Gold Investment Guide for Beginners: 5 Majors Ways to Invest in Gold

Gold, favored by governments around the world because of its monetary stability, has long been regarded as a “quasi-currency”. Its status is equivalent to a country’s foreign exchange reserve and national debt. Currencies may depreciate due to a variety of factors, but gold has a wide demand in the market as an ideal tool for the preservation of value because of its role as an internationally recognized medium of exchange.

This article describes five popular ways to invest in gold, as well as the costs, advantages, and disadvantages of each.

Purpose & Benefits of Gold Investment

1. Hedging

When there is a war or international political turmoil, the development of a local or world economy will face a recession, and fiat money may not be trusted by the market. At this time, the importance of gold will be shown, because gold is an internationally recognized medium of exchange, and its characteristics as a safe haven asset will make the gold price rise.

2. Capital preservation (anti-inflation)

The currency in circulation in the market is mainly paper money and coins, but their value does not increase with time. In the case of inflation, the currency will devalue unconsciously, thus reducing its purchasing power. For example, five sandwiches can be bought for 10 dollars, but only three can be bought for the same amount of money after inflation. Therefore, holding the currency alone is not a long-term solution. On the contrary, as a traditional instrument for capital preservation, gold can not only protect wealth assets from the ravages of time or wars but also be passed on to future generations as “family treasure”.

3. Significant increase in the demand for gold

Although the days of the gold standard are over in many countries, there has been a steady demand for gold, and in recent years many developing countries have joined the buying party, driving up demand. India, for example, is a big buyer of gold every October. Another big buyer is China, whose love of gold bullion and gold jewelry is also evident.

 4. Limited supply of gold

It takes a long time for a gold mine to produce gold (usually more than a few years, and the price of gold has stayed high because of its scarcity.

5. Diversify investment risks

Gold has long been negatively correlated with equities and other risky assets, and it usually rises when equity indices fall.

Although the correlation has been weakened recently, the risk nature of equities has always been at odds with the safe-haven nature of gold, and investors who have both assests in their portfolios will reduce the volatility of external risk on asset prices.

5 Major Gold Investment Methods (with Costs, Pros & Cons)

1. Gold ETF

ETF, also known as an index fund, is favored by investors in recent years. In China, you only need to have a stock account to buy gold ETF, which can save you the price difference when buying and selling in the stores, and the tax involved is pretty low. However, as ETF is still a kind of fund, it needs to manage by professionals, and a certain amount of management fee will be charged. If you open an account with a US broker to buy US ETFs, you also need to pay attention to the exchange rate difference. Please note that shorting is not allowed in China, and it may have some restrictions on frequent trading. For example, the next transaction can only be carried out after delivery.

Pros: simple operation, good liquidity, no bid-ask spread, long-term investment
Cons: management fee is required, exchange rate risk

2. Gold CFD

CFD, also known as Contract for Difference, is a form of speculative trading in the financial market. With CFD, investors do not have to buy any real assets, but only need to deposit margin to guarantee the profit and loss that may occur in the operation.

Until the advent of CFDs, which enable investors with smaller amounts of money to participate in the same financial markets, commodities on international exchanges were only open to institutional investors. The characteristic of gold CFD is the use of margin in trading, which not only has low transaction costs but also is the only type of gold investment that allows frequent bi-directional operation. In terms of cost, CFD will have the bid-ask spread the interest charge for holding the position overnight.

Pros: low transaction cost, high yield by leverage, suitable for short-term long-short operation
Cons: not suitable for long-term holding (overnight interest), heightened risk due to leverage trading

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3. Gold futures

The similarities between gold futures and gold CFD are that they are both margin trading, which is suitable for frequent bi-directional operation and has low transaction cost. However, it is not suitable for beginners because of the margin requirement.

Different from CFD, futures have a maturity date and investors need to buy a new contract to hold over. Note that futures are contract-based, so additional fee and tax may be charged, but there will be no overnight interest and spread.

Pros: low transaction cost, suitable for short – term trading
Cons: Leveraged trading is not suitable for novices, subject to transaction taxes and fees

4. Physical gold

Gold bars issued by Swiss Banks

Physical gold is suitable for more conservative investors because the public’s perception of physical gold is based on gold ornaments and commemorative coins that are commonly seen in daily life. Although these can be bought in stores and shopping malls, most of them have low investment value.

Gold bars and gold coins issued by banks are of real investment value and have fixed specifications, among which gold bars are more commonly bought by retail investors. It should be noted that gold bars and gold coins are recommended to be purchased in institutions that are more internationally accepted because of the different qualifications of issuing parties.

Pros: physical transactions, free of management fees
Cons: the unit price is high, most of the gold jewelry on the market have a low investment value

5. Gold passbook

Gold passbook, also known as “paper gold”, is a common choice for many people to make investments and avoid risks. However, it should be noted that although it is a passbook, there is no accrued interest. The way to purchase gold passbook is to open a gold passbook account in the bank and entrust the bank to buy gold in a single batch or regular payment, and the price is based on the current price of the gold passbook. Investors can request to withdraw the gold bar after a certain amount is accumulated. However, due to the delivery fee and bid-ask spread, the gold passbook is not suitable for short-term trading nor should be converted into physical gold.

Pros: convertible into physical gold bars, suitable for long-term investment
Cons: not suitable for short term investment, exchange rate risk, need to open an account on the counter, no interest

Extended Reading: Gold Silver Ratio – What is it and Why is it so High Recently?

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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.