9 ways to invest in gold and other raw materials

I have not been very active in terms of investing in gold and other raw materials. And I guess it’s a little ironic, considering I’m crazy about gold. 

Not only because of its great colour, solid weight and high market value. But also the history of gold as a means of payment over the millennia, its ability to drive people crazy and how it has settled countless conflicts and power struggles over time.

What’s not to like?

Recently, I had the opportunity to teach alternative investments, which gave me the opportunity to gather some of my thoughts on, among other things, gold. And why not at the same time write it down in a summary article on how to get your hands on the coveted metal?

The 9 ways to invest in gold are:

  • Physical gold
  • Digital gold markets
  • Spot FX
  • CFDs
  • Options
  • Futures
  • ETFs and ETCs
  • Gold mining shares
  • Gold-backed cryptocurrency

Many of these methods also apply to silver, platinum, oil and other raw materials. And raw materials for that matter. For example coffee, sugar and wheat. So if you are a farmer and know enough about the price of wheat, you can possibly invest in even more wheat than just your own production.

Why invest in gold?

Gold has a real utility value beyond just acting as jewellery and investment objects.

It is especially used in the electronics industry because gold is an efficient electrical conductor. Low-current electronics in particular, such as mobile phones, GPS units and computer components, need high-quality conductors that do not rust. Therefore, almost all modern electronics contain a very small amount of gold.

At the same time, gold can be coated in a thickness down to 5 micrometres, or 0.005 millimetres. So even though the price per kilo is high, it can still be used in general consumer electronics without significantly increasing the price of the product.

It is also possible to extract gold from old electronics, provided you have the right knowledge, time and toxic chemicals. However, mining gold from electronics is rarely worth the effort for happy hobbyists.

For investors, there are primarily three reasons to invest in gold:

  • Inflation: Maintaining purchasing power.
  • Speculation: Expectation of future rise in gold prices.
  • Diversification: Gold helps smooth out equity portfolio volatility

Invest in physical gold

Trading physical gold is the most fun of all eight methods. There is something special about holding a real gold coin or bar in your hand.

But investing in physical gold is also expensive, uncertain and impractical.

In part, there is a certain uncertainty associated with the physical purchase of gold. Can you be sure that the authenticity and documentation have not been cheated? Especially if the seller is not a recognized company.

At the same time, the gold must be stored. If you have it lying around in a safe at home, it implies some necessary considerations regarding insurance. And if you don’t already have solid money or a gun safe, then they often cost several thousand kroner to purchase, depending on the size of the safe. 

Potentially, it pays better to rent a safe deposit box from, for example, Chase Bank, where the prices fluctuate between USD 40 and USD 700 annually.

Physical gold is also impractical. It must be transported safely between sellers and buyers, which costs time and/or money and makes it more difficult to trade frequently.

There are also additional transaction costs related to investing in physical gold: the gold you buy from dealers is priced significantly above the market rate. At the same time, they pay well below the market price when you want to sell it again. The gold price must thus have risen quite a lot before you see a real return.

Basically, buying physical gold only makes sense if you a) Primarily do it for fun or b) Expect a zombie apocalypse and need precious metals to buy yeast and ammunition.

Moreover, in many countries, you can still dig for gold the old-fashioned way. A few make it a real living, but for many, it is a hobby in the style of fishing or hunting.

Digital gold markets

The only digital access to direct gold ownership is the digital markets.

Here the gold is bought at market price, the risk of fraud is lower and others take care of storage, insurance etc. The only downside to the digital platforms is that you don’t have the gold at home when the zombie’s attack (buy lead instead).

BullionVault

BullionVault is the world’s largest gold market. Gold (as well as silver and platinum) is traded here at market prices in all major currencies. And at quite a trading cost of 0.5% with no minimum fee.

The precious metals are stored in large boxes in Switzerland, USA, Canada, UK and Singapore. And you choose which boxes you want to shop from.

New investors also receive 5 grams of silver, 1 USD, 1 EUR and 1 GBP just by signing up. No fortune, but it was fun to be able to play with the trading system a bit while waiting for my own money to transfer.

Revolut

In addition to share trading and cheap currency exchange, Revolut also offers the option of buying gold.

To be able to buy gold, you simply create a gold account in the same way as when you create currency accounts. Revolut buys the gold itself from other financial institutions. However, it is not clear which institutions are involved:

Trading with gold at Revolut generally costs a fee of 1.5% of the trading price.

Invest in gold through complex financial instruments

Complex instruments require that you know exactly what you are doing. While the potential for loss and gain from direct trading in gold is relatively straightforward, the instruments below are considerably riskier. There is often the possibility of unexpected expenses or losses that exceed the amount invested.

Among other things, these types of investments are often leveraged, which means that the investor invests larger amounts than they have deposited and that even minor fluctuations can therefore quickly lead to significant losses.

Therefore, be careful before jumping into these four options. That said, there are potential benefits to investing in these instruments as long as they are fully understood.

The descriptions below are not exhaustive. It’s just inspiration to learn more if you find the possibilities interesting.

Spot Gold FX

FX stands for Forex or Foreign Exchange Market. There are many strategies for forex trading – often, however, forex is best known for trading currencies, but also covers gold, silver and platinum.

