Many ancient civilizations have used gold as currency. Egyptian civilizations buried huge amounts of gold with the pharaohs after they died as they believed that they would be able to use them in the afterlife. Up to 1944 prior to the Bretton Woods accord, the mighty US dollar was tied to a fixed quantity of gold held by the government.
From an investment perspective, Gold is usually a good hedge against inflation and depreciation of paper currencies. When the value of the dollar falls, the price of gold will generally rise.
Here are three methods you can use to incorporate gold in your investment portfolio.
Physical Gold Investment
One tried and true method of investing in gold is directing holding gold in the form of bars or jewelry. However, above a certain amount, storage and security can become an issue.
It is also a less liquid vehicle of investment meaning there will be certain delays when converting physical gold to cash. It may be difficult to find willing buyers and transaction / transportation costs may degrade investment returns. Given such frictions, the market price of gold could fluctuate significantly between the time you initiate and close a sale.
Derivatives: Futures and Options
Most institutional investors will participate in gold trading and investment via derivatives. In the United States, this can take the form of exchange traded futures and options. This activity is regulated by the CFTC. Outside of the US, retail investors can enter into contracts for differences (CFDs) with various brokers to speculate on the price fluctuations of gold.
Exchange-traded Funds and Mutual Funds
A popular vehicle US retail investors use for gold investment and trading include Gold Exchange Traded Funds (ETFs) and mutual funds. ETFs are financial instrument that trades on a stock exchange and represent partial ownership in a pool of assets. The underlying assets of a gold ETF may consist of gold linked derivatives or physical gold bullion. Some gold ETFs are also “short” funds that rise in value when the price of gold falls.
Another investment option for retail investors is gold mutual funds. Some funds hold the portfolios of gold stocks. These are stocks of companies like Newmont Mining which mines gold. This is an indirect way of investing in gold. Note the value of the funds is largely tied to the stocks of gold companies rather than the commodity price itself. There are some periods where gold may rise but gold company share prices can fall.