As we all know, gold is a precious metal that is mined by panning rock ores. Mining gold is a very labor-intensive process, and its deposits are rare throughout the world, which allows this metal to be classified as rare. Buying gold is a fairly stable investment option that allows you to protect your money from inflation and devaluation.
Investing in gold can bring the client both solid income and significant losses. To invest in gold, your brokerage account can purchase securities from mutual funds (mutual funds) or ETFs (exchange traded fund) that invest in gold. We will look at all the nuances, pros and cons of this investment in more detail below.
Types of investments in gold
Gold bars
In banks whose activities are confirmed by a license for the purchase and sale of precious metals, individuals can purchase gold bars. The purchase transaction does not take much time; the investor just needs to choose a suitable bank and visit it with money and a passport.
These transactions are considered by investors to be one of the simplest and most profitable, but despite this, there are a number of nuances:
- You cannot store gold bars outside a banking institution; this is fraught with costs for examining the authenticity of the metal returned by the bank. The price of this examination is about 10% of the cost of the ingot.
- There is a difference between the purchase price and the sale price. Gold bars are most often sold at 5-10% more expensive than purchased.
- VAT in the amount of 20% of the price of the purchased bullion.
- Any damage that shows wear on the ingot reduces its price by 10% or more.
Golden coins
There are several types:
- With high quality coinage
- Regular coins
- Those that have not been previously used in circulation
The most profitable option for investors are coins that have not been previously used in circulation. And this is influenced by factors such as rarity, age, etc. It is recommended to purchase such coins from trusted sources in order to avoid unpleasant moments associated with the risk of unprofitable investments. Every year, the value of gold coins increases by 13-18%, which allows investors to bypass inflation and earn income.
Exchange trading
It is carried out by betting on an increase or decrease in metal prices and investing in shares of enterprises. Thanks to stock trading, you can make a profit both when the market is falling and when the market is rising, by opening “long” or “short” positions. An experienced broker can minimize the participation of the investor in the process.
Unallocated metal accounts
A procedure such as depersonalizing a metal account is not at all difficult. To do this, you need to top up your bank account with an amount equal to the value of the precious metal. Invested capital is stored in gold, silver or platinum.
Main types of compulsory medical insurance:
- Urgent. Due to the increase in the price of gold on the market, income is generated from interest, the accrual of which is realized in grams of the precious metal.
- Indefinite. This type can be cashed out at any time without examination for authenticity; when closing such an account, VAT must be paid.
Mutual funds in precious metal
Mutual funds are property that is formed with the money of shareholders; it is divided into possessions between shareholders in proportion to the contribution.
In Russia, there are the following mutual funds: interval, commodity assets (they can be invested both in securities and in the metals themselves) and open-end funds (they are invested in other funds, this also includes foreign ETFs that repeat the dynamics of the behavior of precious metals).
Gold ETFs
Gold funds have a "small downside" - management fees. As long as you own units (shares) of the fund, the commission will be debited from you constantly.
At the moment, we have three gold ETFs on the Moscow Exchange with rates ranging from 0.45% to 0.99%. You can view and compare fees here.
It doesn’t seem like much - just tenths of a percent (although for me it’s a lot). For every 100,000 rubles invested, depending on the fund chosen, the investor will give back (lose) from 450 to 990 rubles. But again, this is per year. If we take long periods of time (and for long-term investors they are measured in years and decades), the amount of losses can become an order of magnitude higher.
Many long-term investors allocate a certain portion of their portfolio to gold - usually from 5 to 20%. And they keep it constantly, throughout their lives (or think that they will keep it forever).
In the long term, as a rule, the investor’s capital increases (due to growth and additional purchases of assets). And with it the value of gold in the portfolio will automatically increase. Which again leads to increased costs. More gold in your portfolio means more commissions you pay.
Taking into account the two above factors, the investor’s expenses (annual and total) for owning a gold fund will grow like a snowball.
How much will it be in money? Let's quickly estimate on our fingers.
The profitability of gold over the past 20 years is 18% per annum (in rubles).
