Investing in Gold: Strategies, Risks, and Considerations

Investing in gold can diversify portfolios but requires careful consideration of its volatility and lack of income generation.

### Exploring Gold Investments: Methods, Benefits, and Risks
* 📈 The recent surge in gold prices has sparked renewed interest in purchasing gold, prompting a discussion on various investment methods and their **advantages and disadvantages**.
* 🔍 Understanding what gold is essential, as it typically **holds value during market shocks and crises**, providing safety, although it does not **generate income like stocks or bonds**.
* ⚠ Gold is a volatile asset, similar in volatility to **global stock indices**, and is not a reliable **short-term investment**, especially for those needing liquidity, like a **house deposit**.
* 💰 Historically, stocks have **outperformed gold** in long-term returns, with gold serving primarily as a way to **track inflation** rather than a hedge against it.
* 🏦 Incorporating gold into a diversified portfolio can enhance overall performance, with studies suggesting a **30% allocation to gold** in optimal retirement portfolios.
* 🏠 Physical gold can be purchased directly, offering the benefit of **tangible ownership**, but poses risks regarding **storage and liquidity**, while gold funds provide **easier access and lower fees**.
* ⛏ Investing in gold mining stocks can yield **dividends and potential equity risk premiums**, but they are still subject to **stock market fluctuations**, while junior gold miners represent a **high-risk, speculative investment**.
* 📊 Evaluating gold's fair value involves considering inflation, interest rates, and currency strength, with current models indicating that gold may be **overpriced by 25%**, suggesting **caution for potential investors**.

the price of gold has been surging recently, so there's renewed interest in buying it. But how do you do that? And putting FOMO aside, why should we buy gold in the first place? In this video, we'll look at six ways in which you can invest in gold by examining the advantages and disadvantages of each approach. I'll help you choose a way of investing in gold that might be right for you. Remember, if you do enjoy our content, please do like this video and subscribe to our channel. Let's start with what gold is and what gold is not. The reason for that is I think there are many misconceptions about what gold provides and its essential value. So, let's start off with what gold is. And I think that something which is definitely true is that when there's a huge shock in markets, when stocks are falling, bonds are falling, and there's a huge crisis, gold usually holds its value. It provides real safety in those kind of extreme scenarios. Now, that's not always true. For example, it had a bit of a wobble in 2020.

with the COVID selloff, but generally during big crises, it provides a level of safety. One of the drawbacks of gold is that, unlike buying a stock or buying a bond, which generates an income for you in the form of a dividend or coupons, gold is a wasting asset. It doesn't generate an income for you. In fact, it often costs money to hold gold, and that's because it has to be stored safely. And as we'll see later, that has an effect on the price of gold and its reaction to interest rates. The third point is that gold is itself quite volatile, quite crashy. So by incorporating it into your portfolio, sometimes it'll be a dragon return. In fact, if you look at the volatility of gold, it's kind of similar to a global stock index. Now let's think about what gold isn't. It's often stated that gold is a good inflation hedge, whereas if you actually look at any commodity, it'll track inflation over the long term because anything that's useful, by definition, will have to track inflation.

if it lags inflation, it'll become super cheap, and if its price growth exceeds inflation, then it'll become super expensive. So, I think one reason not to buy gold is as some kind of inflation hedge. Stocks usually are a much better way of beating inflation long-term. And then the final point, which is related to the point about crash and volatility, is that gold is not safe, certainly over the short term. So, if you have a huge allocation to gold, then it's not going to be a safe investment. If you've got to pay a house deposit in a year's time, say, you'd be crazy to put all of your money into gold waiting for that deposit because it could crash. I think it's also useful to look at the long-term return of gold and compare it with stocks and bonds, but also inflation. Here, you can see that comparison over a 150-year period. Now, notice that before 1970, the price of gold was linked to the value of the dollar. Then, in 1970, the price of gold

