Gold – Different Ways to Own It
The price of gold held the headlines during the coronavirus pandemic. It rose to above $2,000 as investors flocked in to protect against expected inflation.
Trading gold or owning gold are two different things. One can own gold in a portfolio to hedge against inflation, but one can also speculate on the price of gold in order to gain from its volatility.
However owning gold or gaining exposure to gold can be done in various ways. Here are some things to consider.
Physical or Paper Gold
An investor may decide that owning physical gold protects its interest best. To do so, there are various outlets online that sell gold bars or coins, etc., and even store it for you against an annual fee. This way, physical gold ownership protects against inflation.
Another way is to own paper gold. Also known as demand from the investment community, paper gold refers to owning ETFs (Exchange Traded Funds) that track the price of gold—or owning ETFs that track the mining sector. They represent just alternatives to gold ownership.
Talking about ownership, one may decide to own shares of a gold producer. Many gold miners are listed on international exchanges, and owning a piece of the business also means exposure to the gold market.
The Currency Involved
In any of the examples given so far, the currency involved plays a crucial role. Yes, gold did make a new all-time high above $2,000 – against the USD. So, did gold appreciate or USD depreciate?
Gold can be exchanged against any fiat currency, so the currency involved affects the way gold protects against inflation. In other words, gold may move up against the USD and remain flat against the EUR, depending on what the EURUSD rate does.
Out of all the ways to gain exposure to the benefits of owning gold, a mix is recommended. By owning physical gold, the currency risk disappears. For instance, holding physical gold paid for in USD and changing it back to another currency in a number of years, reduces the fiat currency risk.
Also, by owning ETFs for the entire mining sector an investor obtains diversification benefits. Instead of betting on one single company, the risk is spread to an industry.
Finally, share ownership comes with the advantage of dividend payment. In the long term, compounding dividends with price appreciation offers the same protection against inflation.