One of the constants in the world of investing is that there is always someone somewhere telling everyone to buy gold as an investment. The 'everything bubble' is about to collapse, they might say. Or perhaps that central banks have printed too much money and were about to enter hyperinflation. Or maybe something like 'gold is the only real form of money'.
Most investors outside the 'gold bug' arena will dismiss these calls, and fair enough. There have been gold-obsessed chicken littles running around ever since the world came off the gold standard back in the 1970s.
But is there some truth to these concerns? Perhaps the gold cheerleaders are onto something?
So today, let's discuss whether it would make sense to buy gold as an investment.
Does gold make sense as an investment?
At its core, gold is a precious metal. It pays no yield, and in fact, will probably cost you money to own it in some way (more on that later). However, no one can argue that gold doesn't hold its value. In fact, gold has steadily increased in value over time.
Back in 2004, you could buy an ounce of gold for roughly US$400. Today, that same ounce will set you back US$1,940. This trajectory hasn't always been 'up and to the right'. In fact, the gold price almost halved between 2012 and 2016. But the long-term trajectory is undeniable.
This is one of the reasons why some investors love this yellow metal. Together with its relatively scarce supply, and limited industrial uses, most gold bugs believe that this precious metal has inflationary protections built in.
Gold has other uses that can make it useful in a portfolio as well. It often increases in value when there is fear in the markets and other assets like shares are falling. It cannot go bankrupt like a company can, and is universally accepted around the world as having intrinsic value.
However, as we discussed earlier, gold cannot make you rich on its own. It cannot produce cash flow or compound in value. It is only ever worth what someone else is willing to pay for it. And if no one wants to buy it, you are stuck with a lump of metal.
An insurance policy
But here's the thing. I still believe gold has a role in a modern investment portfolio. I personally have money invested in gold. Not because I think it's a fast-track ticket to wealth or because I have some belief that it will double in value in the next year or two.
But I respect the fact that gold has been used to store wealth for thousands of years. It predates any currency around today and even predates stock markets and companies. If, for whatever reason, the global financial system comes under pressure, I'm confident that owning gold will come in handy.
Of course, I don't want this to happen, no more than I don't want my house to burn down. But I still have a fire insurance policy, and I still have a small allocation to gold in my investing portfolio. Gold, for me, is insurance.
How do you buy gold as an investment?
So maybe you also want some gold in your investing portfolio. There are a few ways to do it. The first is by owning physical gold bullion, which tends to come in bar or coin form.
Some investors love actually owning gold, and being able to physically touch it if they so desire. The idea of keeping it out of anyone else's hands and on private property also appeals to a certain demographic.
But many investors don't like to invest in gold this way. You have to store it securely, and moving it around is costly and cumbersome.
A far easier way to invest in gold is to use an exchange-traded fund (ETF). There are plenty of gold-backed ETFs on the ASX. Two popular options include the Global X Physical Gold ETF (ASX: GOLD) and the VanEck Gold Bullion ETF (ASX: NUGG).
These funds own a pile of physical gold bullion, which is normally locked up in a bank somewhere (usually London). Thus, owners of these ETFs' units own the gold by extension. The unit prices fluctuate in line with changes to the gold price, without the individual investor needing to worry about storage costs and the like.
Of course, these ETFs aren't free. The Global X GOLD ETF charges a management fee of 0.4% per annum, while the VanEck NUGG ETF asks 0.25% per annum.
Don't forget about gold miners
Another option for investors wanting to get some gold exposure in their portfolios is by buying shares in a gold mining company. Gold miners obviously own the gold that is housed in their mines, and its shareholders are entitled to the profits that the miners obtain by extracting and selling their gold.
This is a far riskier method of investing in gold. Gold can't go bankrupt, but a gold miner certainly can. However, it also allows a potentially leveraged upside to any price appreciation that gold may enjoy, seeing as a miner's costs are relatively fixed.
So those are the different ways ASX investors can buy gold as an investment. It's not for everyone, and that's okay. But for those who want to make this precious metal a part of your investing strategy, now you know what it involves.