was allowed to float freely, and it surged in value. But if we're thinking about long-term return, notice that stocks are by far the best investment, followed by bonds, and then followed by gold. It has beaten inflation over this period, but usually, you just expect it to track inflation. There's no additional risk premium for investing in gold like any commodity, so just be realistic about the kind of returns that you can expect from gold long-term and the role that it plays in your portfolio. Now, that's not to say that you shouldn't incorporate some gold into your portfolio. For example, if you look at the Portfolio Charts website, which is created by Tyler, he's recently written a beautiful research note about long-term safe withdrawal rates, where he looks at what you can put into your portfolio during the drawdown period in retirement, and that's in order to maintain a certain level of spending without running out of money. Now, time and time again, he finds that in back tests, incorporating some gold into your portfolio is a really good idea. That's despite the fact that when you take it

on its own, it is very crashy, and its return has been very poor. Whereas, if you actually mix it with other investments like stocks, bonds, and other commodities, it actually adds a lot to your portfolio. In fact, what he found was for the best portfolio in terms of safe withdrawal rate globally, gold made up about 30% of that portfolio, a pretty sizable allocation. And he personally uses a beautiful metaphor. He says, Do you like salt on your food? Can you eat an entire box of it in one sitting without getting extremely sick? Same concept. So, on its own, gold can be toxic, but when it's mixed in with other assets, it can provide diversification for your portfolio and improve your outcome over the long term. So now, what we're going to do is to go through these different ways in which you can buy gold if you choose to, and with each one, we'll think about the benefits and drawbacks of getting exposure that way. And we'll start with physical gold owned directly by you. So here, we're talking about buying the

shiny yellow stuff such that you can actually touch it. Now you can store it at home. Of course, that's risky because if you get robbed, you'll lose your investment. Another way of doing it is to store it in a deposit or maybe in a safe deposit box, but of course, that incurs a cost. But one of the benefits of physical gold, at least in the UK, is that if you buy bullion coins from the Royal Mint, they're exempt from capital gains tax. Now, that only applies to UK residents, and that's because of the gold coin status as legal British currency, as you can see here on the Royal Mint's website. Now, some people just love the idea of physical gold that they can touch because they don't trust fund managers to keep it safely. If there is some kind of world-ending event, then at least you'd be able to hold that physical gold and not worry about electronic systems not showing you're the owner. So for real gold bugs, this is usually the preferred way of getting exposure. However, I think there are certain drawbacks. The first

one is the safety and the storage aspect. The second one is to do with liquidity and selling it. It is a bit of a pain to sell physical gold. Plus, I'm not convinced you always get such a good price as you would if you buy it electronically. Now, you can't hold physical gold in an Isa (an individual savings account), but you can in a self-invested personal pension. There are restrictions as to the purity of the gold. You can't use coins, for example; they're not pure enough. And HMRC also insists that it's stored safely at a certified depository. But given the capital gains tax benefit of holding gold bullion in the form of coins, I'd probably hold it outside the Sip anyway. Another way of buying gold is indirectly via a fund. Now, personally, I'd probably avoid buying physical gold. I'm not really a gold bug, and I'm not a gold maximalist. I'd prefer to hold it via this fund form, and the reason for that is it's just so liquid. If you wanted to

sell it tomorrow. You could do that and do so very quickly and cheaply, and of course do it online. You don't have to physically hand your gold to someone in return for money. Plus, there are lots of gold funds out there now, and due to competition, the total expense ratio of those funds is very low. Here, for example, beside me, you can see a list of those ETFs, actually exchange-traded products, because strictly speaking, they're not ETFs. But these would allow you to get that gold exposure for a very low fee of 0.11%, maybe 0.12% for the cheapest funds. If you live in the US, the choice of funds which give you exposure to gold is much wider, of course, and here are the largest 10 by total assets. The two really big funds are GLD and IOU. Now, when I do speak to real gold bugs, they tell me they don't like these funds because they're paper gold. Personally, I'm not convinced by that. If you look at the fact sheet, for example, for one of

