Midas Touch: Gold Investment Tips for Beginners

We've been using gold as a currency and store of value for millennia. Expressions like "worth its weight in gold," "the gold standard," and "striking gold" all point to its centrality in human transactions through the ages.

In investment, gold stands out historically as a stable asset and reliable store of value. Time and again, it’s been the go-to asset in periods of crisis and extreme market volatility.

While its role in money and the economy is several thousand years old, gold has kept pace with the times. It transcends cultures and borders. Investors use it to shield their wealth from market uncertainty and diversify their portfolios.

For beginners, venturing into gold may seem intimidating. But like any investment, it's simply about understanding the fundamentals and dynamics. We begin with the appeal of gold investing, run through its advantages and downsides, and uncover what's behind its value. We also review the various gold products investors can add to their portfolios.

Armed with foundational knowledge and valuable tips, you can take the first steps in learning to hedge against inflation, diversify, and build wealth with gold.

Top Reasons To Invest in Gold

Gold's physical properties, scarcity, intrinsic value, role in currency, universal appeal, and historical endurance make it a coveted investment. Recent concerns about inflation have also piqued the interest of many new investors. The following are the top reasons to invest in gold:

History

Gold has been used as money and traded for over 6000 years. Gold coins were used in Lydia as early as 560 BC. Gold trading existed in China around the 10th century BC. Modern milestones included gold futures in the 1970s and the first gold-backed ETF in 2003.

At one point, paper notes corresponded to a set weight in gold. The international monetary system was once based on the gold standard from the 1870s to the early 1920s, from the late 1920s to the early 1930s, and from 1944 to 1971—years we still look to for insight.

Diversification purposes

Why is portfolio diversification important? As a beginner investor, you must ensure that while you target growth, you also stabilise your results. Diversification improves your overall performance while ensuring that no single investment can hurt you so much that it drags down your entire portfolio.

Gold exhibits a low correlation with other financial assets, such as stocks and bonds. This inverse relationship to different types of investments offsets risk and makes gold an excellent diversifying tool. Incorporating gold into a portfolio reduces overall volatility and enhances risk-adjusted returns.

A notable historical example that supports this case is the 2007-2009 financial crisis, where the S&P crashed nearly 57 percent, but gold rose 25 percent.

As an inflation hedge

Many seasoned investors consider gold to be the ultimate inflation hedge. It has stood its ground in the face of inflationary pressures. When central banks expand the currency supply, gold's intrinsic value and scarcity hedge against currency debasement and, thus, wealth erosion over the years.

Inflation has an indirect effect on commodity prices, including gold. When consumer prices rise and purchasing power drops, investors tend to buy precious metals, including gold, to preserve that purchasing power.

According to James Anderson, a Financial Analyst at SD Bullion, “Anyone who is looking to store and preserve their purchasing power and savings should consider a healthy liquid net worth allocation of up to 20 percent to physical bullion. The fact that the government central banks have been buying gold bullion in record volumes and metric ton weights over the last two years—2022 and 2023— is a sign investors might recognize and mimic for their long-term investment portfolios.”

Safe haven asset

A safe haven is a long-term investment expected to retain or increase value during market turbulence. Gold is considered a reliable asset during economic turmoil and geopolitical uncertainty. People turn to gold when traditional financial assets falter, making it an effective hedge against systemic risks.

The recent surges in gold prices are a telltale sign of our times. As we continue to see trade tensions, financial conflicts among global powers, high interest rates in the world's advanced economies, ongoing wars in certain regions, and heightened global uncertainty, governments and investors of all levels default to seeking refuge in gold.

Portfolio insurance against unforeseen events

Gold insures portfolios against tail risks and black swan events that destabilise financial markets. Investors who allocate a part of their portfolios to gold can mitigate downside risk and thus safeguard their wealth against unexpected events.

As a long-term store of value

Gold's time-tested role as a store of value contrasts with paper assets, which can be subject to default risks and bankruptcy. As a tangible asset with intrinsic value, it is durable and stands the test of time.

The Beginner’s Gold Starter Kit: Products You Can Invest In

There are various ways to invest in gold. You can purchase the asset as physical gold, invest in gold exchange-traded funds or unit trusts, buy gold mining stocks, or make gold-linked currency investments.

There is a wide array of products available to beginner investors. Familiarity with these products and understanding how they fit into a portfolio is the cornerstone of long-term wealth-building.

Physical gold: coins or bullion

Beginners must know that you can invest in gold in two primary ways: directly or indirectly. Physical gold is an example of a direct investment involving buying and storing bullion or coins.

Gold bullion is investment-grade gold in the form of bars, ingots, or coins. Investment-grade gold adheres to a 99.5 percent purity standard.

Be sure to inspect the gold. Gold bars must have the manufacturer's name and the bar's purity and weight properly stamped on them.

