Investing In Gold: The Definitive Guide

Gold is one of the rarest metals in the world, and has a long history as a valuable and intensely sought-after element. The precious metal has served as the basis for physical currency for thousands of years, and many monetary systems throughout human history have utilized a gold standard that focused on the precious metal. Exploration and production of gold has become a major industry in regions that maintain significant deposits of the metal, and quests for gold have been the impetus of countless expeditions and discoveries [for more gold news and analysis subscribe to our free newsletter].

The price of the metal is widely followed by many investors, both sophisticated and simplistic. There are a number of different options for investing in gold, including buying up coins and bars of the product, exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of the metal, and both physically-backed and futures-based exchange-traded products.

Physical Properties And Uses Of Gold

Gold metal is dense and soft, and is one of the most malleable and ductile of the pure metals. Those features, along with a resistance to corrosion, make gold useful in applications such as dentistry and electronics. Gold often appears naturally as part of a solid solution that is part gold and part silver–usually more than 90% gold. Gold can be found and mined in many forms, including flakes, grains, or larger nuggets [see also Platinum/Gold Ratio Suggests Economic Slowdown].

Mining for gold is only economically viable if the metal is found in certain concentrations. Thanks to significant appreciation of gold prices in recent years, deposits with gold occurrences as low as 0.5 parts per million may be worthwhile; a concentration of about 60 times that level is needed before gold becomes visible to the naked eye, meaning that gold that appears invisible can often be valuable.

Unlike many metals, demand for gold in industrial applications is minimal. About half of new gold mined is mixed with other concentrations of precious metals like copper, silver, and palladium, and are used as jewelry. Since the financial crisis and most recent rush, investments now account for a significant portion of demand as well. Thanks in part to the introduction of gold exchange-traded funds (ETFs) in recent years, demand for gold from individual investors has increased significantly [see also Company Spotlight: Barrick Gold Corporation (ABX)].

Central banks of dozens of countries around the world hold gold bullion as a store of value and guarantee to debt-holders  Gold is occasionally used in the settlement of international transactions. The largest holders of gold include:

Country Holdings (tonnes) % Forex Reserves
U.S. 8,133 77%
Germany 3,396 74%
IMF 2,814 n/a
Italy 2,452 74%
France 2,435 74%
China 1,054 2%
Switzerland 1,040 17%
Russia 874 10%
Japan 765 3%
Netherlands 613 63%

Other precious metals, such as silver and platinum, are used more widely in industrial applications such as automobile components. Because a significant portion of gold supply is used as an investment, the correlation between prices and the strength of the global economy may be considerably less than other metals (in certain environments, gold may be an effective equity market hedge).

Gold Supply And Demand

Gold comes primarily from mining activity, with total global production approximating to 2,560 tons. South Africa has historically accounted for a significant portion of global gold supplies; in 1970 the country accounted for almost 80% of the world’s supply, though that percentage has declined to about 7% today. There has been a history of poor working conditions in South African mines, and as worker strikes become more frequent it seems that the nation will have to make some changes to increase production levels again.

In 2007 China accounted for more gold than South Africa, the first time in more than a century that the African country had not been the world’s largest supplier. The U.S. and Australia have also surpassed South Africa in terms of production in recent years. It is estimated that South Africa has produced about half of the gold ever mined, though the country now accounts for only about 11% of global reserves. Australia accounts for close to 15% of global reserves, illustrating the extent to which known gold deposits are spread around the globe. (all data below is in tons)

Country 2010 Production 2011 Production Reserves
U.S. 231 237 3,000
Australia 261 270 7,400
Brazil 58 55 2,400
Canada 91 110 920
Chile 38 45 3,400
China 345 355 1,900
Ghana 82 100 1,400
Indonesia 120 100 3,000
Mexico 73 85 1,400
Papua New Guinea 68 70 1,200
Peru 164 150 2,000
Russia 192 200 5,000
South Africa 189 190 6,000
Uzbekistan 90 90 1,700
Other 559 630 10,000
Global Total 2,560 2,700 51,000