these funds, in this case, the one from XT trackers. You can see that when you buy some of the fund, it is backed up by physical gold. They'll go out and buy gold bars, and they'll store them somewhere safely. As more people buy some of their fund, so it is physically backed by the metal somewhere. You just have to trust the fund manager that they've done that and kept the records properly and legally. You can see that they say in the fact sheet that the issue has direct and sole ownership of the gold, which is stored in Secure accounts. Some funds will tell you where it's stored in case you're worried that it's in another country. How much of that gold are you entitled to? Well, it's just your proportion of the fund, so that's called the metal entitlement, which you have as an owner of the fund. And then finally, the value of your holding depends on, obviously, the price of gold. They call that the gold spot price, and that's usually calculated according to a standardized index minus any fees which

you're being charged by the fund manager, so physical gold is good if you're very paranoid about not trusting fund managers and you don't trust paper gold. But personally, I prefer the liquidity of holding things like gold funds. Plus, if you have a gold fund, you can hold it inside an ISA or a SIP, or indeed outside an ISA or AIP in a general investment account. So, I think it gives you the greatest flexibility. Now, people often say to me, What's the cheapest fund to do X or Y? And we've actually got a list of the cheapest funds for US and UK investors, which we maintain. So, if you do become a premium member on our website, then you'll have access to that cheapest fund list, which you can see beside me here. Another choice is to get exposure to gold indirectly via gold miners. So, one way to do that is to buy a physical gold mining company. So, that involves dynamite, diggers, and dumpers. These people dig the ore out of the ground, they purify it, and they sell it. Notice

I've also put copper and silver there in parentheses because those are often found with gold, and they're obviously quite profitable metals in their own right. And so often what you find is that there isn't a pure gold mining company; it also mines those other metals. Now, the benefit of buying a gold mining company is that, unlike gold, where you're not paid an income, for a gold mining company, you will be paid a dividend. So, this is not a wasting asset. Furthermore, because these are stocks, you're going to earn the equity risk premium. So, I think you stand a greater chance of beating inflation long term. However, as a hedge for equity, you're buying equity, which clearly is not going to work if there is a huge crash in the equity market. Well, gold miners will sell off along with all the other stocks, so that argument for holding gold via gold miners doesn't really stack up. But there are also other ways of getting gold exposure via buying shares. So, you can own gold royalty companies where the company pays a mine or a mining operation an upfront fee in

return for revenues, which are generated from a mine, or alternatively, the profits generated by a given mining operation. Now, you're assuming the management knows what it's doing; it chooses the good mines rather than the bad mines. But here, you're taking less of a risk, assuming they've made the right choices, because you're not exposed to all of the operational risks that go along with a mine. And then finally, we've got gold streams. Now, these are companies which are paid in physical metal rather than cash payments. So, it's the same idea; there's an upfront payment to a mining operation, but then the company gets some proportion of the production of the mine in metal. So, here, for example, are a selection of mining companies. One of them, Franco Nevada, is a gold royalty stock. So, it's really important to understand what type of exposure you've got. It's not just about going out there and buying a random mining company, and you probably want to have more than one mining stock in order to diversify your exposure. So, the benefits for mining.

stock are that you get the income. The dividend, usually the dividends, are also quite high. It is linked to the price of gold. It'll go up if the price of gold goes up. It'll go down if the price of gold falls. But it's not such a great hedge against equity. It'll fall along with the rest of the stock market if there is a big selloff. The final way we'll look at to get exposure to gold is via Junior Gold Miners. So here we throw out the idea of a safe hedge altogether because these are very speculative stocks. Usually, they're small caps, which immediately tells you they're going to be volatile. But also, these are gold exploration companies, or even if gold's being found, it'll be early-stage development of mines that they'll be involved in. Now, that's very risky. So some of these companies will fail. If they do succeed, however, in identifying new gold reserves, then it can have a huge payoff. So Junior Gold minor stocks will be very volatile. This is the kind

of growth stock approach to investing in gold. Personally, I think I wouldn't touch this, or if I did, it would be in very small size because it is very speculative. It's not a hedge; it's just speculation. To end, we'll take a look at the fair value of gold. Now, normally, when you try to price an equity, for example, you look at the cash flows which it'll generate in the future. You'd guess what those would be, and then you discount those future cash flows to get a present value. So, for cash flow-generating assets, you can always build a discounted cash flow model to see roughly what it should be worth. For gold, however, remember that it doesn't generate an income; it's a wasting asset. So, its price, according to a discounted cash flow model, would be negative, which is nonsense. But that doesn't mean that we can't have a go at working out what it should be worth. So, as I said, the price of gold should roughly track inflation long term. So, that's one input to our model. Another

