Since ancient times, nations and civilizations have used gold to conduct financial transactions or store value. Gold coins were used as a currency long before the introduction of paper currency. Even after the introduction of paper currency, governments backed their currencies with gold — a system known as the gold standard, which was finally abolished in 1973.
Apart from the monetary value, gold is used to make jewellery, ornaments, and medals. It is used in industry, medicine, computers, and electronics. In the financial market, gold is considered a safe-haven asset during a recession and a general hedge against inflation.
In this guide, we explain what gold is and offer the best ways to invest in gold in 2021.
Where Can I Trade Gold?
Physical gold can be traded on the spot market or through futures. However, the process and capital involved may be way above the limits of retail investors with small capital. You can trade the stocks of gold companies through a stockbroker or speculate on the futures market through a futures broker or a CFD broker. So, whichever way you choose, you need a broker to access the market, which is why we’ve shortlisted our top 3 brokers below.
What Is Gold?
Gold is a bright, reddish-yellow, dense, soft, malleable, and ductile metal. It is a transition metal formed by mineral deposition from hot fluids flowing through cracks deep in Earth's crust. Compared to other elements, gold is less reactive but is a good conductor of heat and electricity. It is also extremely ductile and malleable.
Gold means different things to different people, depending on their needs. To the chemist, it is a metal. To the economist or financial expert, it is a store of value. To the jeweller, it is a raw material used to make jewellery, medals, and ornaments. It is a rare precious metal used for coins, wedding rings, and other artifacts throughout recorded history. Despite these varied uses, the central factor is that gold is highly valuable.
As early as 2000 BC, the ancient Egyptians were already using gold to make jewellery. But it wasn't until 560 BC that the precious metal was used as a currency by merchants who wanted to create a standardized form of money to simplify trade. This led to the creation of gold coins stamped with a seal.
Gold is no longer used to back currencies, but it is still considered a store of value, and central banks and other financial organizations — such as the International Monetary Fund — do maintain gold reserves in their balance sheets. Presently, these financial institutions account for almost one-fifth of the world's supply of above-ground gold.
Overall, the gold market is worth about $9 trillion as of 2021, covering the spot gold market, gold futures, CFDs, gold equities, and gold-related ETFs.
What Are the Trading Hours for Gold?
The international gold market spans around the globe, with continuous 24-hour operation from east to west during weekdays. So, gold can be traded at any time on different markets around the world.
Spot gold trading is available 23 hours a day from 6 pm Eastern Time (ET) Sunday through 5 pm ET Friday. Trading is closed from 5 pm to 6 pm ET daily for clearinghouses to settle the day’s trades.
Trading Gold in 3 Steps
Choose Your Preferred Way to Invest in Gold
There are many ways you can trade gold: the spot market, futures contracts, gold mining stocks, or a fund that trades on a stock exchange, such as the SPDR Gold Trust (GLD). Depending on your experience, risk appetite, and knowledge, you can choose any of those ways to invest in the metal.
Open the Appropriate Trading Account
Your preferred method of trading determines the account type you open. For example, if you prefer investing through a fund or gold stocks, then you open a share dealing account with a stockbroker. If you prefer futures contracts, you open a futures trading account with a futures broker.
The broker’s platform has a list of the available gold instruments or contracts you can trade. Select the one you want and place your buy order. When and how you trade depends on your approach to gold: you can only trade gold funds when the stock market is open but you can trade gold futures or CFDs almost 24 hours a day and 6 days a week.
Which Is the Best Way to Invest in Gold?
Based on a variety of factors, such as exposure to the market, liquidity, suitability for hedging against inflation and equity market volatility, and return on capital invested, these are the best ways to invest in gold in 2021:
- Gold bullion
- Gold futures
- Gold CFDs
- Gold stocks
- Gold ETFs
1. Gold Bullion
The traditional way to invest in gold is to buy bullion. This entails owning gold in coins or ingots (bars). Bullion owners make profits when they sell at a higher price than they bought. Gold bullion is considered legal tender of some sort and is often held as reserves by central banks and institutional investors.
The advantage of gold coins over gold bars is that they allow for more flexibility in financial transactions. It may be easier to sell your gold coins, but gold bars give you more value for gold content. One key issue with investing in gold bullion is the cost of storage. However, you can invest in gold bullion through online dealers, such as APMEX or JM Bullion or a local dealer or collector, which also offer storage services.
2. Gold Futures
Trading gold futures is a good way to speculate on gold prices. It is also a great way to hedge against risks in the equity market, as gold prices tend to negatively correlate with the equity market. One major benefit of using futures to invest in gold is the availability of leverage, which allows you to trade bigger contracts with small capital.
3. Gold CFDs
Contracts for difference (CFDs) are another way investors can make money trading gold. A trader simply speculates on the price of gold without owning the commodity. The investor enters into an agreement with a CFD broker to exchange the difference in the value of gold between the time the contract is opened and the time it is closed. CFDs are highly leveraged instruments, which allows traders to use small capital to trade large positions and maximize their profits from small price movements. However, the use of leverage also magnifies potential losses.
4. Gold Stocks
Buying gold stocks is another popular way to invest in the gold market. Gold stocks are stocks of companies that mine and supply gold or use gold to produce ornaments. An investor can invest in companies that mine and store gold, including gold streaming and royalty companies, which act as middlemen in the sector. One thing to note is that buying shares of gold-related companies cannot be a hedge against equity market risks, because, in bear markets, almost all stocks go down, including those of gold-related companies.
5. Gold ETFs
Investors can also trade shares in exchange-traded funds (ETF) that hold gold as their underlying asset or that invest in gold futures contracts. This is a liquid and low-cost option for investing in gold compared to alternatives, such as gold futures or shares of gold mining companies. In the United States, there are nine gold ETFs as of February 2021. This excludes leveraged or inverse funds and those with under $50 million in assets under management (AUM).
Expert Tip on Investing in Gold“ If you want to use gold to protect wealth and hedge against inflation, your best option is gold bullion. But if you just want to speculate on gold prices to make some extra money, you may trade gold futures or CFDs. Gold shares and funds allow you to invest in gold in the equity market but cannot serve as a hedge against market risks because a stock market downturn drags all stocks with it, including gold stocks. Buy gold futures or gold bullion if you want to hedge your equity market portfolio. ”- Emmanuel Ekwomadu
Why Invest in Gold?
Gold is considered a safe-haven asset; it serves as a good hedge during economic downturns and market volatility. Investors can also use gold to protect their wealth against inflation. Gold has successfully served this purpose for thousands of generations.
If you want to make some money from trading, gold is a great asset for speculative trading because it has enough liquidity and volatility — the two key features for speculative trading.
Frequently Asked Questions
Gold bullion involves dealing with physical gold, but the other ways of investing in gold are merely paper assets — the investor doesn't deal with physical gold. However, gold futures may be settled with physical gold on expiration.
It can be if the investor knows how the market works and has the skills to trade it. Gold has been on the rise in the last five years, so it has been profitable to invest in gold.
With a reliable broker, trading gold CFDs may be the most profitable. It requires the least margin, and the trader won’t have to worry about contract expiry and rolling over.
Buying gold bullion is very safe if you have a reliable way to store it. Investing in gold ETFs is also safe because gold ETFs offer a diversified gold stock portfolio.
It can be if the beginner knows what he/she is doing and trades the right gold products. The best product for beginners to start with is gold ETFs.
The international gold market spans around the globe, with a continuous 24-hour operation. So, gold is traded on different markets and exchanges around the world markets all round the clock, from Sundays to Fridays.