Admit it.
You love the idea of owning precious metals. Gold. Silver. Platinum.
Palladium. It doesn’t really matter. But, you’re not too sure how to get
started. Here are some of the
basics you need to get down pat before you dive in.
Why Bother With Gold?
For 5,000 years, it’s been the metal that has withstood all other
currencies. It has maintained its long-term value when everything else hasn’t.
In fact, some research shows that a Roman centurion, living 2,000 years ago, in
ancient Rome made the equivalent of $46,000, give or take (based on a roughly
$1,200 per-oz gold price). That’s close to the average household income of
today, about what a captain (with less than 2 years experience) in the U.S.
army makes today.
Needless to say gold holds its value and is often considered the
ultimate “safe haven.”
Long-Term Returns On Gold
While gold is extremely volatile, and vulnerable to short-term
fluctuations, its long-term returns are fairly stable and predictable. In the
past 10 years, the price of an ounce of gold rose from $464 to over $1,200,
representing more than 160% increase in value. Compare that to the long-term
returns in the FTSE 100 of just 23.5 percent.
Gold is entirely dependent on investor sentiment, however. So, it can be
quite volatile. And, there is the matter of where to store your gold. Spreads
and storage fees can decrease the return on your gold significantly. That’s why
a lot of gold owners who start out on their journey often start with a company
like http://www.AtkinsonsBullion.com/.
You shouldn’t be looking for a quick profit because, regardless of who
you buy from, there is always a spread and a lag between a return on your
investment and original purchase.
When you buy gold, you’re buying a precious metal that people hold as
valuable, even though many of these people are long-since dead and gone.
This differs from buying a share of stock in a business, where you own
part of the business and your returns are generated from business activity.
How To Invest In Gold
There are a few ways to invest in gold. The first way is to invest
directly into physical gold. This is usually the safest in the sense that there
are no counterparties and no risk that someone else may lay a claim to your
asset.
You can buy gold directly from a dealer or through various online
services that have sprung up in recent years. Some companies offer storage
options for you if you don’t want to take physical delivery of the metal.
Others require you take possession of the gold and figure out a storage
solution yourself.
ETFs
Many investors like investing in gold through ETFs. An ETF is an
exchange-traded fund. These funds invest either in gold itself or in mining
companies that mine gold out of the ground. These funds also tend to track a
particular sector rather than try to employ a specific active investment
management strategy.
Stocks
You can also invest in gold indirectly by buying producers of gold.
These companies are responsible for mining gold and making sure that their
operations produce consistent yields for investors. The large mining operations
are focused on buying up junior exploration companies, but they only do so when
those companies can prove that there are reserves that can be dug out of the
ground at reasonable and economic prices.
So, if you’re looking for a reliable gold play, an established producer
will give you exposure to the gold market without you having to invest directly
in the commodity itself.
Investment Trusts
Finally, investments trusts offer an alternative to gold ETFs, and they
can be one of the best ways to capture some of the upside potential of gold.
Investment trusts are managed like a mutual fund, except that they are a trust
account. This means that the trust is set up like any other company and accepts
deposits from investors.
The trust then employs a trust fund manager or managers, who then invest the money for the benefit of the beneficiaries — investors of the trust.
Investors buy into the trust by buying shares that are issued when the
trust is first formed. Trusts can employ various leveraging strategies
(borrowing money to invest) to take advantage of investment opportunities, but
this introduces additional risk. Most trusts that leverage are seeking outsized
returns in the market.
And, while it can happen, if the trust loses money, it represents
additional risk for investors who have to bear the brunt of a failed investment
strategy.
Trusts can only retain up to 15% of income in any given year. The rest
must be distributed to shareholders.
Jonathan Farrell is
a keen investor who enjoys writing beginner articles for personal finance blogs
in his spare time.
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