5 Ways to Invest and Trade Gold

I'm sure you've heard before the gold is a good investment. Okay, that's great, but what does that mean? How does the average Joe or Shantelle get involved in this industry.

Why don't you check out my video on this topic, or keep reading to find out how.

So... Why Gold?

• Steady Increase in Value

Gold is one of those almost magical assests that just continue to rise in value over the long term. Although month-to-month there is some volatility (we will explain later), in the long term it's seen steady growth.

• Works Against the Dollar

Gold also tends to perform best when the economy is turbulent. Whenever we see the US dollar taking a dip, we usually see a spike in the gold market. This is because of the reputation gold has. It's seen as a safe bet when the economy is turbulent, so experienced investors tend to invest in gold when economies take a hit.

• Hedge Against Inflation

Also, gold acts as a hedge against inflation. This is because it’s price tends to rise as the cost of living tends to rise. Unlike savings accounts, which are not influenced by the cost of living, gold tends to move with inflation, which protects your investment if you're looking to invest long-term.

How do I start?

Here are a list of the 5 ways you can trade or invest in gold.

1. Buy Physical Gold

You can buy a gold bullion (bar or specialised coin) from a reputable gold seller or minter for a little over market price. As we've mentioned before, the gold market increases over time, so the goal is to buy gold and keep it until the market price is significantly higher. Then you can sell it to a gold buyer, or pass it on as an inheritance to your children. Jewellery is not considered the best gold investment, as usually you will pay much more for the jewellery than the gold itself is worth.

Pros

This method is easy and accessible to all. There are no licenses or previous knowledge required.

Also, buying gold in bullion form means that it is untaxed.

Cons

Like any investment, you can only make money if the value of the market increases. This means that if you buy gold at too high a price, it may be a while before you see a return on your investment. Also, when buying gold, you are unlikely to get market price when you buy gold, and also when you sell it.

As with any valuable investment, there is the risk of theft or damage. If you were to unfortunately experience a break-in, or natural disaster, you would lose your investment. You could of course insure your investment, or store in another location, but this is another investment on top of your initial one.

2. Contract for Difference (CFD)

A contract for difference (CFD) is a popular form of derivative trading. Derivative trading is when there is a contract between two or more parties and the value of the contract is based the value of the underlying asset, in this case gold.

CFD trading enables you to speculate on the rising or falling prices of gold which means, that you can potentially profit if the value goes up or if it goes down.

This is because you are not investing in the value of gold, you are investing in the value of the contract. So, if you are selling gold, the more the value drops, the more your contracts is worth. And if you’re buying gold, the more the value increases, the more your contract is worth.

Also, CFD trading allows you to use leverage. This means that you can access more of the market’s money, without having to put up the funds yourself. It means that your profits can be higher, but it also your losses will be higher also.

Pros

You can use leverage to access a lot more of the market than in your account. Due to this, you can see profits within seconds, minutes, hours or days.

Cons

CFD trading requires using a broker. This means that trades are subject to interest charges the longer you hold them. These are called spreads. Every trade held overnight will incur a small fee, as the contract will "renew" overnight.

If you don’t use a risk management strategy, you can easily blow your trading account, meaning that you will lose your money quickly. The best ways to prevent this is to use a sensibile leverage, and apply appropriate risk management techniques.

Due to the fast-paced nature of the CFD markets, it is very easy to get sucked into the movement of the trade. If you are prone to gambling, or have an emotional attachment to money, I wouldn't advise using this method without first getting an education.

3. Contract for Difference with Currencies

This works in a similar vein to trading CFDs. The only real difference is the addition of a secondary market, meaning that you would be trading gold like a currency. The most common to trade against gold is the US dollar. This would appear as "XAUUSD".

As gold is a stronger market than the dollar, it is considered the base currency. The base currency is the one that determines the market value. The benefit of trading these two currencies is that the dollar usually works inversely to the gold market. Meaning that when the gold market gets stronger, the dollar market tends to get weaker.

Pros

You can use leverage to access a lot more of the market than in your account. Due to this, you can see profits within seconds, minutes, hours or days.

Also, with the addition of the US dollar as an indicator, this makes it much easier to predict the direction of the market.

Cons

In addition to the cons raised in point two, CFD trading is a high risk market, meaning that there is no guarantee of profit.

4. Exchange Traded Funds (ETF)

Gold investment funds can be a good alternative to buying physical gold. Let’s be honest, unless you have a massive vault in your basement, there's no safe place to keep it. For an easier, cheaper way to invest in gold, you can do this using exchange-traded funds (ETFs)

An exchange-traded fund is a type of investment fund and exchange-traded product, i.e. it’s something you will find on the stock exchange.

There are two differences between ETFs and CFDs. The first difference is that an ETF is an investment into gold itself, whereas a CFD is an investment into a contract. The second difference is that while a CFD allows you to buy and sell; ETFs only allow you to buy into an investment. This doesn't mean that it's bad. In fact, ETFs give some people a lot of security, as all they need to look for is an opportunity to sell their investment at profit.

You can access ETFs through various investment platforms.

Pros

There are many pros of ETFs. Firstly if you are using a licensed broker, you have legal protection. Alternatively, if you are using an ISA, your investment is tax-free for the first £20,000. This is well within the £85,000 protection that the FCA offers.

Also, unlike buying physical gold, you don't have to invest anything into the protection of the asset.

Cons

On the reverse, like any investment, you only make money if the value of gold increases. The best way to make money from market drops is to CFD.

Also, if not using an ISA, it may take some more time to understand legal tax requirements based on the UK.

Most investment funds also charge a fee, either per investment, per month or upon withdrawal.

5. Wealth Management Fund

This is very similar to using ETF, and often wealth management funds will provide the same services. However, a wealth manager will instead manage your financial portfolio for you, meaning that you don’t have to do anything with it.

Pros

Apart from the initial reasearch into a reputable broker, this is a low-touch approach, as the wealth manager manages any investments for you.

This is a great approach for managing your investment over 3, 5 or 10 year plans. Also, there is a more experience person (or team of people) managing your money.

Cons

Due to this being a managed service, it does incur large fees, meaning that it should be considered as part of a long term plan. Also, a managed service means no control over your investment.

Again, you only make money if the value of gold goes up.