FX trades in so-called “pairs”. For example, DKKUSD is the price difference between the Danish kroner (DKK) and American dollars (USD).

The most popular FX gold is XAUUSD, i.e. the price of gold in relation to US dollars. When you trade FX gold, you buy gold with borrowed dollars. It cannot be exchanged for real gold and you do not own the underlying asset (gold). Instead, one speculates whether the price of gold will rise or fall.

Trading gold via Forex offers the opportunity to invest for the long term, but usually, Forex trading is short-term. Here you have to pay attention to the “rollover swap”, which is the interest rate difference between the two “currencies”. Since you thus pay interest to borrow USD, XAUUSD may well become relatively expensive just to have lying around. Not least because FX trading is leveraged, and so is the interest rate.

CFDs

CFD stands for Contract For Differences.

For the common investor, CFD is the same as FX in the above section. There are some technical differences as well as a difference in which markets you have access to. Among other things. CFDs can also be traded with shares as underlying assets.

Options

An option is a contract that gives the option holder the right to buy (or sell) an asset at a set price within a set period of time.

For example, a gold option allows the investor to buy an option that gives them the right to buy 1oz of gold for $1,500 within the next 2 weeks. If the price of gold rises to $1,600, the investor can exercise the option and thus earn $100 minus the price of the option.

The advantage of buying an option instead of just buying the gold outright is that you know the potential loss. If the gold price falls, you can refrain from redeeming the option and thus only lose the amount the option has cost.

Futures

Like options, futures are trading contracts. But instead of acquiring the right to a future trade, you buy the obligation to later take over the asset for a fixed price. It is an excellent opportunity if, for example, you buy gold for use in the electronics industry and want to secure a stable gold price for some time in the future.

In connection with the fact that the price of oil briefly fell below 0, there were stories about investors who could not sell their futures on. They were thus contractually obliged to buy and take over many thousands of litres of physical oil and were sued for breach of contract. However, this is not the norm. Often the contract contains a condition that the deal must be settled monetarily and thus does not involve the physical product.

Futures are also leveraged. Since the commodity is only bought in the future, you usually only pay a margin – i.e. a percentage of the entire trade’s value, when you buy a future. This means that you can buy a future that obligates the investor to buy gold for 1 million. but only prepay around USD 50,000.

If the gold falls by 5% in the meantime, the investor has thus lost the entire amount. And if it drops 20%, he will have an extra USD 150,000 out of his pocket! This is precisely why futures are an extremely risky instrument if you do not know exactly what you are doing. A wrong click with the mouse can be a very expensive pleasure.

Invest in gold via ETFs and ETCs

ETFs are the closest you get to buying gold directly through a stockbroker.

An ETF ( Exchange Traded Fund ) is a fund that buys assets. Most often these are stocks or bonds, but a few ETFs also buy physical commodities – including gold.

ETC stands for Exchange Traded Commodities. It is basically a form of ETF that, instead of buying stocks or bonds, invests in gold, silver, coffee or other commodities. Technically speaking, this happens via a debt document with security in the underlying raw material, but in practice, it is of no great importance to the individual investor.

iShares Physical Gold ETC ( SGLN ) is an example of an ETC with gold as the underlying asset, where the objective is for the rate to follow the gold price. As shown in the graph below, there is only a minimal difference. The small negative deviation is due to funds’ costs.

Gold mining shares

Just like investing in oil via oil companies, gold mines can be traded on the stock market on an equal footing with all other stocks.

Mining companies can give higher returns than gold because they continuously extract more of the raw material. They can also expand the company, find new gold veins and streamline production for the benefit of the investors.

However, this also means that by investing in gold mines you are not only exposed to the value of the gold but also to how the company performs. Are they, for example, still able to pull gold out of the ground? Can they run a profitable business, etc. And since gold as a metal cannot go bankrupt (surprise!), that is always a real risk for any mining company.

If you want to invest in gold mines but prefer to spread your investments a little more widely, there are also ETFs that are exposed to this sector. An example of a gold share is the iShares Gold Producers UCITS ETF ( SPGD ). The well-run mining companies’ share prices generally follow gold prices relatively closely, although there are greater fluctuations, and thus the potential for greater returns and greater losses.

Gold backed cryptocurrency

A newer but quite interesting way to invest in gold is to buy a cryptocurrency with gold as an underlying asset. That is, a cryptocurrency where the issuer holds gold equivalent to the value of the issued cryptocurrency.

If you are not familiar with cryptocurrency it may sound a bit suspicious, but the concept is solid as long as the issuer is a trustworthy company. In fact, it may be the closest we get today to a currency based on the gold standard.

There are still only a few cryptocurrencies that are backed by gold, and even fewer that are traded on the most widely used platforms. One of them is PAX Gold ( PAXG ), which i.a. can be traded on Binance. Paxos is a major financial company that regularly has its gold holdings checked by external auditors.

PAX Gold development in dollar exchange rate
Gold spot price development in dollars

One of the advantages of buying gold in the form of cryptocurrency is the low trading fees, and at the same time, it is easy to transfer to others either through a trading platform or by making a direct transfer in the same way as when exchanging other cryptocurrencies such as Bitcoin or Monero.

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