While equity, fiat currency and property investments are all viable options–but are sometimes inaccessible to beginners–you need to consider including gold because it can cost less but reward them more.
Experienced investors may have encountered gold investment in other ways, but increasingly Millennials have seen the merits of buying this precious metal as it serves as an early hedge against market volatility. Gold has come a long way since being restricted to physical assets now that it is available digitally through fintech platforms, enabling you to access this asset for your investment portfolio.
Why is gold a good investment for first-time investors?
Time-share savings accounts and the equity market are both some of the most frequent suggestions for new investors to take advantage of, but as these are both tied to fiat currencies, they are vulnerable to the changes associated with economic downturns or geopolitical instability.
Fiat currencies, or government-issued money, are assigned their value based on the issuing government, domestic monetary policy and movements in the market.
In our hyper-connected world, this means a downturn in one economy on one side of the world will be felt on another side of the world–and impacts the purchasing power, savings and investments of individuals tethered to the fiat currency-based global economy.
This makes fiat currency-tied investments increasingly riskier to buy, as these tend to be more vulnerable to geopolitical factors. Prices of key commodities are outpacing wage growth, putting strain on family incomes and draining savings–these aren’t ideal circumstances for beginner investors who want to put their hard-earned money toward rewarding pursuits.
Central banks try to contain inflation by increasing interest rates, but these measures come with drawbacks. As these tactics are meant to limit the money circulating in an economy, people and businesses are motivated to hold on to their income and reallocate to make their loan or credit payments.
All in all the value of fiat currencies depends on the issuing government and its policies in place–so your money is essentially backed by faith in the government to act in its economy’s best interests and balance the books. If all your investments are in fiat currency then it’s a portfolio that’s vulnerable to external conditions out of your control.
Owning gold is a good way to keep one’s portfolio diverse, and can act as a hedge against inflation and deflation.
This asset has been a hedge against inflation for years because its price rises as the cost of living increases; gold prices soar and the stock market plummets during periods of high inflation. Fiat currencies lose their purchasing power but gold being priced in these units tends to rise in price alongside everything else.
Gold manages to hold its own even in the opposite circumstances, wherein periods of deflation (or prices decrease alongside business activities due to excessive debt) motivate people to hoard cash and the safest place to hold it is in gold or gold coins.
When social and political tensions rise around the world gold manages to retain its value, often outperforming other assets. The lower the confidence of people in their government, the more the price of gold increases.
Given how vulnerable fiat currency is to other factors, it’s wise to start diversifying your portfolio even in the early stages of your investment journey, and gold is a precious metal asset that has stood the test of time.
Including gold in your basket of investments ensures that even if your other assets are affected by fluctuations in the market, you can rely on gold’s value to remain stable.
3 types of gold investments you can include in your portfolio
Gold is an asset that’s available for investment in multiple forms, and we’ve listed three main types so you can evaluate your options based on your investment goals.
1. Physical gold
The most common idea that people have when you mention gold investment is the purchase of physical gold, either as bullion, coins or jewellery. Investing in physical gold translates to dealing with dealers generally outside of usual brokerages for stocks and bonds. You will need to pay for storage and acquire insurance for the asset as well as paying for the asset.
Gold bullion comes in bars that range from a few grams to 400 ounces, but it’s most commonly available as one- and 10-ounce bars. As the current gold price is around AU$ 3,046 per ounce (as of April 2023), this makes investing in gold bullion a bit more costly. Unlike stocks, there’s no way to get a fractional share of a gold bar.
This type of physical gold is priced quite high, so it’s essential to enlist the services of a reputable dealer and to pay for delivery with insurance, or cover the costs for storage in a large vault or security deposit box. Investing in gold bullion means you also have to stay updated on the price of gold so you can choose the right time to buy, as dealers update their rates based on current spot prices.
Gold coins weigh one or two ounces, although you may also encounter half-ounce and quarter-ounce coins. Collectible coins are the most widely available type of gold coins, and you’ll encounter South African Krugerrands, Canadian Maple Leafs and American Gold Eagles. Some dealers may sell blank, damaged or worn coins.
The gold content of coins may not always match up; in-demand collectible coins tend to trade at premium prices. For example, a one-ounce American Gold Eagle coin retails for about AU$ 3,161.48 in early April 2023, showing a comparable markup relative to gold bullion.
Of the types of physical gold accessible for purchase, gold jewellery carries risks that buying pure gold does not have. Not all secondhand jewellery is sold by credible dealers, and authenticity matters both to you and to anyone you resell the piece to later on. Investment jewellery requires as much documentation as possible so you get the most out of it.
Aside from the cost of the jewellery itself, you’re going to shell out an amount of markup based on the company which designed and manufactured the jewellery, which ranges from 20% to more than thrice the value of the precious metal itself.
You also need to know what percentage of gold the piece is; gold purity is calculated in karats, with 24 karats being 100% gold. The lower purity your piece has, the lower value your jewellery’s components will be if it were melted back into pure gold.
Better deals may be accessible through local collectors or pawn shops, but for all formats of physical gold, it’s crucial to transact with a reputable dealer.
2. Gold as a commodity-linked structured investment
In case you are unfamiliar with gold’s value without a specific currency tied to it just yet, you can try buying gold as a commodity-linked structured investment.
Using this method, an investor decides with the bank or broker on the duration of the investment and a base currency–such as USD, SGD and so on. With a broker you need to agree on a Target Conversion Rate (TCR) to be applied between gold and the base currency; in this format, gold is treated like a currency with a code of XAU.
By the end of your investment duration, you will get both the principal and a coupon in either gold (XAU) or the base currency. In the event XAU appreciates against the base currency, for example USD, you’ll be repaid in USD for the principal amount and coupon.
If XAU falls below the TCR, the investment is converted and you will be repaid the equivalent of principal and coupon in XAU converted at TCR. This method generates more interest than holding US dollars and works best for investors who don’t mind being paid in gold.
When repaid in gold, you can hold on to, sell or reinvest the XAU in another commodity-linked currency investment with gold as the base commodity to potentially earn another round of higher coupons. This means this method comes with all the risks and volatility associated with trading fiat currencies.
3. Gold in mutual funds or ETFs
Investing in gold mutual funds or exchange-traded funds (ETFs) are similar to each other, in the sense that you don’t need to worry about theft or storage and don’t tend to undergo many fluctuations in rates.
Gold ETFs invest in physical gold of 99.5% purity, sourced from banks approved by the government. A minor portion of its corpus is invested in debt securities. Since gold ETFs invest in physical gold, returns offered are similar to those offered by physical gold. The minimum units for gold ETFs are one unit, which is equal to one gram of gold.
Gold mutual funds allow you to invest in gold ETFs, and offer you less liquidity relative to investing in physical gold through ETFs themselves.
Whether you choose to invest in gold through physical formats, commodity-linked structured investments, ETFs or mutual funds, including gold in your investments is a great way to diversify your portfolio and keep your money growing at a steady, consistent pace.
Fortunately, gold investment is more accessible than ever. It can be simple and generate better returns as you continue on the rewarding journey towards your goals. Download the Nauggets App today. We can help you bag the gold in your journey.