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How to invest in gold: Your guide to the precious metal

07:37, 9 May 2022

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How to invest in gold: Your guide to the precious metal. Closeup of big gold nugget and scales copper
How to invest in gold: Your guide to the precious metal Photo: Roman Bodnarchuk / Shutterstock.com

The recent confluence of changing central bank policy on interest rates in response to inflation and Russia’s invasion of Ukraine have turned investors’ attention to the gold market as a potential safe haven amid increased uncertainty and stock market volatility.

With the geopolitical and economic agenda shaping gold price news, investors are left wondering why to invest in gold and what factors to look at when considering gold as an investment. We’ve put together a gold investing guide, outlining everything you need to know about the asset.

Gold price offers portfolio hedge

The precious metal is considered by many to be a safe-haven investment, acting as a form of payment and a store of value throughout history.

Gold’s historical performance has been influenced by macroeconomic factors and geopolitical events. Prices tend to rise because more people invest in gold when high inflation erodes the value of fiat currencies such as the US dollar or when geopolitical events, such as war, prompt investors to sell stocks and other assets.

Conversely, when central banks raise the level of interest rates, or the value of the US dollar rises, gold investment becomes less attractive because investors do not receive interest payments or dividends for holding it.

The gold price defied analysts’ expectations in 2021, failing to gain value despite a sharp rise in inflation globally, as the prospect of central banks unwinding economic stimulus and raising interest rates to combat the inflation rate weighed on sentiment.

The gold price chart shows that the metal fell from just under $1,900 an ounce at the start of 2021 to below $1,700 in March last year. It briefly touched the $1,900 level again in May, but remained range bound between those two prices for the rest of the year, ending December at around $1,830.

Gold price chart, 2017 - 2022

The gold graph shows that the price again dropped below $1,800 in January, but then rallied in response to the conflict in Ukraine, moving above the $2,000 per ounce level in early March, its highest since it reached a record in August 2020. 

By the end of April, the price had slipped back below $1,900, as interest rate policy and concerns about the impact of extended Covid-19 lockdowns in China outweighed the reaction to the war. 

The World Gold Council, an industry association, reported that gold demand rose by 34% year on year in the first quarter of 2021, the largest quarterly gain since the fourth quarter of 2018. The surge was driven by strong flows into exchange traded funds (ETFs) as investors increased their exposure and demand for gold used in the technology industry increased.

Gold is predominantly used in jewellery and as an investment asset, with less than 10% consumed by the technology sector for use in electronics. As such, the gold commodity price is largely driven by economic sentiment, which affects both investment demand and consumer purchases of jewellery.

Gold market outlook for 2022

“The outlook for investment demand also remains muted, with gold bugs staring down the barrel of a hawkish Fed…”
by TD Securities

Analysts at Canadian bank TD Securities were cautious on the sustainability of gold price rallies in the current environment. In recent gold analysis they underlined that expectations of US interest rate hikes, a stronger US dollar and lower prices prompted money managers to cut their exposure to gold. 

“Investors sold long positions and also acquired new shorts as the yellow metal fell through key supports and the prospect of progressively more aggressive monetary tightening moved further and further in the forefront,” they wrote in a note on 29 April. 

“Given that high food and energy prices are here for a significant period of time and considering that inflation is well rooted in the economy, it is very likely that the US central bank will continue to emit very hawkish policy signals for a while yet. This implies that any rallies… may have a limited life span and long liquidations may be a fact of life well into the second half of the year.”

According to the note, gold traders in Shanghai have been liquidating their long gold positions at a rising pace on concerns about the impact of lockdowns on demand in China. With economic activity falling, jewellery sales could drop, further weighing on gold prices.

“The outlook for investment demand also remains muted, with gold bugs staring down the barrel of a hawkish Fed, while safe-haven flows associated with the war in Ukraine begin to fizzle out. With Comex shorts largely wiped out, we've argued that the right tail in gold prices is narrow as few participants remain willing to buy gold in this context,” TD analysts wrote. 

“However, a contingent of participants also expects the Fed's ability to constrain supply-side inflation is limited, which argues for a stagflationary regime in which gold will be in high demand as a store-of-value. However, the decline in prices is rather nodding to a growing cohort which expects that last month's inflation print may have marked the peak.”