Price Drivers

Unlike many investable assets, there are no cash flows associated with physical gold. And unlike many industrial and precious metals, there are few industrial applications for the metal either. As such, identifying the exact reasons for a move in gold prices can be tricky; the metal often reflects investor sentiment, and can respond to indications of inflation expectations, general economic health, and the strength of fiat currencies such as the U.S. dollar. Below, several of the primary price drivers of gold are highlighted:

  • Inflation: Gold often acts as an inflation hedge, with interest in the metal increasing when price increases show signs of accelerating.
  • New Discoveries: As with any metal, the supply of gold can have a significant impact on prices. The pace of new gold discoveries has slowed considerably in recent years, though there are still a number of firms globally engaged in searching for new deposits of the precious metal. To the extent that any major discoveries are made, prices could decline. If discoveries of the metal slow even further, upward pressure on prices could materialize.
  • Reserve Demands: Governments and central banks are major buyers of gold, and the behavior of these institutions can have a major impact on the price of the yellow metal. China in particular could have a major impact on global gold prices, since precious metals account for only a minor portion of foreign exchange reserves.
  • Investment Demand: From one perspective, demand for gold as an investment vehicle is a self-fulfilling prophecy. Because gold can be stored at a relatively low cost and held indefinitely, stronger investors interest in gold leads to higher prices for the metal. Assets in gold ETFs have skyrocketed in recent years, and the increased availability of these products has likely contributed to the rally in gold prices. To the extent that investment demand accelerates, upward pressure on gold prices could remain.

Investing In Gold

Gold has appeal as an investable asset for several reasons. It can serve as a safe haven, attracting assets when global equity markets show signs of instability. The yellow metal also has appeal as an inflation hedge or alternative to fiat currencies, positioning to potentially appreciate in a wide variety of environments [see also For Day Traders: The Most Liquid ETF for Every Commodity].

There are a variety of options for accessing gold, including futures, ETFs, and physical exposure:

Physical Gold

Because gold maintains an extremely high value-to-weight ratio (a troy ounce is worth close to $1,500), it is possible and feasible for investors seeking exposure to simply buy gold coins or gold bullion. This strategy has the benefit of eliminating the nuances of a futures-based strategy, but may require secure storage arrangements. There is no shortage of dealers in gold coins, jewelry, and other forms of the metal.

As discussed in more detail below, there are also ETFs whose underlying assets consist of gold bullion. These funds offer exposure to spot prices while allowing for economies of scale that can minimize storage expenses.

Gold Futures

Gold futures are traded on the COMEX, with contracts priced in dollars and cents per troy ounce (one troy ounce is equivalent to about 31 grams, and is equal to about 1.1 avoirdupois ounces). Trading in gold futures, which carry the product symbol “GC”, occurs on the CME Globex, CME ClearPort, and in Open Outcry trading in New York.

Gold futures are available during the current calendar month; the next two calendar months; any February, April, August, and October falling within a 23-month period; and any June and December falling within a 72-month period beginning with the current month. The contract size for gold futures is 100 troy ounces.

Gold futures are subject to NYMEX position limits.

Gold Miners

Investors can also obtain exposure to gold by purchasing stocks of companies that are engaged in extracting and selling precious metals. Like most companies, the profitability of gold miners depends on the prevailing market price for the products they sell. As such, mining companies tend to realize higher profits when natural resource prices are elevated—especially if significant portions of the cost structure are fixed in nature. Mining stocks tend to trade as a leveraged play on the underlying resource, meaning that the movements in price are often more significant than changes in the related commodity over the short term.

