Every now and again, investing in gold becomes popular on the ASX. Like shares, cash, bonds and property, gold is a distinct asset class and one that offers its own set of pros and cons. Today is one of those times when interest in gold is rising, thanks to the recent geopolitical uncertainty and violence in the Middle East.
But investing in gold may not be the right move for everyone. So today, let's discuss the advantages and disadvantages of investing in this yellow precious metal.
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Why should investors buy gold?
Gold has many attributes that investors like to see in an investment. For one, it is a physical asset with legitimate scarcity and a lot of perceived value. There's a reason why people have been seeking out and hoarding gold throughout all of human history. It's rare, beautiful to look at and wear, and doesn't rust or corrode.
Gold also tends to hold its value over time. This makes it an appealing investment for investors concerned about inflation, deflation or currency debasement (money printing).
The precious metal is also looked at as a safe haven investment. Any time there are global financial crises or geopolitical instability, investors often turn to gold as a safe harbour of sorts. This tends to make gold-based investments inversely correlated to other asset classes (like shares), which many investors also value.
The case against owning precious metals
While some investors seek out gold or other precious metals like silver and platinum, others avoid them entirely. The latter group famously includes Warren Buffett. Buffett's main criticism of gold is that it doesn't actually function as a proper investment because it doesn't yield any cash flow. In this way, gold can't be counted on to compound in the same way that quality shares can.
Unlike shares, bonds or property, gold won't pay you to own it. In fact, it will probably cost you money if you buy the physical bullion, thanks to the costs of insuring and storing it. Even if you own gold indirectly, such as through an exchange-traded fund (ETF), you will still be paying for the privilege through fees.
How to buy gold on the ASX?
If you do want to own some gold in your portfolio though, there are many ways of doing so. You can own the physical metal through bars, coins and other bullion of course.
While many investors who appreciate the 'physical value' of gold might opt for this choice, it is almost certainly the most costly method of doing so. You will typically pay a spread wherever you buy or sell the bullion itself. And then there are the storage and insurance costs of holding the bullion that we've already discussed.
That's why many investors choose a gold ETF instead. The ASX is home to a few gold ETFs.
Some, such as the Global X Physical Gold ETF (ASX: GOLD), give investors indirect exposure to gold bullion that is stored in a bank vault somewhere.
Others, like the VanEck Gold Miners ETF (ASX: GDX), allow investors to indirectly invest in gold by owning shares of gold mining companies.
Gold miners as an investment
A gold miner owns the gold that its mines contain, and as a shareholder, so do you by extension. However, gold miners also have to fork out money to extract, purify and sell this gold. As such, some miners are profitable, while others might not be, depending on the gold price at the time.
This makes investing in these mining companies inherently more risky than owning the metal yourself. There is the risk of bankruptcy here that is not present in owning gold bullion or a bullion-backed ETF.
The upside of this increased risk is that a gold miner can pay you to own it, just like any other ASX share. A gold miner can pay its shareholders dividends and franking credits, undertake share buybacks and grow its share price over time.
As such, many gold investors like to own miners or ETFs that track gold miners over gold bullion itself.
But at the end of the day, gold investors have to go with the assets that they feel most comfortable with, and that suit their individual needs and goals.
