in the open market. To buy gold investment bars, you need to find a local gold dealer, who will sell the bars to you. You will then sell them when the price moves up.
However, this is not the recommended way to invest in gold for three reasons. First, storing the physical gold is risky because the bar can get lost or stolen. Second, selling the bars could be difficult because you might not have a buyer. Third, if you are not an expert on gold, you can easily get scammed.
If you’re looking for gold investment for beginners, you’d better take a look at the options below than buying yourself physical bars of gold.
You can also use contracts for difference (CFDs) to invest in gold. When you do this, you will not own the physical gold. Instead, you will own the equivalent of the gold through an online broker. You will then sell the gold once the price reaches your target.
Gold futures are listed in the major futures exchanges like Chicago Board of Options Exchange (CBOE) and Chicago Mercantile Exchange (CME). The futures allow you to predict the price of gold at a specific time and then buy a call or put options.
Since mining gold is an expensive process, it is dominated by large companies. These companies are listed in major exchanges like New York Stocks Exchange (NYSE). The stock price of these companies tend to go up when the price of gold goes up. Therefore, if you believe that the price of gold will go up, you can buy the gold mining stocks. These stocks include companies like Newmont Mining, Goldcorp, Sibanye Stillwater, Barrick Gold, Anglo American, and Newcrest.
Finally, you can invest in Gold-based Exchange Traded Funds (ETFs). Examples of gold-related ETFs are: iShares Gold Trust, SPDR Gold MiniShares Trust, GraniteShares Gold Trust, and iShares Gold Strategy ETF. The benefit of investing in ETFs is that they tend to be more diverse than investing in a single stock.
What Moves the Price of Gold
While there is a lot of disagreement on gold, the consensus is that its movement is correlated with the US dollar. As shown in the chart below, gold tends to rise when the US dollar falls and vice versa. The reason for this is that gold is always quoted in dollar terms and the fact that the US Fed has the most gold reserves in the world.
Therefore, when analyzing the future price of gold, it is always important to do so using the lens of the US economy. For example, if the US economy is doing very well, it means that the Federal Reserve could be forced to hike interest rates. If this happens, the USD can gain as investors expect more yields from the dollar. When this happens, the price of gold can fall.
Alternatively, when the Fed issues a dovish statement, the dollar could fall, leading to the price of gold to rise. This situation has happened this year since the Fed announced that it won’t hike rates as investors were expecting.
Bitcoin: digital gold
After more than 10 years Bitcoin has proven to be a good contender to become the digital gold of the 21st century. The built-in limited issuance of a maximum of 21 million bitcoins combined with the vastly superior ways of storing, moving and transferring bitcoin lead some people to believe that Bitcoin is massively undervalued compared to gold and silver.
Gold is a controversial metal, partly because it does not have any major industrial use. The ideal situation for investors is to allocate some of their funds to gold, gold ETFs, and other gold-related products. The rest of their funds should go to other assets like technology stocks and major indices like Nasdaq and SP.
Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities.