GOLD
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HOW TO INVEST IN GOLD
Investing in gold has been a common practice since ancient times. It is seen both as a safe haven during economic uncertainty and as a tool for diversifying portfolios.
There are various ways to invest in gold, each with advantages and disadvantages. This article will explain how to invest and the different ways to invest in gold, focusing on the main asset classes available and the strategies that should be applied.
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8. elok. 2024
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Market Analysis: Gold and the Precious Metals Sector
For centuries, gold has been a valuable and sought-after investment asset. It is appreciated for its intrinsic value and uses in jewellery, technology, and as a store of value.
Gold is considered a haven in economic uncertainty, protecting investors' wealth against market volatility and inflation.
Key Factors Affecting the Gold Market
Various economic, political, and social factors influence the gold market. Here are some of the most important factors:
Inflation: Gold is used to hedge against inflation, increasing its price. As inflation increases, the purchasing power of paper money decreases. Gold, on the other hand, tends to maintain its value. This means that while the cost of goods and services rises, the amount of gold required to purchase them remains relatively stable. Investors turn to gold to preserve their purchasing power in the face of rising prices.
Geopolitical Instability: In geopolitical tension, gold appreciates as investors seek safe assets.
Industrial and Jewelry Demand: The demand for gold in jewellery making and industrial applications also influences its price.
Supply and Production: Mining production and the available supply of gold can significantly impact its price in the global market.
Central Bank Policies: Central banks in various countries can purchase and sell gold, influencing its price.
Advantages of Investing in Gold
Diversification: Gold can diversify an investment portfolio as it often has an inverse correlation with stock and bond markets.
Safe Haven: During economic crises or political instability, gold tends to maintain its value, offering protection against the depreciation of other investments.
Liquidity: Gold is highly liquid and can be easily bought or sold in markets worldwide.
Risks and Challenges
Volatility: The price of gold can be volatile, especially in the short term.
Does Not Generate Income: Unlike stocks or bonds, gold does not generate regular income, such as dividends or interest.
Storage and Security: Owning physical gold requires additional considerations for storage and security.
So, Is Gold a Good Investment?
Gold can be an excellent addition to a diversified portfolio, especially during economic uncertainty. Its ability to act as a haven and its history of preserving value make it attractive to many investors.
However, you should consider the associated risks, such as price volatility and lack of income generation (gold does not pay dividends). Let's examine further concepts.
Gold Extraction Process and Supply Chain
The gold extraction process is complex and encompasses several stages, from exploration and mining to refining and distribution. Here is a step-by-step description of what happens with the gold extracted from a mine and how it reaches the market:
1. Exploration
The first stage of the gold extraction process is exploration. Specialized mining companies use various geological techniques to identify and evaluate potential gold deposits. This includes field studies, drilling, and sample analysis to determine the viability of extraction.
2. Development and Construction of the Mine
Once a gold deposit is confirmed, the mine's development and construction begin. This involves creating access roads, processing facilities, and storage areas. Safety and environmental measures are also established to minimize negative environmental impacts.
3. Extraction
Depending on the location and depth of the deposit, gold extraction can be done through underground or open-pit mining. Open-pit mining removes the earth's surface layer to expose the gold ore, whilst underground mining excavates tunnels and shafts to access the ore.
4. Processing
The extracted gold ore is transported to a processing plant, where it is crushed and ground into fine particles. A cyanide-leaching process dissolves the gold from the ore. The dissolved gold is separated and precipitated by zinc dust or activated carbon.
5. Refining
The precipitated gold is melted into bars and refined to remove impurities and obtain high-purity gold. This process may include electrorefining or advanced chemical techniques to achieve a purity level of up to 99.99%.
6. Distribution
Once refined, the gold is sent to various markets. The main actors within the supply chain include central banks, jewellery manufacturers, electronics producers, and other institutional investors. Banks and financial companies also play a crucial role in distributing, storing, and trading gold.
Key Players in the Supply Chain
The key players within the gold supply chain include:
Mining Companies: Companies engaged in the exploration, extraction, and processing of gold. Examples include Barrick Gold, Newmont Corporation, and AngloGold Ashanti.
Refineries: Companies specialized in gold refining, such as Valcambi, PAMP, and Metalor.
Central Banks: Institutions that buy and store large quantities of gold as a store of value. Examples include the U.S. Federal Reserve and the European Central Bank.
Jewelers and Manufacturers: Companies that manufacture jewellery, watches, and electronic products use gold. Examples include Cartier, Tiffany & Co., and Samsung.
Institutional Investors: Investment funds, banks, and other financial institutions that buy and sell gold in their investment portfolios.
The gold extraction and refining process is a complex global supply chain involving multiple actors and stages to transform raw ore into a valuable and highly traded product in international markets.
