Investing in gold: These options are available to investors
Investors have an effective tool against the risk of economic crises and high inflation: buying gold. As part of a portfolio, gold can reduce the overall risk of investments. Find out what the options are for investing in gold and what the pros and cons of gold investments are.
Gold as a safe investment
Gold has a special significance. For instance, the gold medal in sports stands for the highest performance and is an important award. One example is skiing. Marco Odermatt, our skiing gold champion, has already earned many. The material value of the gold prize is estimated at around CHF 660. Away from athletic podiums, gold is turned into valuable jewelry and represents luxury and quality. One- to two-thirds of the total demand for gold comes from the jewelry industry. Additionally, gold attracts investors' attention as a complement to a diversified portfolio, especially in times of rising inflation or crisis. The following factors are in favor of gold as an investment.
Why invest money in gold?
These are the main reasons for a long-term investment in gold
- Economic growth is driving physical demand: Demand for jewelry is closely linked to economic growth, particularly in emerging markets.
- Support in uncertain markets: Gold is a permanent investment, even in times of crisis:
- Despite the high price volatility, particularly in the short term, gold is a relatively secure investment and is extremely stable in value. In addition, the price of gold often goes against stock market and interest rate developments, which makes gold investments good insurance against economic downturns and full-blown crises.
- Gold's rarity and limited supply offer valuable protection against high inflation rates. As a tangible asset, the precious metal – in the form of gold coins, gold bars, or jewelry – protects investors against inflation.
- Currency diversification: Denominated in USD, gold benefits from a weaker USD, especially driven by demand from investors and the central banks of emerging markets.
- Investment diversification: Gold features a low correlation to other asset classes, has inflation hedging qualities, and is a tangible investment.
What is the best way to invest in gold?
If you want to invest in gold, you can do so in four different ways:
- Gold bars or gold coins
- Precious metal account
- Listed securities (e.g. index funds and ETFs)
- Gold mine equities1
1Gold mine equities do not necessarily reflect the price of gold, as they are also sensitive to the capital market.
The traditional way of investing in gold is coins and bars. Purchasing and holding physical gold provides security, as there is no counterparty and therefore no default risk either. However, you also need to store your gold bars and coins and protect them from theft, e.g. in a safe or in a bank safe deposit box. This will lead to additional costs.
The gold price is exposed to certain currency risks due to its being linked to the US dollar (USD). If the US dollar loses value against the Swiss franc, the value of gold also decreases.
- The certification of physical gold bars can be used to track the environmental impact and social compatibility of their origin. It is also important for a smooth resale.
- Buying gold bars in denominations that are too small is not advisable because reselling them can be difficult. Gold bars weighing between one ounce and one kilogram are the best option for private investors – they are the most widely traded and offer the best spread between buy and sell prices.
- Holding assets physically in gold bars can be part of the investment strategy. In relation to the remaining assets, a maximum amount in the low single-digit percentage range is recommended.
- In terms of coins, there is a wide selection available. Any investment coin is suitable for cash investments, such as the popular Gold Vreneli, the Vienna Philharmonic, and the Krugerrand. The gold content of the coins is an important factor. The rule of thumb is the higher the better, because the amount of embossing required decreases in relation to the material value. In addition, gold coins can also be collectible – depending on the coin and its vintage. This can influence their price, regardless of the gold content.
An alternative to the physical form is the precious metal account (PDF). In this case, the investor does not own the gold. The latter acquires only a supply claim for the amount of gold commensurate to the money invested toward the bank. This also has advantages: for instance, no value-added tax is payable on the purchase and there are no concerns about storage. In addition, the balance in the account is very easy to adjust. On the flipside, precious metal accounts are only insured up to CHF 100,000 under the deposit protection scheme and account fees are levied.
It's also possible to invest in gold through exchange-traded funds (ETFs) and index funds. These passive investment vehicles buy physical gold and in doing so precisely replicate the price of the precious metal. This allows investors to easily invest their money in gold and set rising prices.
Lower costs and minimal effort for private investors are the advantages of this type of investment. Furthermore, the existing fund liquidity allows flexible trading with the units. Investors are therefore able to react very quickly and benefit from a rise in the price of gold. With ETFs or index funds, investors are also entitled to delivery of the gold and the money invested is deemed a special fund under the Collective Investment Schemes Act; this ensures the security of the assets even if the bank fails. A fixed fee is payable for administering the fund within your safekeeping account.
- When selecting ETFs, verify that the funds contain physical gold. Physical gold is a prerequisite for the delivery and investor protection provisions to legally take effect.
Gold shares or gold mine shares are shares of gold mine operators. The price of gold has an impact on the securities. However, their value is much more dependent on the performance of the mining operator and the stock exchange. This dependency on the equity market makes the equity securities volatile and only partially reflects the price of gold. Investments in individual gold companies therefore involve risks similar to investments in any other share.
- Gold shares are often classified as unethical because their purchase supports gold mine operators. This involves problematic working conditions and insufficient wages for mining workers in many developing countries.
Investing in gold: The advantages and disadvantages.
- Stable and retains its value
- The price of gold often increases in times of economic crisis
- Physically holding gold bars and coins provides security
- A hedge against inflation risks
- Long-term performance tends to be on the poor side
- No regular income such as interest or dividends
- Investments in commodities and corresponding derivatives or indices are subject to special risks and high volatility.
- The performance of such investments depends on unpredictable factors such as natural catastrophes, climate influences, hauling capacities, political unrest, seasonal fluctuations and strong influences of rolling-forward, particularly in futures and indices.
- Currency risk, as traded in US dollars
- Investing in gold carries a significant opportunity cost, because it does not generate any income in the form of dividends or interest.
- Long-term performance tends to be on the poor side