How to Invest in Gold

How to invest in gold

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What's the best way to invest in gold? You have options, from owning physical gold to investing in gold-mining companies and gold-specific ETFs. First, read this story to learn everything you need to know about how to buy gold, what to look for and which type provides the best returns.

Gold has a unique set of characteristics that make it the ideal option as a medium of exchange. This metal is chemically inactive and anti-corrosive, making it a sustainable source of value. Additionally, gold is rare, which gives it inherent value, but abundant and malleable enough to allow for the creation of bullion.

When it comes to new investments, gold is a viable option. This commodity has a history of holding its value and, as such, can serve as an effective hedge against inflation. Moreover, the demand for gold is continually increasing.

In this guide, we take an in-depth look at the different ways to invest in gold and the top gold stocks to consider. Keep reading to learn more.

Different Ways to Invest in Gold

You will find several ways to invest in gold: purchasing physical gold or investing in gold ETFs and mutual funds, gold certificates, and gold stocks of many types.

Physical Gold

The simplest and most practical way to invest in gold is with direct ownership, which involves buying physical gold in the form of bars, coins, or jewelry.

Taking physical possession of gold is a secure investment option, as your assets will not vanish during an electronic blackout or stock market crash. Additionally, your physical gold will serve as financial insurance and an inflationary hedge in a political or economic catastrophe.

However, several drawbacks exist to buying physical gold. Verifying rare or old gold coins can be challenging, and it is expensive to store and insure bullion. Dealers also tend to charge a premium for coins and jewelry.

The Royal Canadian Mint is a reputable source of gold coinage, such as the Gold Maple Leaf or Golden Eagle. You should always buy gold in its purest form and compare the premium asked with gold’s current spot price. If there is a difference of 10% or more, consider other options.

Gold ETFs and Mutual Funds

Gold exchange-traded funds (ETFs) are commodity funds, with gold as the principal asset, which trade on an exchange in the same manner as individual stocks. A gold ETF can hold physical gold stored in vaults or gold-mining company investments. These funds can also track gold-derivative contracts such as:

  • Gold futures
  • Spot gold over-the-counter (OTC) contracts
  • Spot gold low-leveraged contracts
  • Gold options

Buying gold ETFs allows for broad exposure to gold price movements or performance without investing in individual companies, thus mitigating your risk.

A gold ETF combines the benefits of an ETF with those of a traditional gold investment. You can use a gold ETF as an effective hedge against a weakening currency and potentially damaging market movements. The capital requirements of investing in a gold ETF are also relatively low, and you can sell your investment at any time.

Some of the best gold ETFs in Canada include:

  • Horizons Enhanced Income Gold Producers ETF
  • iShares S&P/TSX Global Gold Index ETF
  • BMO Equal Weight Global Gold Index ETF
  • Sprott Physical Gold and Silver Trust ETF

If you’re a DIY investor and want to buy gold ETFs, your best bet is to open a self-directed account with a discount brokerage account. Since discount brokerages charge very little in fees, you’ll save a lot of money going this route. For instance, Questrade offers free ETF purchases and you can open an account with just $1,000 to start. Plus, Young and Thrifty readers who open a Questrade account get $50 in free trades..

Or there’s Wealthsimple Trade account – a mobile-only trading platform that offers zero-commission stock and ETF trading. That will allow you to buy gold ETFs without spending a dime in fees. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $25 cash bonus + $0 commission trades. All you have to do is fund at least $150. Plus, Wealthsimple Trade will reimburse an outgoing administrative transfer fee of up to $150 on investment account transfers valued at more than $5,000.

Gold Certificates

Buying gold certificates is an indirect way to hold physical gold. Canadian banks and bullion dealers offer them, which allow you as an investor to own gold bullion without the hassle and expense of physical possession, storage and insurance.

This method of buying gold is unallocated gold investing, which means that, although you own physical gold, you’ll not have possession of it. Instead, you’ll receive a certificate from the dealer or bank representing your ownership of a specific gold amount.

Even though you don’t have to pay insurance or storage fees, sales charges may apply.

Gold Stock

Investors who buy gold want to store their wealth in a manner that safeguards them against inflation. However, if your objective is capital appreciation, you should buy gold stocks.

Investing in the companies that mine gold offers a higher potential for growth than buying physical gold. At an average increase of 0.3% per year, you should see virtually no change in gold’s real value, and the amount of gold you own would not increase over time.