Alternatives to Invest in Gold: An Analysis of Financial Asset Classes
There are various ways to invest in gold, each with advantages and disadvantages. This section will explore the different alternatives. In the upcoming sections, we will detail some investment strategies applied to these alternatives.
Physical Gold: Bullion and Coins
Gold bullion and coins are the most traditional forms of physical gold investment. Bullion varies in size, from small grams to large bars weighing kilograms. Coins like the South African Krugerrand, Canadian Maple Leaf, and American Gold Eagle are popular among investors.
Advantages:
Direct Ownership: The investor has physical possession of the gold.
Intrinsic Value: The value of physical gold does not depend on the solvency of any entity.
Hedge Against Inflation: Gold has proven to be an excellent long-term hedge against inflation.
Disadvantages:
Storage and Security: Keeping physical gold secure can be costly, and if you keep a beautiful, shiny golden coin at home, it could be stolen.
Liquidity: Selling physical gold may not be as quick or efficient as other forms of gold investment; spreads (the difference between buying and selling) tend to be high.
Exchange-Traded Funds (ETFs)
Gold ETFs allow investors to buy shares representing a specific amount of gold without handling physical gold. They are a popular and liquid way to invest in gold.
Examples of popular gold ETFs:
SPDR Gold Shares (GLD): One of the largest and most liquid ETFs tracking the price of gold.
iShares Gold Trust (IAU): Another popular ETF providing exposure to gold.
Aberdeen Standard Physical Gold Shares ETF (SGOL)is an ETF that offers an efficient way to invest in physical gold.
Advantages:
Ease of Access: ETFs can be easily bought and sold through the stock exchange.
Low Transaction Costs: Compared to physical gold, ETFs have lower transaction costs.
Diversification: ETFs can be composed of a variety of gold-related assets.
Disadvantages:
No Physical Ownership: Investors do not own the gold directly.
Counterparty Risk: Although minimal, there is a risk associated with the solvency of the ETF issuer.
Management Fees: Although low, annual fees affect long-term profitability.
Gold Mining Stocks
Investing in gold mining company stocks is an indirect way to benefit from gold price movements. Additionally, these stocks often pay dividends (except for new mining projects).
Examples of gold mining companies:
Barrick Gold Corporation (GOLD): One of the world's largest gold mining companies.
Newmont Corporation (NEM): Another leading miner with global operations.
AngloGold Ashanti Limited (AU): Major gold producer with operations in several countries.
Kinross Gold Corporation (KGC): Operates in the Americas, Russia, and Africa.
Gold Fields Limited (GFI): Producer in South Africa, Ghana, Australia, and Peru.
Advantages:
High Potential Returns: Mining stocks can offer higher returns than physical gold in bull markets.
Dividends: Some mining companies pay dividends to shareholders.
Portfolio Diversification: Investing in mining stocks can add diversification to an investment portfolio.
Disadvantages:
Business Risk: Company-specific factors, such as management and operational efficiency, can affect performance.
Volatility: Due to market and operational factors, mining stocks can be more volatile than physical gold.
Commodity Exposure: Miners are also exposed to other metals, which can influence their performance.
Futures and Options Contracts
Gold futures and options are derivative financial instruments that allow investors to speculate on the future price of gold. Futures are agreements to buy or sell a specific amount of gold at a predetermined price on a future date, while options grant the right, but not the obligation, to buy or sell gold at a specified price.
Advantages:
High Leverage: Futures and options allow investors to control large amounts of gold with a relatively small initial investment.
Liquidity: Futures and options markets are highly liquid.
Hedging: They can be used to protect against adverse gold price movements.
Disadvantages:
High Risk: The use of leverage can result in significant losses.
Complexity: They require a deep understanding of financial and derivatives markets.
Margin Costs: Maintaining futures positions may require additional funds in a margin account.
Gold Certificates
Gold certificates represent ownership of a specific amount of gold without physically storing the metal. Banks or financial institutions issue certificates, a convenient alternative to physical gold.
Advantages:
Ease of Transaction: Buying and selling certificates is simple and does not require handling physical gold.
Security: There are no risks associated with physical storage.
Liquidity: Certificates can be easily converted to cash.
Disadvantages:
Counterparty Risk: The solvency of the certificate issuer can affect its value.
No Physical Ownership: The investor does not have physical possession of the gold.
Possible Fees: There may be fees for issuing and maintaining certificates.
Gold Accounts
Gold accounts, offered by banks and brokerage firms, allow investors to buy and sell gold similarly to a bank account. There are two main types: allocated and unallocated accounts. Allocated accounts assign specific gold bars to the investor, while unallocated accounts represent a portion of a large gold deposit.
Examples of banks offering gold accounts:
HSBC: Offers allocated and unallocated gold accounts.
UBS: Provides gold account services for investors.
Credit Suisse: Known for its precious metal management services.
