How to invest in gold

Is investing in gold a good idea?

That depends on who you ask. Some argue commodities like gold and silver are too risky and don't offer enough utility as investments, while others argue they can help round out a diversified long-term portfolio.

Many people rush to gold in tough times. The shiny metal has been valuable since the dawn of recorded history and tends to hold up well during stock market dips and periods of high inflation.

Famed investor Warren Buffett has been somewhat ambivalent about gold over the years. “I have no views as to where (gold) will be (in the next five years), but the one thing I can tell you is it won’t do anything between now and then except look at you,” he told CNBC in 2009.

Buffett shocked his followers in 2020 when his company Berkshire Hathaway actually picked up shares of gold mining company Barrick Gold — but he sold them the following year.

More: How to create a diversified investment portfolio

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How to invest in gold

You have a few options: You can either buy physical gold bars or coins, invest in gold mining company stocks, buy shares in 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 difficult to predict.

In the 1990s, gold barely hit US$300 on a good day. But as financial crises loomed in 2007 and 2008, people did what they always do — they started buying up gold and drove up the price.

Its value shot from US$800 an ounce in 2009 to US$1,900 in 2011. But by 2013, gold was down to US$1,300.

Then, in the summer of 2020, pandemic uncertainty briefly pushed gold to an all-time high of US$2,000 an ounce before sinking back down.

2. Invest in gold stocks

You can invest in gold without ever touching a flake by purchasing shares in gold mining companies. And, if you like to keep your investments in Canada, this country has plenty of firms to choose from.

The advantage here is that if the price of gold falls, mining companies can often shift focus to another metal.

The disadvantage is that mining stocks can decline alongside the rest of the market, even when the price of gold is steady. If stock analysts don't like a company’s financials, the quality of its management team or future production prospects, investors may punish its stock price.

You can easily buy commodity stocks through any number of investing apps.

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.

These funds, which are traded like stocks, pool investor capital and pour it into a variety of gold and mining companies. Some popular gold ETFs in Canada include XGD-T and HGY-T. ZJG-T is also an option if you want to invest in smaller exploration firms.

Although ETFs are diversified to reduce risk, any of these investments are subject to stock market fluctuations. If the market crashes, the value of your investment could drop even if the price of gold doesn’t change.

4. Buy gold futures

Gold futures are 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.

Is investing in gold for you?

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.

And remember, if you're just starting out as an investor, it's not a bad idea to look into some low-stakes alternatives.