With gold mining stocks, on the other hand, the risk and potential rewards are significantly higher. No direct correlation exists between gold stocks and the gold price, but you can find some overlap between the factors affecting them.

The gold market is global, and individual gold miners are predominantly price takers, which means they must accept the prevailing market prices for the gold they produce. However, while all mining companies sell gold at the same price, they don’t have equivalent production costs.

The stocks of gold mining companies with efficient operations and economies of scale typically perform well, especially during periods of economic strain when investors buy gold to preserve the value of their portfolios.

Again, if you want to save a bundle on fees, open a self-directed account with an online brokerage like Questrade or Wealthsimple Trade. And if you’re new to DIY investing, you can get a crash course on how to buy stocks in Canada.

Stock from Royalty and Streaming Companies

When gold mining companies need economic support for their exploration and production projects, they turn to royalty and streaming companies. As financiers of miners, royalty and streaming companies receive royalties on the profits that these projects generate. They may also receive rights to a stream, which is the amount of gold parties agreed to.

Gold investors often regard buying royalty and streaming company stocks as a low-risk alternative to investing in conventional mining stocks. Royalty companies set fixed prices for mining output, safeguarding themselves against the volatility of gold prices. Fixed pricing allows them to generate revenue when the gold price rises and falls.

Top Gold Stocks in 2020

So far, 2020 has been a good year for the gold mining industry. In particular, gold stocks outperformed the Canadian market as a whole, thanks to rising gold prices. By the end of September, the total returns from gold stocks exceeded those of the Russel 1000 by around 26%.

In this section, we look at the top gold stocks for Canadian investors. If you are looking to invest in gold mining stocks, consider the companies below.

Best Value: Teranga Gold Corporation and Barrick Gold Corporation

The best value gold stocks are the ones that have achieved the lowest trailing price-to-earnings ratio, or earnings multiple, for the past twelve months. This ratio offers an apples-to-apples comparison to determine the relative value of a company’s shares. In other words, the P/E Ratio equals earnings per share, divided by market value per share.

Teranga Gold Corporation is a Canadian gold producer focused on operations and exploration property development throughout West Africa. The company’s assets include Golden Hill, Sabodola, Massawa and Wahgnion.

Barrick Gold Corporation is a Canadian gold and copper producer operating in locations worldwide, including Nevada, Veladero, Lagunas Norte and Pascua Lama.

Fastest Growing: Eldorado Gold Corporation

The fastest-growing gold stocks reported the highest year-over-year earnings per share (EPS) for the last quarter. A company’s EPS is its profits divided by its outstanding common shares. This measure indicates the money that a company generates for each share of its stock and is significant in determining profitability.

Eldorado Gold Corporation is a Vancouver-based mid-tier gold producer that has operating mines in the Americas, Asia and Europe for the past 25 years. Eldorado Gold Corp. shares trade on the Toronto (TSX: ELD) and New York (NYSE: EGO) stock exchanges.

Most Momentum: Pure Gold Mining

Momentum measures the rate at which a stock price rises or falls, which is critical in establishing a trend’s strength. A momentum stock is one that tends to move with the strength of momentum. Measuring momentum is essential in establishing whether you are investing with or against a gold stock’s momentum.

Pure Gold Mining is one of the stocks with the most momentum. This Canadian company focuses on gold exploration and development along with mineralization discoveries on the Madsen Gold Project in the Red Lake greenstone belt.

Risks and Benefits

You will encounter several risks if investing in gold. Most significantly, gold has no traditional intrinsic valuation methods. Its price depends solely on supply and demand. Gold prices are also volatile. For 22 years, gold went through a bear market. Another prominent reason not to invest in gold is that it doesn’t produce any yield.

On the plus side, gold has a prominent global demand and it is the ideal hedge against inflation and other financial risks. Investors have found various gold investment methods for optimal diversification—including direct ownership, buying stocks, and tracking price movements with the gold derivatives that back gold ETFs.

The Last Word: Should You Invest in Gold?

Whether or not you should invest in gold depends on your risk tolerance and investment objectives. Gold has a low correlation with other investment classes, rendering it one of the more effective volatility hedges. Gold is also more likely than other assets to retain value, and, as a gold investor, you can have peace of mind that an economic catastrophe will not wipe out your portfolio.

If you aim to pay off inflation returns, you should invest in gold. However, if you want to grow your capital, consider investing in gold mining stock or gold ETFs.

New to investing? No worries! You can get the inside scoop on how to start investing in Canada.

Chris Muller

Chris Muller

Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He's also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter @moneymozartblog.

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