Many gold mining companies also are engaged in the extraction of other precious and industrial metals such as silver, platinum, and copper. However, because gold is significantly more valuable than silver and copper and more common than platinum, it will often account for the majority of revenue and earnings of mining companies. Major gold miners include:

  • Barrick Gold Corporation (NYSE and TSX: ABX)
  • Goldcorp (NYSE: GG and TSX: G)
  • Newmont Mining (NYSE: NEM and TSX: NMC)
  • Newcrest Mining (TSX: NM)
  • AngloGold Ashanti Limited (NYSE: AU and Euronext: ANG)

[see the holdings of the Gold Miners ETF for a more detailed list of assets]

Gold ETFs

There are multiple ETFs offering exposure to gold as well, including both funds that invest in gold futures contracts and funds that invest in physical gold bullion. While the returns generated by these funds will generally be similar—especially in the short term—over longer periods certain strategies may perform better depending on the slope of the futures curve. Gold ETFs include:

  • Gold SPDR (GLD): This ETF invests in physical gold, meaning that it will reflect changes in spot prices of the commodity.
  • iShares COMEX Gold Trust (IAU): This ETF also invests in physical gold, and is cheaper than GLD in terms of expense ratio.
  • ETFS Physical Swiss Gold Shares (SGOL): This ETF invests in physical gold, storing bullion in Switzerland.
  • ETFS Physical Asian Gold Shares (AGOL): This ETF invests in physical gold, storing bullion in Singapore.

Futures-based gold ETFs include:

  • PowerShares DB Gold (DGL)
  • E-TRACS UBS Bloomberg CMCI Gold ETN (UBG): This product is an exchange-traded note, meaning that investors are exposed to the credit risk of the issuer.

Other gold exchange-traded products include:

  • RBS Gold Trendpilot ETN (TBAR): This product oscillates between exposure to gold and cash depending on momentum factors and recent performance.
  • FactorShares 2x Gold Bull/S&P 500 Bear ETN (FSG): This ETN offers leveraged exposure to the spread between gold and the S&P 500 on a daily basis.

Leveraged gold ETFs include:

  • PowerShares DB Gold Double Long ETN (DGP)
  • PowerShares DB Gold Double Short ETN (DZZ)
  • PowerShares DB Gold Short ETN (DGZ)
  • ProShares Ultra Gold (UGL)
  • ProShares UltraShort Gold (GLL)
  • VelocityShares 3x Long Gold ETN (UGLD) 
  • VelocityShares 3x Inverse Gold ETN (DGLD)

There are also a number of ETFs that provide exposure to gold indirectly through investments in stocks of companies engaged in the discovery, extraction, and sale of the metal. These ETFs include:

  • Gold Miners ETF (GDX)
  • Pure Gold Miners ETF (GGGG)
  • Junior Gold Miners ETF (GDXJ)
  • Global Gold and Precious Metals Miners Fund (PSAU)
  • Gold Explorers ETF (GLDX)
  • MSCI Global Gold Miners Fund (RING)
  • Daily Gold Miners Bear 3x Shares (DUST)
  • Daily Gold Miners Bull 3x Shares (NUGT)

Resources On Gold Investing:

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Disclosure: No positions at time of writing.

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Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

24 Responses to “Investing In Gold: The Definitive Guide”

  1. [...] This article was originally written by Carolyn Pairitz, and posted on CommodityHQ. [...]

  2. John Bass says:

    The newest book on investing in gold was published this past month and is available on Amazon.com ” The AMP Gold and Precious Metals Portfolio ” is focused on 70 gold ( and silver ) miners and the ETFs mentioned above – but with the addition of Sprott funds headed by Eric Sprott of Canada.
    One of the exploration companies discussed Guyanna Gold ( GUY) had a ” pop” today but no news release as yet.

  3. [...] Coming out of October, gold investors may feel a bit bearish given the metal’s week performance, but this too follows the historical trend, as October has consistently been the worst month for this commodity in the last 15 years. Other notable downturns come in March where it appears that many sell of or take profits. Should gold stick to its decade and a half long trend, now could be a good time to buy in low and ride out a potential short-term rally [see also Investing In Gold: The Definitive Guide]. [...]

  4. [...] and futures-based investments in gold have been a mainstay in many investors portfolios for years now, but allocations to gold mining and [...]

  5. [...] ago, silver had been surgingrelatively under the radar. Its strong gains were out-shined by gold, despite the white metal performing better than its more popular counterpart. But recent weeks have [...]

  6. [...] may not seem like a large amount, but has been enough to support a multi-billion dollar industry of gold investing and jewelry collecting among consumers. Much gold has yet to be mined from below the earth’s [...]