Advantages:
Security and Storage: Banks handle the storage and security of the gold.
Ease of Access: Transactions are easy and fast.
Diversification: They offer a way to diversify gold investment.
Disadvantages:
Counterparty Risk: There is a risk associated with the bank's solvency.
Maintenance Fees: Accounts may have management and storage fees.
No Direct Physical Ownership: Especially in unallocated accounts.
Each asset class has its characteristics, advantages, and disadvantages. Investors should understand their investment objectives and risk tolerance before investing in gold.
Tips for Finding a Good Broker to Invest in Precious Metals
Choosing the right broker is crucial as it is your gateway to investing in the precious metals market.
A good broker facilitates transactions and provides the tools, resources, and support needed to make informed investment decisions. Before this section, we provide a ranking of brokers that might interest you.
Here are some tips to help you find the broker that best suits your needs:
Regulation and Security: Ensure the broker is registered with major financial regulatory bodies. Additionally, verify if they are members of investor protection schemes that safeguard your funds.
Commissions and Fees: Compare the commissions for buying and selling precious metals. Also, consider the broker's additional fees, such as account maintenance, inactivity, and withdrawal. Some brokers offer "commission-free trades," which can benefit frequent traders; however, these entities charge other fees (their business is based on making money from your trading activity).
Trading Platform and Tools: Evaluate the usability, speed, and reliability of the trading platform you will use. A good platform should be intuitive and offer real-time data, charting tools, and technical analysis indicators.
Range of Investment Alternatives: Ensure the broker provides access to a wide range of precious metals in various global markets. This is particularly important if you plan to diversify your investments internationally. Check if they offer other investment products, such as ETFs, mutual funds, bonds, and options, which can provide additional diversification opportunities.
Customer Service and Support: Test the broker's customer service by contacting them with questions before opening an account. Evaluate their responsiveness, professionalism, and availability. The last thing you want is a problem and no one to help. This is your capital at stake.
Account Types and Minimums: Review the types of accounts offered, such as individual accounts, retirement accounts, and margin accounts. Check for minimum deposit requirements and ensure they align with your financial capabilities.
Order Execution Speed and Quality: Investigate the broker's order execution speed and quality. This refers to how quickly the broker processes your buy and sell orders. Fast and accurate execution is crucial, especially for active traders.
Gold is used as a hedge against inflation. As inflation increases, the purchasing power of paper money decreases. Gold, on the other hand, tends to maintain its value. This means that while the cost of goods and services rises, the amount of gold required to purchase them remains relatively stable. Investors turn to gold to preserve their purchasing power in the face of rising prices.
About the Gold Markets
As mentioned, gold is traded in various global markets and is probably the most recognized and valued physical asset (along with Oil) in the financial world.
The gold market has existed for centuries and is renowned for its stability and intrinsic value. Gold is traded on various exchanges and markets. Some of the main markets include:
London Bullion Market (LBMA): The primary market for physical gold and silver trading.
New York Mercantile Exchange (NYMEX): Part of the CME Group, where gold futures are traded.
Shanghai Gold Exchange (SGE): The main gold market in China, where physical gold and derivatives are traded.
Tokyo Commodity Exchange (TOCOM): A significant Asian market for futures and options on precious metals.
Hong Kong Exchanges and Clearing (HKEX): Another key Asian market for gold trading.
With a high volume of trades, these markets offer significant liquidity, making it easier for investors to buy and sell gold without causing major price fluctuations.
The gold market is synonymous with growth and stability, providing a platform for investors worldwide.
Trading in the Gold Market
Gold is traded electronically through various global platforms. This electronic system offers several advantages, including faster transaction times and greater transparency. Here’s how trading in the gold market works:
Listing and Market Makers: Companies and banks must meet strict requirements to participate in gold trading. Once listed, market makers and financial firms responsible for providing liquidity facilitate trading by posting bids and asking prices for gold.
Order Placement: Some investors place buy orders, others place sell orders, each through their brokers. These orders are sent to the gold market network, which matches them with corresponding buy or sell orders.
Trade Execution: The trade is executed electronically when a match is found. The systems ensure that trades are processed quickly, often in milliseconds, ensuring efficient price discovery and rapid execution.
Trading Hours: The gold market operates 24/7 across the different global exchanges (some of which we mentioned in previous paragraphs), allowing investors to take advantage of trading opportunities anytime.
Specific Strategies for Investing in Gold
We have already analyzed gold as an investment, the need for a broker as an intermediary, and the different markets where it can be traded. The next question you should ask yourself is: How do I invest? What types of investment strategies exist?
The answer to this last question is: It depends. Consider your investment objectives, your time horizon (whether you want to buy and sell within a day or invest for the long term), and the capital you have available.
Here are some of the most common investment strategies, from Long-Term to Short-Term.
