For thousands of years, the most popular investment was gold: the prettiest metal you could bend, re-form, bury and reuse endlessly.
And even though investors have many more options nowadays, gold still has its champions.
One hedge fund manager, who predicted the metal’s rise to an all-time high of $2,000 per ounce last summer, is confident the price could climb to $3,000 to $5,000 an ounce in the next three to five years.
Here’s his rationale for gambling on gold and the best ways for ordinary investors to follow his lead.
Is buying gold a good investment?
Diego Parrilla, manager of the defensive and gold-heavy Quadriga Igneo fund, is undaunted by the metal’s tumble to $1,800 and widespread expectations that the price will continue to slide.
“I think the drivers for gold strength not only remain but actually have been strengthened,” he told Bloomberg News earlier this week.
Many people rush to gold in tough times. The shiny metal tends to hold up well during stock market crashes and periods of high inflation.
Parrilla believes both could happen in the near future, as people are not appreciating the risks of the massive pandemic stimulus efforts underway, like today’s incredibly low interest rates. He expects the next decade will see runaway inflation that central banks cannot control.
“Central bank money printing isn’t really solving problems, it’s delaying the problem,” Parrilla says. “Gold will benefit purely from being a physical asset that you cannot print.”
How to make money with gold
If Parrilla’s argument is making sense, or you’ve got your own reasons for investing in gold, you have a few options available to you.
You can either buy physical gold like bars or gold coins, invest in gold mining company stocks or a gold exchange-traded fund (ETF) or buy into gold futures.
1. Buy gold bullion or coins
The most straightforward way to put your money in gold is to buy and store gold bars, coins or jewelry.
To actually make a profit off the precious metal, you need to have a reasonable expectation that your gold can be sold for more than you paid for it. Unfortunately, gold prices are notoriously difficult to predict.
In the 1990s, gold barely hit $300 on a good day. Then, as financial and political crises loomed in the mid-2000s, people did what they always do and started buying up gold, which drove up gold prices.
Its value more than doubled from $800 an ounce in 2009 to $1,900 in 2011. But by 2013, the bubble had burst and gold was down to $1,300.
If gold forms part of your retirement plan, you can actually buy it through a gold Individual Retirement Account (IRA). That said, you’ll need to set it up with a special custodian or broker, and you may face unpleasant fees to cover the cost of storing the metal.
2. Invest in gold stocks
You can invest in gold without ever touching a flake of it by purchasing shares of gold mining companies on the stock market.
The advantage is that if the price of gold suddenly plummets, you may not lose your shirt because the mining company could decide to focus on another metal.
The disadvantage of owning mining stocks is that they can decline with the rest of the market, even when the value of gold is steady. In fact, business factors can always come into play — factors like the company’s financials, the quality of its management team and long-term production prospects.
You can easily invest in commodity stocks through any number of investing apps — although a few will give you a free stock just for signing up.
3. Put money into gold ETFs
Investors might buy into gold exchange-traded funds (ETFs) to avoid the uncertainty that comes with investing in a particular company.
Put simply, these funds are pools of money from investors that are poured into a variety of gold and mining companies. ETFs are traded like stocks; some of the most popular gold ETFs are GLD, GDX and GDXJ.
You will have to be prepared to lose a certain percentage of your investment’s value every year to the fund’s expense ratio. For example, with the largest gold ETF, SPDR Gold Shares, you’ll be charged 0.40% of your investment’s value each year.
Still, ETFs as a whole have very low management fees, and you save even more by buying them through a zero-commission investing app.
It’s also important to note that there’s still a measure of uncertainty when investing in ETFs. Although these funds are heavily diversified to reduce risk, they are subject to the fluctuations of the stock market.
If the market crashes, the value of your investment could drop even if the value of gold doesn’t change.
4. Buy gold futures
Gold futures are very complicated. They’re contracts in which you agree to buy a set amount of gold at a specific price some time in the future.
Traders can strategically buy and sell futures contracts to profit from the changing price of gold.
Buyers of futures contracts profit when commodity prices rise. Sellers of futures contracts profit when commodity prices fall.
The contracts typically require a minimum purchase of 100 ounces of gold. Novice investors should exercise extreme caution with futures contracts due to the high degree of borrowing typically involved.
Next steps: Buying gold as an investment
Before you go King Midas and turn your entire portfolio to gold, take the following precautionary steps:
Decide your risk tolerance: Investing in gold futures can be risky, while ETFs can help spread out your risk.
Do your research: If you decide to invest in a specific gold mining company, look into its performance over the last few years and whether it mines for other metals or resources.
Start slow: Most people who invest in gold make it a small part of a diversified portfolio. Consider a wide range of investments, including things like real estate and even farmland.
Ask for help: Don’t be shy to ask your financial adviser for their input on whether gold would be a good addition.
And remember, if you’re just starting out as an investor, it’s not a bad idea to look into some low-stakes alternatives. One popular app lets you invest with just your “spare change.”