Bullion, gold stocks or gold futures – which performs better?
For many, gold is an important part of a diversified portfolio. Here are several ways to invest in it.
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Sponsored by CYA Titles (AFSL 403863) – the Australian broker with a wide range of global CFDs on stocks, forex, indices, commodities, ETFs, crypto and low spreads through easy-to-use trading platforms. Trade CFDs on precious metals such as gold, silver and platinum and speculate on your view whether long or short.
Gold has been considered a store of value for thousands of years, but in recent decades it has also grown in importance as a financial asset.
Indeed, investing in gold is considered a valuable hedge against inflation and a safe way to diversify a portfolio, given its stability during periods of market volatility.
With the market turmoil that has peaked in recent months, this avenue of investment is once again in the spotlight.
“Although its price has fallen, gold is more resilient to a bear market,” said ACY Securities market analyst Peter Pan, pointing to a 15% decline from gold’s peak, versus a down 33% from the Nasdaq 100 peak.
“As a component of the portfolio, it could reduce the total exposure to market risk. Gold remains a key choice for diversification.”
Here are a few different ways to start investing in/trading gold. Let’s take a look at how each option performs (note: our list is indicative only and does not cover the entire market).
Investing in physical gold can be in the form of gold bars, jewelry, or commemorative gold coins that your neighbor owns.
Bullion refers to gold that is at least 99.5% pure and has been turned into bullion or bullion or minted into coins. It is the form in which gold is traded in commodity markets around the world.
On the other hand, gold jewelry represents the greatest use of physical gold, although it can be of varying purity.
The price of gold surged during the coronavirus pandemic, hitting a record high of US$2,074.88 per ounce in August 2020. The price rose again to US$2,052.60 per ounce in March 2022 It is trading at US$1,712.76, down 2.1% from a year ago.
- Tangible asset, easy to buy.
- Hedge against inflation as its value increases.
- Diversifies the portfolio.
- Security and physical storage are necessary.
- Not very liquid and may incur additional charges.
- Unlike property or stocks, provides no ongoing income.
These are shares of companies involved in the extraction and production of gold. The category is generally dominated by miners, but also provides access to gold broadcast and royalty companies, which fund mining efforts in exchange for the ability to purchase gold at a fixed price in the future.
Investing in shares of gold companies can be an effective way to profit from gold and also carries a potentially lower risk profile than other investment methods.
Some of the top ASX gold stocks include Newcrest Mining (ASX:NCM), Northern Star Resources (ASX:NST), Evolution Mining and (ASX:EVN).
Gold stocks can experience wild swings depending on the nature of the business as well as market factors. Typically, stocks of junior gold exploration companies show greater outperformance, but can often be much riskier. On the other hand, big gold companies manage to generate big profits even when gold prices are down, but their stocks are stable.
For example, the best performing gold stock on the ASX is Santana Minerals (ASX:SMI) with a 230% increase in value year over year to 66 cents, following a recent gold discovery in New Zealand.
By comparison, Australia’s largest gold producer, Newcrest Mining, posted an annual profit of $872 million, but its share price has fallen 22.5% in the past 12 months.
- An effective way to profit from gold.
- Relative security of investments in listed companies.
- Offers portfolio diversification.
- The performance of stocks can vary considerably.
- Riskier option compared to some other investments.
- Additional charges such as brokerage fees.
Disclaimer: This information should not be construed as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be taken as investment advice or construed as providing recommendations of any kind. Trading futures, stocks, ETFs and options involves substantial risk of loss and is therefore not suitable for all investors. Trading CFDs and forex with leverage carries a higher risk of losing money quickly. Past performance is not indicative of future results. Consider your own situation and get your own advice before you trade.
Gold Futures Contracts
Given gold’s intrinsic quality as a natural hedge against inflation as well as its popularity as a tool for portfolio diversification, many investors try to profit from movements in the price of gold by trading in the futures market, where they do not own the asset itself, but rather own contracts based on price changes.
“For long-term investors, ETFs may be suitable, but for hedging or short-term speculation, futures are preferred,” Pan says.
In Australia, investors typically trade contracts for difference (CFDs) in the futures market using a specialist trading platform, for example ACY Securities.
Contracts for Difference (CFD) traders seek to profit from movements in the price of gold, whether up or down. This means that even if the price of a gold currency pair (or a gold-related equity CFD) goes down, the owner of the CFD can still make a profit, as well as a loss. Given their risky and complex nature, these instruments are best suited for advanced traders.
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“The most popular gold CFD in the world, including Australia, is XAU/USD (gold price in USD) due to its trading volumes and better liquidity,” Pan said. . The XAU/AUD (gold price in AUD) is also widely used by Australian traders.
XAU/USD is down 2.6% over a 1-year period. In comparison, the XAU/AUD pair generated a return of 11.2% over the same period.
- No need to worry about physical gold storage costs.
- Can go long and short using CFDs.
- Leverage can be used to take advantage of price volatility.
- Involves a higher degree of risk and experience.
- Costs of holding CFDs, exchange risks.
- Exposure to market volatility.
Exchange-traded funds (ETFs) based on gold are a good alternative to investing in physical gold for small investors, because if they allow you to profit from the price of gold, they are more profitable because the minimum investment is only the price of a single share of the ETF.
Most gold ETFs track the price movements of the commodity itself, an index that tracks multiple companies exposed to gold or in shares of gold mining and exploration companies.
The main gold-themed ETFs available in Australia include:
- VanEck Vectors Gold Miners ETF (GDX)
- BetaShares Global Gold Miners (MNRS) ETF
- BetaShares Gold Bullion ETF (QAU)
- Physical Gold ETFS (GOLD)
- Perth Mint Gold (PMGOLD)
As with stocks, the performance of gold ETFs can vary significantly depending on the composition of their portfolio, the performance of individual company stocks as well as market factors.
The best performing funds in this category were the bullion-focused Perth Mint Gold funds and the ETFS Physical Gold funds, which generated 1-year returns of 8.5% and 8.4%, respectively. By comparison, the BetaShares Global Gold Miners ETF returned (7.7%) over the same period.
- A profitable way to profit from gold.
- Relative safety of listed securities.
- No individual business search is necessary.
- Performance may vary significantly.
- Riskier option compared to physical gold.
- Exposure to market volatility.
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