Gold Trading: How to include Gold in an Investment Portfolio

According to a report released by the Standard Bank on October 6, 2011, the interest rate policy, increased government debt and quantitative easing are expected to lead to a higher gold price in 2012. Over the past five years, gold has been one of the top performing commodities and has gone up by about 175 percent over that period. Even as investment experts like Amine Bouchentouf are proclaiming gold to be a safe haven investment, one needs a thorough understanding of the gold trading market to be able to optimize on such products.

Gold Options

There are many different ways in which gold can be included in one’s investment portfolio.

Physical Gold: Over the years, investment experts have tracked Gold’s maintained value through political and social upheavals, wars and natural disasters. Physical gold is said to be the most secure and popular way of owning gold. Buying bullion bars and coins is a very popular way to own physical gold. These products are sold at a premium over the actual spot gold price and are a highly liquid. One needs intricate knowledge of the fluctuations of the gold market to be able to optimize buying and selling physical gold. Buying government minted gold coins and bars, assures certification of gold purity and is a safe way of dealing in gold which also has legal tender. Physical gold is generally considered a longer-term hold.

Gold Certificates: These are certificates of ownership of gold. The banks give these for allocated as well as unallocated gold. Unallocated gold certificates are a form of fractional reserve banking and allocated certificates are correlated with specific numbered bars.

Gold Mutual Funds: Typically included in this category, are mutual funds pursuing capital appreciation of companies engaged in the mining, distribution, or processing of gold, by investing primarily in their equity securities. Unlike bullion there is no need for storage and these funds can be traded on the stock market like any other stock. Such mutual funds have price fluctuations that usually correlate positively with gold bullion prices, and typically leverage due to company operating leverage. Factors that should be kept in mind before indulging in such investment opportunities are your investment style, sales charges, expense ratios, expected portfolio turnover and a track record of the past performance of the company (though this should not be taken to be a guarantee of future performance).

ETFs: Gold Exchange Trading Funds refers to buying shares in a fund, based solely on the existing market price of gold. Thus, there are no leverage or storage problems. The fund purchases mass quantities of physical gold and bears storage costs. Then, they issue shares, the value of which fluctuates according to the prices of gold bullion. It is a flexible trading option as most such funds have a minimum investment but you can buy them in portions of an ounce. There will however, be a brokerage fee attached to such gold trading. ETFs are generally considered a shorter-term investment.

Gold Futures: Trading in gold futures eliminates any storage, transportation costs and leverages on the current and future gold prices. The trading method includes buying gold at the current spot gold prices but setting the delivery date well into the future to allow for speculation. Delaying the settlement creates the need for a margin trading system, which is the most important aspect trading in gold futures.

Other popular ways of owning physical gold is through jewelry or numismatic coins. While jewelry is a ready stock of physical gold, numismatics are rare gold coins and ornaments which have values at much more than the price of gold because of the historical significance attached to them.