So you want to start investing in gold?
This article is going to walk you through how to invest in gold for retirement and provide three different ways do to so as well as some of the best gold funds.
As we get older we all find ourselves taking less risks, that pier we used to jump off as a kid looks just that little bit higher and the shark diving adventure package on your holiday starts to look a little less appealing. This is all part and parcel of getting older and being more risk averse, the same thing goes for our investing strategies and for good reason. Just like you don’t bounce back quite as quick as when you were a teenager, if your pension pot takes a big hit after you’ve stopped working it can mean a serious long term financial injury. Traditionally gold has always been a ‘safe haven’ investment for when we start to see a downturn in the stock market.
Gold Vs the Stock Market: September 4th 2019.
As we can see from the below graph for the past 12 months. Gold [GREEN] has returned 27.1% while the S&P stock market [BLUE] has been almost completely sideways at only 1% growth. This kind of movement is uncommon for both markets as for the past 10 years, the S&P has done 13% per anum and gold has only done 6.5%. So for those that invested in this gold fund for their retirement, would have already made a tidy return.
Three ways to invest in gold: Physical, Mining Fund and Investment Fund.
So when you’re investing in gold their are three classic ways to enter the market and all three will have different effects. The first way is to buy physical gold and keep it yourself. The second way is to invest in mining companies that mine the actual gold. And the third way is to invest in a physical gold investment fund that holds the gold for you.
From the graph above you can see the 10 year return of the worlds largest gold mining fund VanEck Gold Miners [RED] which has seen a -31% return, a physical gold ETF called iShares Gold Trust in [GREEN] and the US S&P stock market in [BLUE]
Mining: GDX Gold miners fund.
As you can see from the above graph their is a correlation between mining funds and pure gold funds however their is obviously more ‘risk’ involved with the mining fund -31% return vs a pure gold fund of +62% so why would one invest in the mining fund? Well lets look at the graph below.
GDX is an ETF (basket of shares) and is the worlds largest gold mining fund. It has over $12.2 billion of money in it and only costs 0.52% as a total expense ratio., making it a very cheap entry into the market. It can be bought and sold at any time (usually takes around 3 days) so it could be considered ‘liquid’.
As you can see from this graph which is over the past 12 months, the mining fund is actually up 65% for the year. This fund is still a whopping 100% BELOW it’s all time high. This means that their could potentially be a lot of upside left in this investment even though it’s up 65% for the year.
Things that could make this fund (and gold) go up:
Their a are a few factors that could push the price of Gold up over the next 1-3 years. Gold is still 25% off it’s all time high in 2011 and GDX is 100% off it’s all time high.
- A weak USD: When we see weakness in the dollar typically that makes gold go up.
- An increase in Silver: While gold is at a 6 year high, we have only just seen silver start to pick up. If we see a rally in silver, this should also push gold up.
- Gold Miners performance compared to gold: When we see the above fund go up, that also means we will see an uptake in gold. This is good for both sectors.
- If we see both Silver and Mining outperform gold then we could see a 1-3 year long bull market.
Physical Gold Fund: IAU iShares Gold Trust.
The next way to invest in Gold is through a fund that tracks the price of physical gold ‘bullion’ and for this we will look at the iShares IAU gold trust.
This is another Exchange Traded Fund (ETF) that only costs a 0.25% sponsor fee and has performed well since 2005 (chart below).
The underlying value of this fund is not based in $ Dollar but alternatively in ounces of physical gold. While this is NOT exactly the same as owning gold in your hand (our third method), from an investment standpoint it does track the price very very closely.
Why IAU?
1. Exposure to the day-to-day movement of the price of gold bullion
2. Convenient, cost-effective access to physical gold
3. Cheap purchase of gold at only 0.25% sponsor fee.
Final Method: Holding Physical Gold.
The final method discussed here is to hold physical gold. This involves purchasing gold either at your local seller (where their are plenty of in South East Asia) or ordering it (which comes with its own obvious risks). This article does not touch on holding physical gold in the forms of jewellery which can be worn to show off your wealth and opulence but simply as an ‘investment method’.
If you are serious about this method then you must also take your security serious. This will involve typically the purchasing of a safe and or some kind of security system, failing that you can always hire a safe deposit box from a bank or security institution, all the aforementioned strategies come at a real cost. You then also have to factor in the ‘spread’ or the charge that you would get when you initially purchase the gold and then again when you go to sell it.
Personally I can’t see the benefit of any of these strategies short of their being a major global melt down across all financial institutions that you wish to safeguard your wealth against. If that is truly your goal then obviously transportation of said assets would also be a major factor. If you are planning to wander the post apocalyptic financial wasteland with your assets in tow then may I suggest diamonds instead, they are much easier to swallow….
Final Notes:
I would certainly consider gold as forming some part of your overall pension strategy, and up to 5% of total allocation or more isn’t atypical in lots of well planned retirement strategies. While gold mining funds might be a little to ‘high risk’ for some, the rewards are also there for the brave.
I hope you have enjoyed this article and found it informative. If you want to go to the next step of actually planning on holding some gold in your retirement strategy today, then please fill out the form below.
Disclaimer:
This publication has been carefully prepared, but it has been written in general terms and should not be taken as financial advice. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice we do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
This article was prepared by Ryan Cullinan: https://www.linkedin.com/in/ryancullinan/