  7. [...] gold investing has surged in recent years, so too has the popularity of the gold ETF space. These funds have [...]

  8. [...] gold investing has surged in recent years, so too has the popularity of the gold ETF space. These funds have [...]

  9. [...] As gold investing has surged in recent years, so too has the popularity of the gold ETF space. These funds have allowed for investors of all kinds to add exposure to an asset that was once difficult for retail investors to afford. Now, there are a multitude of ETFs tracking this yellow metal, each with their own nuances and methods for providing the best exposure. But many are left wondering which gold ETF is the best [for more gold ETF news and analysis subscribe to our free newsletter]. [...]

  10. [...] ago, silver had been surgingrelatively under the radar. Its strong gains were out-shined by gold, despite the white metal performing better than its more popular counterpart. But recent weeks have [...]

  11. [...] had been a great experience that made him tougher. At 23, he returned to Brazil to find a major gold rush occurring in the Amazon River basin. Seizing upon the opportunity, he started a trading company to [...]

  12. [...] (EPA:BNP) recently cut its outlook for gold in the next two years, and similarly agrees that the precious metal will rise in 2013, only to pull back in 2014 as the bubble finally gives [...]

  13. [...] bear fund is geared towards those with a negative outlook for the precious metal. Unfortunately, many investors carry a bullish sentiment on the precious metal, making this fund [...]

  14. [...] Since that time, Paulson has made some big bets concerning the health of the global economy by accumulating gold and gold mining stocks at a fevered [...]

  15. [...] average price in 2012 fell at $1,679/oz, and Citi expects the yellow metal to add to that tally for the coming year. Citing President Obama’s re-election and the [...]

  16. [...] The next, and possibly more important question, is whether or not you are buying or selling gold in the current environment. Markets have been on a tear this year, but many feel as though the fundamentals for such a rise simply are not there. Still, as markets continue to chug along, gold prices have been feeling the pressure, dropping more than 6% in the first seven weeks of the year. The “risk-on” sentiment has led to a surge in equity inflows, putting the pressure on everyone’s favorite precious metal [see also Investing In Gold: The Definitive Guide]. [...]

  17. [...] Direxion Daily Gold Miners Bear 3x Shares (DUST) – With the goal of achieving three times the inverse of the daily performance of the NYSE ARCA Gold Miners Index, this fund gives investors a way to bet against gold producers. Since their valuations depend on gold prices, gold producer equities represent a way to bet on gold price sentiment without betting on gold directly. The fund’s 1.08% expense ratio is a bit steep for an ETF, but the fund has reasonable liquidity, despite just over $30 million in total assets, with diversified exposure to Canada (62.88%), the U.S. (17.15%) and South Africa (10.8%) [see also Investing In Gold: The Definitive Guide]. [...]

  18. [...] Investing In Gold: The Definitive Guide [...]

  19. [...] Much ado has been made about gold prices making fresh lows and when the right time is to buy the yellow commodity, but its sister metal, silver, has been somewhat overshadowed, as it too has been faced with a [...]

  20. [...] Much ado has been made about gold prices making fresh lows and when the right time is to buy the yellow commodity, but its sister metal, silver, has been somewhat overshadowed, as it too has been faced with a [...]

  21. [...] you feel that gold is simply too weak of an investment in the current environment and you wish to short it, there is [...]

  22. [...] and futures-based investments in gold have been a mainstay in many investors portfolios for years now, but allocations to gold mining and [...]

  23. [...] Gold is one of history’s most famous and important metals and has been the basis for monetary systems for thousands of years.  This influential metal that has sculpted our history may not even be from our planet. Researchers have recently found new evidence that gold actually comes from the collisions of dead neutron stars. While this discovery may do little as a price mover for this precious metal, it may give us an insight into just how rare gold is [for more commodity news and analysis subscribe to our free newsletter]. [...]

  24. [...] may not seem like a large amount, but has been enough to support a multi-billion dollar industry of gold investing and jewelry collecting among consumers. Much gold has yet to be mined from below the earth”s [...]

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