Gold coins, on the other hand, may vary in size and shape. Always remember that such items could intersect with collector value. Coins may have designs or engravings that point to their cultural or historical significance.

Some countries accept gold coins as legal tender—the UK gold sovereigns are an example of this, although the convenient use of such coins as actual currency is another story.

When looking to buy gold bullion, ensure that you only purchase it from reputable brokers or sellers. With a physical gold purchase, you must also decide on karat preferences. Karats refer to the gold proportion to other metals in a physical item, measured on a scale of 0 to 24. The higher the proportion in karats, the purer the gold.

It's reasonable to benchmark a level of 21 karats or higher as the most desirable investment when investing. Purer gold bullion is less likely to tarnish. However, it can be less durable and more prone to physical damage.

After deciding on the kind of physical gold you want, you must consider storage, such as obtaining an in-home safe or keeping it in a safety deposit box. Also, remember that insurance policies protect your physical gold investment from theft or loss.

Gold ETFs and gold unit trusts

Another way to invest in gold is through an exchange-traded fund or ETF. ETFs provide an alternative if you find investing in physical gold cumbersome or unaffordable.

Gold ETFs provide a low-cost diversification alternative to buying physical bullion.  These funds hold a range of gold-backed assets. Some gold ETFs mimic or track physical gold's price movements. Other ETFs include shares in gold-backed derivatives. Others still invest in shares of gold-mining companies. The specific ETF's performance is dictated by its chosen underlying asset.

You can trade a gold ETF like any stock. It is liquid and easy to sell whenever required. Moreover, it is cheaper for beginners or new investors to own. You only need to check with a qualified broker for the spot price. The significant advantage of such ETFs for beginners is that they let you include gold in your portfolio with a far smaller capital commitment than buying physical gold.

A gold unit trust or UT is a fund comprising gold derivatives and gold-related assets. Some gold UTs invest in physical gold. Gold-related UTs, on the other hand, invest indirectly through bulk commodities, other precious metals, and gold miner stock.

Unit trusts differ from ETFs in one critical aspect—they are more actively managed. Managers handle the buying and selling of the derivatives and gold-related assets in the fund. These full-time professionals would ideally get better returns than ETFs, which mirror the price movements of an asset.

Either way, you will incur costs for fund management. ETFs, however, charge slightly lower fees as they are not as actively managed. Check the expense ratio for any ETF and fund you buy. Ensure the company behind the fund is well-capitalised and has an established history.

Gold mining stocks

Another indirect way to invest in gold is through gold-mining companies. As the shares of these companies rise, so does the value of its gold inventory—or at least in theory. With skilled management, mining costs may decrease, resulting in a potential upside. Conversely, poor management may result in higher operating costs, leading to other risks and potential downsides.

Gold mining stocks may deliver dividends—something impossible with physical gold and most ETFs. It's important to remember that the value of a gold mining company's stocks depends on its future returns, not on the price of gold.

Gold currency investments or commodity-linked structured investments

You can invest in gold using gold currency investments. One example of this method is buying gold as a commodity-linked structured investment. With commodity-linked structured investments, you work with a bank or broker to decide your base currency and your investment's duration. Base currencies can be in USD, SGD, and others.

You must also agree on a target conversion rate or TCR between gold and your chosen base currency. Gold is treated as a currency in this investment type and uses the currency code XAU.

When your investment duration ends, you will get your principal and coupon in the base currency or as gold (XAU). If XAU appreciates against the base currency—USD, for example—you get paid in USD for both principal and coupon. If XAU falls below the TCR, your investment gets converted. You will be repaid the equivalent of the principal and coupon in gold (XAU) converted at the agreed target conversion rate (TCR).

Choosing this product could be more interesting than just holding US dollars. More opportunities could open up for investors who are okay with being paid in gold (XAU). You can hold, sell, or reinvest the XAU in other commodity-linked investments using gold as the base currency or commodity in another round of potentially higher coupon.

XAU's currency-like tradability makes it an excellent canvas for financial innovation. However, like many forms of forex-based investing, XAU deals with volatility. Investors must be prepared to track their movements and know the accompanying risks like liquidity, principal, and market risks. 

To Get Started in Gold Products, Only Invest in What You Understand

The most seasoned investors like Warren Buffett embrace a simple investing philosophy. They believe you should invest only in things you thoroughly understand. In buying a gold product, beginners must conduct the necessary research and consult professionals to guide them with their decisions.

Gold has high growth prospects in the coming years.

"That is a trend we believe, both technically and fundamentally, is set to continue and rhyme in the coming 3 to 5 years as this bullion bull market becomes more mainstream and recognized for what it is," remarked Anderson.

This potential makes it a key consideration in your investment plan.

As a beginner investor, you must aim to have a well-diversified and balanced portfolio—a strategy in which gold plays an integral role.