Buy and Hold Strategy
Horizon: Long-Term
Overview: This strategy involves buying and holding precious metals, such as gold or silver bullion, over a prolonged period, regardless of market volatility.
Objective: To benefit from the overall growth in the value of precious metals and the compounded returns over the long term.
Tips: Choose precious metals with high demand and intrinsic value. To spread risk, diversify into multiple metals, such as gold, silver, and platinum. Be patient and avoid reacting to short-term market fluctuations.
Investing in Precious Metals ETFs
Horizon: Long-Term
Overview: Focus on ETFs that invest in precious metals, providing a diversified and liquid way to invest in gold, silver, and other metals.
Objective: To generate capital gains and diversify the portfolio without physically holding precious metals.
Tips: Look for ETFs with low management costs, such as SPDR Gold Shares (GLD) or iShares Silver Trust (SLV). Evaluate the liquidity and historical performance of the ETFs. Consider diversifying into different ETFs to cover a range of precious metals.
Investing in Precious Metals Mining Stocks
Horizon: Long-Term
Overview: Invest in stocks of companies that extract and produce precious metals. Large miners include Barrick Gold and Newmont Mining.
Objective: To achieve capital gains by appreciating stock prices and the dividends paid by these companies.
Tips: Focus on companies with strong earnings growth and solid financial fundamentals. Diversify into several mining companies to mitigate company-specific risks. Conduct thorough research on the mining industry's prospects.
Investing in Precious Metals Certificates
Horizon: Medium to Long-Term
Overview: Purchase certificates that represent the ownership of a specific amount of precious metals without the need to store the metals physically.
Objective: To benefit from the rise in the value of precious metals without the inconveniences of physical storage.
Tips: Ensure the certificates are backed by reliable financial institutions. Check the fees associated with purchasing and maintaining the certificates. Monitor the performance of the certificates and their correlation with market prices.
Trading Precious Metals Futures and Options
Horizon: Short-Term
Overview: This strategy involves trading futures and options contracts on precious metals to speculate on short-term price movements.
Objective: To achieve quick profits based on daily or weekly fluctuations in the prices of precious metals.
Tips: You need a solid understanding of technical analysis and access to real-time trading tools. Use strategies such as scalping and breakout trading. Set stop-loss orders to manage risk and limit losses. Stay updated with news and events that may affect precious metal prices.
Contrarian Investing in Precious Metals
Horizon: Medium/Short-Term
Overview: Take positions against the prevailing market sentiment by buying precious metals when others sell and vice versa.
Objective: To benefit from market overreactions and mispricing in the prices of precious metals.
Tips: Look for fundamentally strong precious metals that have been oversold due to negative news or market sentiment. Be patient and willing to hold positions until the market sentiment reverses. Conduct a thorough fundamental analysis to ensure the underlying value supports your investment thesis.
Swing Trading in Precious Metals
Horizon: Short-Term
Overview: A short-term strategy that involves holding positions in precious metals for a few days or weeks and capitalizing on expected price movements.
Objective: To profit from short to medium-term price fluctuations using technical analysis.
Tips: Use technical indicators such as moving averages, Relative Strength Index (RSI), and MACD to identify entry and exit points. Set stop-loss orders to manage risk and protect against significant losses. Stay updated with market news and events that may impact precious metal prices.
Day Trading in Precious Metals
Horizon: Short-Term
Overview: This strategy involves closing trades within the same day, based on technical analysis and intraday market movements of precious metals.
Objective: To achieve profits from daily price movements.
Tips: You need a solid understanding of technical analysis and access to real-time trading tools. Use strategies such as scalping and breakout trading. Set stop-loss orders to manage risk and limit losses. Stay updated with news and events that may affect precious metal prices during the day.
Check out our ranking of the best apps for Day Trading.
News Trading in Precious Metals
Horizon: Short-Term
Overview: A strategy that involves taking positions based on the market's reaction to significant news and economic events related to precious metals.
Objective: To capitalize on volatility and rapid price movements from important news and events.
Tips: Stay informed about relevant news and economic events that may impact precious metal prices. Use an economic calendar to anticipate key events. Set stop-loss orders to protect against adverse market movements. Be quick and decisive in executing your trades.
Key Findings
Investing in gold requires a deep familiarity with the gold market and the elements influencing its price, such as supply, demand, and global economic circumstances.
Assessing alternatives, such as other precious metals and diverse alternative assets, is essential to building a solid and diversified portfolio.
Choosing a suitable broker and adopting investment strategies that align with your objectives and time horizon are fundamental steps to maximize your returns and manage risk.
Choose the right strategy: A long-term strategy, such as buying and holding physical gold, differs from a short-term strategy, like trading futures and options on gold.
Additionally, consider the exchange rate of the dollar and other currencies. Fluctuations in the exchange rate can impact your returns, especially if you invest in gold internationally.