important one is interest rates because if interest rates are high, you can buy a Government Bond, which will pay you a very safe income, and that makes it much more attractive than gold. So, high interest rates should push down the value of gold. And then finally, if we think about currency, the price of gold is measured in dollars. So, high price of gold is actually high price relative to dollars. So, dollar strength pushes down the price of gold, and dollar weakness pushes up the price of gold. So, if we combine those ingredients, the level of CPI inflation, the real interest rate in the US, and finally, the strength of the dollar, we end up with a very simple fair price of gold. Here, you can see that going back to roughly 2001. So, the fair value from the model is in blue, and the actual price of gold is in yellow, of course. And what you can see is there are huge deviations above and below that trend that the model would suggest is the fair price, but it does give you a rough idea of what the price of gold

should be, and at the moment, it's very overpriced according to this fair value model, and not just by a little bit, but by 25%. So, while I wouldn't trade on the basis of a model like this, a very simple model, I think it is useful to know roughly what the price of gold should be given those fundamental drivers. Now, of course, this model will be out of date by the time you see this video, but if you do have a premium membership on our website, you get access to this value model, the most up-to-date one here in our trackers. So, I just click on the fair value tracker, and this will give you the fair price of gold according to that very simple model. We also have one for silver, and what's kind of interesting is that silver is also overpriced at the moment, in fact, even more so than gold. So, if you are interested in joining our membership, it's very easy. Just go to our website, pensioncraft.com/membership, to learn more, and hopefully, this video has given you some insight into whether you

think gold is right for your portfolio, but also how to get exposure to it. I don't think it's that easy to decide. Personally, I think the best way to get exposure for me is to go for one of those funds, one of those gold funds. I just like the liquidity and the fact I can buy and sell it very cheaply, and I don't have to worry about storage. But that's just me and my personal preferences. Yours, I'm sure, will be different to mine. And as always, thank you for listening.

Best Way to Invest in Gold 2024

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

If you want to learn how to become a better investor then why not join our friendly membership at pensioncraft.com?


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Gold's recent price surge has sparked renewed interest in buying it, with the metal providing safety during market crises.

However, gold is a wasting asset that doesn't generate income and can be volatile, making it a risky short-term investment.

While often considered an inflation hedge, gold's long-term price growth is similar to other commodities, and it may not be the best option for beating inflation compared to stocks.

Gold has surged in value but offers limited long-term returns compared to stocks and bonds.

Incorporating gold into a diversified portfolio can improve outcomes and provide a safe withdrawal rate in retirement.

Physical gold ownership has benefits, such as tax exemptions in the UK, but also carries risks and drawbacks.

Investing in physical gold has challenges, including liquidity, selling difficulties, and storage restrictions.

Gold can be held in a self-invested personal pension, but coins are not allowed due to purity issues.

Alternatively, investing in gold through funds offers liquidity, low fees, and the advantage of being backed by physical gold.

Investing in Gold: Options and Strategies

Physical gold is a good choice for those wary of fund managers, while gold funds offer liquidity and flexibility in investment accounts.

Gold mining companies provide exposure to gold indirectly, offering dividends and the potential for long-term growth.

Other options for gold exposure include gold royalty companies and gold streams, which provide a share of the mine's production in metal.

Investing in Gold: Strategies and Fair Value

Gold stocks provide income through high dividends and are linked to gold prices, but they can also fall during market selloffs.

Junior gold miners offer a speculative investment with high volatility, aiming for significant payoffs from discovering new gold reserves.

The fair value of gold is influenced by long-term inflation, interest rates, and the strength of the dollar, leading to deviations from its actual price.

The Current Overpricing of Gold and Silver

Gold is currently overpriced by 25% according to a fair value model.

The model, which is available to premium members on the website, also indicates that silver is even more overpriced than gold.

The speaker suggests that investing in gold funds may be the best way to gain exposure to gold, offering liquidity and low transaction costs.