Analysts at Australian bank ANZ pointed to the stagflationary risk being supportive for gold in a note to clients sent on 7 April. 

“Gold is benefitting from safe-haven demand, with prices consolidating USD1,910-1,928/oz. Investors are flocking to gold as the Russia-Ukraine war drags on and market uncertainty intensifies,” they wrote in a note obtained by Capital.com. 

“This has seen a strong net increase in ETF flows of 150t in March. As Russia is a major commodity producer, sanctions have increased stagflationary risks. We believe heightened geopolitical tensions and higher inflation will continue to support gold prices.”

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ANZ’s long-term gold price forecast has the metal remaining above the $1,900 an ounce level for what remains of 2022, but then declining back down to $1,700 by the end of September 2023.

Note that analyst predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading, and never invest or trade money you cannot afford to lose.

Investing in gold for your portfolio

Are you wondering how to start investing in gold? There are several ways to invest in gold to gain exposure to the precious metal market.

Buying gold bullion

If you want to hold physical gold, you can buy bars and coins from a dealer. Gold bullion has been used as a store of value for thousands of years and is a liquid asset that can be exchanged for cash. It can also be passed on as an inheritance. The downside of trading physical gold is the need to arrange and pay for safe, reliable storage.

Buying gold ETFs or other funds

If you would rather hold a paper gold asset, you can trade ETFs or other funds that track the gold market. You do not need to hold physical gold and you can own the funds in your existing investment portfolio. However, ETFs and funds charge management fees that can reduce the profits you make on your investment.

Buying gold mining stocks

Another way to gain exposure to the gold market is by investing in gold mining companies directly. By holding stocks in individual companies, you avoid fund management fees. 

However, while gold companies’ share prices reflect profits and business health, investing in gold stocks means that prices can be influenced by the overall direction of the stock market, so they can fall even when gold prices rise during times of heightened market volatility.

Buying gold futures and options

Gold futures and options contracts allow investors to take a buy or sell position on physical gold with a lower upfront investment. Depending on the position, if the gold price moves above or below the agreed strike price, the investor either makes a profit or loses the premium they paid, so the risk is limited to the cost. 

Options and futures are traded through a margin brokerage account, although some brokers limit access to gold options.

Note that the gold market can be volatile. Always remember that your decision to trade should depend on your risk tolerance, your expertise in this market and the size of your portfolio. Never invest or trade money you cannot afford to lose.

Another alternative: Trading gold with CFDs

As an alternative to trading options, you can trade gold via contracts for difference (CFDs)

CFDs enable trading on both bullish and bearish price fluctuations. You can either hold a long position, speculating that the price of a commodity will rise, or a short position, speculating that it will fall. CFDs tend to be considered a short term investment, as overnight swap fees preclude long term holdings.

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Be aware that as a leveraged product, CFD trading increases risk, magnifying not only profits but also losses if the asset price moves against your position.

Make sure you understand how CFDs work. Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money. Keep in mind that past performance is never a guarantee of future returns. And never trade more money than you can afford to lose.

Learn more about commodities CFD trading with our comprehensive guide.

Create an account on Capital.com to stay on top of the market’s latest news and spot potential trading trends. Our trading platform gives you access to CFDs on a plethora of popular commodities, including gold, silver, copper, Brent crude and US crude.

FAQs

Is gold a good investment?

Whether gold is a good investment for you will depend on your personal investing strategy and risk tolerance. While some analysts suggest holding a small portion of a portfolio in gold as a hedge against inflation and stock market losses, others note that holding gold does not produce income such as interest and dividend payments. You should do your research to decide whether holding gold is the right choice for your portfolio.

What is the best way to invest in gold?

There are different ways to gain exposure to the gold market. The best way for you to invest in gold will depend on your portfolio strategy and investing goals.

How to buy gold for investment?

You can buy physical gold for investment from a dealer and arrange safe storage. If you want to hold gold as a paper investment, you can buy stocks, ETFs and other funds, or alternatively trade futures, options and CFDs.

Is gold a safe investment?

Gold is considered to be a “safe haven” asset because it tends to hold its value over time relative to other investments such as stocks. But you should keep in mind that the gold market is volatile and the price can fall from your entry point. You should consider your investing goals and time horizon before making a trade.

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

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