Why and how to invest in gold and silver
Gold and silver have been the main measure of value for many centuries. Money was minted in gold (for example, a ducat) or silver (for example, a kopeck). In the following centuries, monetary systems evolved.
A hundred years ago, the currencies of many countries were based on gold (gold standard). Currently, money is not backed by metals, which is why it is called fiat money. There is also a decrease in the purchasing power of money, which is reflected in inflation. Some investors are trying to protect themselves from inflation, for this they buy stocks, real estate or bonds.
Renowned investor Ray Dylo has built an «All Weather Portfolio» in which he recommends holding 7.5% of assets in gold and a similar amount in commodities.
Gold and silver do not need to be bought in physical form, but can be invested in the stock market.
How to invest in gold and silver through ETFs and derivatives
Physical purchase of precious metals is not always the best way to invest in gold.
Investing through the exchange limits tax expenses as well as storage costs (safe deposit box, safe deposit box). At the same time, you can earn both on the growth and on the decrease in the cost of precious metals. On the exchange, you can invest in gold using:
ETFsGold futures are available on the US stock market (COMEX). The unit of measurement for gold is the Troy ounce, which is 31.1 g. The following futures can be distinguished:
Gold Futures (GC) — one contract is worth 100 troy ounces
E-Mini Gold Futures (QO) — one contract is worth 50 troy ounces
Micro Gold Futures (MGC) — one contract is worth 10 troy ounces
You can also invest in silver using futures:
Silver Futures (SI) — one contract is worth 5,000 troy ounces
E-Mini Silver Futures (QI) — one contract is worth 2500 troy ounces
Micro Silver Futures (SIL) — one contract is worth 1,000 troy ounces
Investing in commodity futures requires familiarity with terms such as contango, backwardation. These terms refer to the difference between the spot price and the futures price.
Here is an example of a contango on a gold futures contract (GC).
The price of each subsequent execution month is higher than the current one. If an investor bought the June futures contract at $1,905 and the spot price rises from $1,885 to $1,904 over the next 7 months, the investor will incur a loss of $100 ($1 loss per ounce).
Remember to reconcile contracts before expiration. Otherwise, an inattentive investor will be forced to physically receive or deliver gold or silver.
To protect yourself from acquiring, for example, 5,000 ounces of silver, you must perform a process called «bonding.» In the case of a long position in a silver futures contract expiring in December 2022, you need to sell the contract for December delivery and buy a silver contract for delivery, for example, in March.
If an investor expects the price of gold to rise, then he takes a long position in a futures contract (buys a contract). In the case of capturing a short position (selling a contract), the investor assumes that the price of gold will begin to decline.
An investor can also purchase gold through ETFs that mimic the price of gold. Some of them physically acquire and store gold in vaults. An example of such an ETF is the SPDR Hunger Trust (GLD), which held 37.9 million ounces of gold as of June 30. The management fee is 0.4% per annum. Because of this, the ETF price deviates slightly from the price of gold.
There is also a version with lower fees, which are only 0.18%. This is SPDR Gold Minishares Trust (Ticker: GLDM).
If an investor intends to invest in a silver buyer's ETF, then an interesting option is the iShares Silver Trust (SLV), which held 569.37 million ounces of silver as of November 13, 2020. The annual management fee is 0.5%.
There are also leveraged ETFs, an example being ProShares Ultra Gold (UGL) which offers double leverage using futures to do so. The annual fee is 0.95%. The instrument is intended for speculators with a short-term “bullish” bias.
Another option for investing in gold and silver is the over-the-counter (OTC) market. To do this, he can use contracts for difference, called CFDs. This allows an investor to buy or sell precious metals without requiring physical delivery. Gold and Silver CFDs mimic the price of these commodities in an organized market (such as futures).
Investing with CFDs is a good option for small equity holders who invest in the short term. If an investor expects the price of gold to rise in the near future, he can take a long CFD position (buy). In the event of an expected fall in the rate, the investor can take a short position on the contract (sell).
Forex brokers offer Gold and Silver CFDs Plus500, XTB or Admiral Markets.
How to invest in gold and silver with stocks?
It is possible to invest in mining companies that are the beneficiaries of rising gold or silver prices. An investor can purchase shares of individual companies or purchase an ETF, which is a basket of groups of such companies.
Stock prices that mine gold and silver are characterized by higher volatility than metal prices. This is due to the large operating leverage of companies and their financial condition.
Precious metals mining companies
Newmont Corp (NEM) — founded almost 100 years ago, the company is the largest gold producer in the world. In 2019, gold production amounted to 6 million ounces. They have about 95.7 million ounces of gold in proven reserves.
They are mining in Australia, Ghana, Mexico, Peru. The company in 2019 received revenue of $9.74 billion and made a profit of $2.86 billion. The company is registered in the United States. It is also a component of the S&P 500 index.
Barrick Gold is a Canadian gold, silver and copper mining company. Mining activities are carried out in Argentina, Chile, the Democratic Republic of the Congo, Canada or Mali. In 2019, gold production amounted to 5.5 million ounces with a gold value of about $900. The company is listed on the Canadian and US markets. The company's revenue was $9.7 billion and net income was $3.96 billion.
Wheaton Precious Metals is a Canadian silver and gold mining company. The company was founded in 2004. The company is listed on the Toronto, New York and London Stock Exchanges. In 2019, production was 22.5 million ounces of silver and 400 thousand ounces of gold. A spin-off business of palladium with a production of 22 koz. In 2019, Wheaton achieved $861 million in revenue and $86 million in net income.
Another way out is to buy a basket of gold and silver mining companies, that is, ETFs.:
VanEck Vectors Gold Miners (GDX), which, as of November 13, 2020, held shares in 52 gold mining companies. The annual cost of managing an ETF is 0.52%. GDX owns $16.3 billion of assets under management.
Global X Silver Miners (SIL). This is an ETF that invests in silver mining companies. SIL held shares in 40 companies as of November 13, 2020. TER (total expense ratio) is 0.66% per annum. The ETF has approximately $1 billion in assets under management.