Gold is a precious and limited metal on earth, and gold has been a currency for trade, a store of value, and a valuable asset class. As it is limited, it has been a trusted asset for investment that has stable and non-decreasing intrinsic value.
Investment Alternatives
There are different investment alternatives such as financial assets, including private equity or venture capital, hedge funds, managed futures, and tangible assets including antiques, commodities, real estate, equipment, and natural resources such as gold and oil.
What is a Physical Gold Investment?
Two ways to invest in gold are there, and these are
- Physical gold (purchasing gold in its metallic form)
- Gold securities (buying gold in the form of stocks and funds and futures)
Physical gold means gold in bullion form, cast in different shapes and sizes based on its weight and purity. These forms can be bars, ingots, and even coins, but most importantly, it has to be 99.5% pure gold. Investing in gold in the form of gold bullion, gold coin, or gold jewelry is called investing in physical gold. Physical gold is considered one of the vital investment alternatives for risk-averse people or who want to reduce investment risk through investment diversification. Investment portfolio advisers recommend that every investor keep physical gold as a part of the investment portfolio. And physical gold should be 5% to up to 20% of the total investment portfolio (https://www.businessinsider.com) (https://www.forbes.com/)
How Many Types of Physical Gold Investment Are There?
The types of physical gold for investment includes the followings:
Gold Coins
Gold in the form of coins is one of the ways to invest in physical gold, similar to silver investment. These coins are not the old historical gold coins, these are coins minted by the government for investment purposes, and the price of these coins is set based on the melted value of the gold and includes 1%-5% premiums on it. Some world-famous gold coins include American Gold Eagle, Canadian gold nugget, South African krugerrand, and the fitness of these gold coins varies from 24 karats to 10 karats.
Gold Jewelry
Gold jewelry is used as ornaments, and as it looks beautiful, some of it is worth collecting. It is easily purchasable and whoever purchases it instantly gets the ownership of the gold. Gold jewelry is shaped in different form and require skills to shape it. Jewelry market price is always higher than the regular melted gold price.
Gold Bullions
Gold bullions are the chunk of pure gold shaped in the shape of ingots, nuggets, and bars. Gold bullions are valued based on their purity and mass rather than their shapes. It comes in different fitness standards internationally, ranging from 99.00% to 99.99% purity of gold, and the specification of gold in the international market varies from 400 ounces to as small as ΒΌ ounce. Gold bullion is a safer and cost-effective way for gold investment than gold coins. Additional costs of gold bullions are lower than gold coins. These costs include gold premiums and commissions. Gold bullions have higher liquidity than gold coins. It means that gold bullions can be converted to cash in less time. Due to its advantages, investors choose bullions over coins and jewelry.
Vaulted Gold
Vaulted gold is the gold bars or ingots kept in the vault of a bank. In most cases, investors of vaulted gold do not want to withdraw the gold as it is kept in the highly secured bank vaults. Although vaulted gold includes the additional cost of storage in the bank, it is sold at nearly the cost of market price of gold, making it cheaper than any other form of gold investment.
Bullion is the appropriate form of gold investment for a new investor as it holds higher liquidity and a comparatively low cost of acquisition. Gold investment requires lots of cash, making it appropriate for those investors who have idle cash or cash equivalent assets. (https://www.goldpriceoz.com)
How Many Options to Invest in Physical Gold?
Investment in physical gold requires the knowledge of the current market price of different gold investment options. It is for those investors having previous experience in this investment option. It involves interaction with dealers and requires considering different types of costs associated with gold investment. Investors who only invested in stocks and bonds may find those expenses demotivating and high cost of gold investment. Such cost includes
Commission of dealer: Investing in gold coins or bullion requires a dealer who will bring the investment opportunity.
Premium of seller: Gold bullions and coins, especially gold jewelry, have a premium charge that varies from around 1% – 5%, depending on the country’s restriction or the fame and quality of gold.
Cost of storage: Investing in gold bullion requires finding a safe place to store the investment, and it generated the need for storage for gold investment.
Cost of investment insurance: Usually, coin or bullion gold investment requires an additional insurance policy for the investment safeguard. This investment insurance costs an additional charge on the amount invested in gold.
Cost of liquidity: Whenever an investor wants to sell his investment, he will require some time to convert the gold into cash because it involves interaction with dealers.
SWOT Analysis for Physical Gold Investment
Strengths
- Outside financial system: As it is outside of the financial system, a breakdown in the financial system does not impact gold negatively
- No 3rd party risk: Purchasing gold directly from dealers avoids the risk of being cheated by 3rd party intermediaries
- CGT free: In some countries, there is no tax on capital gain from gold bullions
- Inflation Hedge: Inflation in a financial system does not affect gold value.
Weakness
- Premium buy: A charge has to be paid to the dealers
- Delivery fee: Requires to deliver to the storage facility, it can be home or vault
- Investment Insurance fee: Some investments might require insurance as protection
- No yield generation: Gold does not generate any profit
Opportunity
- Capital gain: Value is constantly increasing in the gold market
- Growing gold demand: Inflation hedge increased the demand for this investment
- Possibility for fiat currency backing: Chance of backing fiat currencies in many declining economies
Threats
- Theft: Having it at home increases the chance of theft
- Premium sell: Selling to a dealer may require selling in less than its actual value + expenses
- Fraudulent act of dealer: Inexperience and lack of market knowledge may result in the fraudulent act by the sellers.
Conclusion
Gold as a precious metal and investment option has always been preferred. It does not have a diminishing demand and drop in value; therefore, it is preferable for investors with idle funds to invest in this precious metal such as gold and silver to diversify an investment portfolio and reduce the risk of investment losses.
More Related Reading:
- Small Business Ideas in India
- What is an Investment Bank? Definition and Functions
- Advantages and Disadvantages of Foreign Direct Investment
- Investment Strategies by Bill Ackman
- Investment Strategies by Benjamin Graham
Bibliography
- https://www.businessinsider.com. (n.d.). Retrieved from https://www.businessinsider.com/how-to-invest-in-gold
- https://www.forbes.com/. (n.d.). Retrieved from https://www.forbes.com/advisor/investing/how-to-invest-in-gold/
- https://www.goldpriceoz.com. (n.d.). Retrieved from https://www.goldpriceoz.com/what-types-of-the-physical-gold.html
- https://www.investitin.com. (n.d.). Retrieved from https://www.investitin.com/swot-analysis-gold-investments/
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