Investing in gold
Investing isn’t limited to stocks, bonds, or ETFs; you can also invest in tangible assets such as gold. This lesson covers the key characteristics of investing in gold.
Investing isn't limited to financial products like stocks, bonds and ETFs. You can also invest in tangible, physical assets, and gold is one of the most well-known examples. In this lesson you'll learn about the advantages and disadvantages of investing in gold, and the different ways to do it.
Gold: a commodity
In the investment world, gold falls under the category of commodities. This same category includes other precious metals like silver and platinum, as well as oil, gas, and even agricultural products like corn and soybeans. What they all have in common is that they're physical, real-world products. Unlike stocks and bonds, they don't just exist on paper.
Gold's reputation as a safe haven
Gold has a reputation as a "safe" investment. When the global economy is struggling and uncertainty is high, gold tends to become more popular. This is down to a few key characteristics:
Inflation | Gold is relatively resistant to inflation. Inflation can occur when too much money enters the economy — but "too much gold in the economy" is simply not a realistic scenario. The amount of gold available on earth is finite and can't suddenly increase. As a result, gold holds its value well over the long term. |
Low correlation | Gold has a low correlation with other investments. As far as can be referenced, when stocks and bonds perform poorly, gold price has remained largely unaffected. In fact, gold prices sometimes rise when stocks and bonds fall — making it a useful asset for diversifying a portfolio. That said, it’s important to note that the gold price can always fall too. |
Highly liquid | Gold is highly liquid. Gold is a valued and sought-after material all over the world and its price is consistent globally. This means it can be traded easily on the market. |
Disclaimer: Past performance is no guarantee of future results.
The downsides of gold
At this point you might be thinking: where do I sign up? But investing in gold does have its drawbacks.
For one, it's not suited to investors looking for passive income: gold bars don't pay dividends or interest. The gold price can also be quite volatile in the short term, meaning there's always a chance of making a loss, just as with any other form of investing.
There's also the practical reality that gold is a physical object. If you invest in gold, you literally own gold, and that needs to be stored somewhere secure. Not everyone wants a safe at home, and storing it elsewhere usually comes at a cost.
Gold ETCs
For investors who'd rather not deal with physical gold, there's an alternative: financial products that track the gold price. One example is a gold ETC (Exchange Traded Commodity), which you buy and sell in exactly the same way as ETFs: on the market, typically through a digital investment platform.
A gold ETC is, in simple terms, a certificate that proves you own a certain quantity of gold. The ETC provider generally takes care of storing that gold securely, so you don't have to. The value of the ETC moves in line with the price of gold.
Key takeaways
- Gold is a commodity investment, in the same category as oil, gas and agricultural products like corn
- Gold is largely resistant to inflation, has a low correlation with other investments, and is highly liquid
- Gold does not generate passive income in the form of interest or dividends
- The gold price can be quite volatile in the short term and lower in value
- Gold ETCs are financial products that allow you to invest in gold without buying physical gold bars