The investor decided to invest 3 thousand rubles a month in gold. Or 36 thousand per year.
After 10 years, his capital amounted to exactly 1 million rubles (due to the growth of quotes and annual replenishments). This is ideal!
Minus management fees (let it be 0.5% per year) - real capital will drop to 970,000.
Losing 30 thousand on commissions is the amount that the investor had been saving for almost a whole year.
In 15 years, the total losses on commissions will be about 100 thousand. That's almost 3 years of personal savings.
After 20 years, the commissions “eat up” 400,000 rubles. It turns out that the investor saved for more than 11 years and gave all the money to fund commissions.
Don’t you think it sounds a little crazy to work for several years only for commissions?
Advantages and disadvantages
Advantages
- High liquidity. Gold will never depreciate in value; it can fall in value or rise. Regardless of economic turmoil, gold can be sold.
- Stability. The price of gold is rising slowly but steadily.
- Recognition. In all countries and at all times, gold served as a means of payment.
Flaws
- Low profitability. Investing in gold is not always profitable.
- Duration. Within 10-15 years, the effect of investing in gold can be observed.
- Increased spread. If the investment is minimal, then to receive income you will have to wait for the price of the metal to rise.
How do spot trading in gold and silver differ from futures trading?
Exchange trades in precious metals are more suitable for long-term investing than futures due to the lack of expiration dates. After purchasing a precious metal through an exchange, it can be stored indefinitely.
Spot contracts are not tied to a global benchmark. They show the state of the developing domestic market for gold and silver in Russia, characterizing domestic supply and demand. However, pricing takes place here taking into account the international cost of precious metals, established in London. If prices on different exchange platforms differ greatly from London prices, then appropriate arbitration is carried out to restore balance.
Other differences with futures are that exchange trades in gold and silver do not come with a forward interest rate, guarantee or expiration date. Tariffs for brokerage firm services also vary.
By successfully combining exchange transactions with futures for precious metals, you can achieve a greater level of hedging and use various strategic investment schemes.
Shares of mining companies
Shares of mining companies are much less volatile than commodity prices on world markets. If the cost of gold, silver, nickel, etc., in the trading of which significant speculative capital is involved, can fluctuate by tens of percent in the medium term, then company shares reflect long-term trends in price. And over the long term, metals become more expensive. Thus, when investing for a period of one to three years, the risks of investing in a diversified portfolio of shares of miners and metallurgists are significantly lower than when investing in the metals themselves.
Investments in the mining sector are more reliable in the long term than, say, oil. Thus, the development of alternative energy does not threaten them, since wind, solar, tidal, wave and all other power plants need metals, and they all need wires to deliver this energy to consumers. And even electric cars or hydrogen fuel cars also need metal.
The mining sector is also less dependent on political risks - there are no large cartels like OPEC, and the strongest powers are less able to influence this market.
Advantages of shares of mining companies
- Growing industrial demand for mining products. Many analysts are talking about a new commodity supercycle
- A significant part of the products is sold for foreign currency and the industry feels great when the ruble weakens
- Deliveries under long-term contracts allow for the implementation of investment projects whose implementation period is 5 years or more
“Companies in the metals and mining sector pay good dividends. About 10%. Against the backdrop of expectations of rising global inflation, shares of gold mining companies can become a protective asset and, during periods of correction on global exchanges, reduce portfolio volatility,” Andrey Vernikov, Head of the Investment Analysis and Training Department at UNIVER Capital.
Procedure for purchasing precious metals
Transactions with precious metals on the Moscow Exchange are concluded in the currency section. The contract deadline is the next day. For direct trading, a personal account is used on the website of the brokerage firm with which the investor works, or special software.
The purchase and sale of gold and silver lasts from 10.00 am to 23.50 at night. Contracts must be completed by 20:00 pm.
A long trading session allows you to cover the period of operation of Asian and European exchanges, which is extremely important, as it makes it possible to take into account the price dynamics of foreign precious metals exchanges when making large transactions.
Exchange Traded Fund (ETF) and Futures
The most popular instruments for investing in gold are exchange-traded funds and futures. Unlike physical commodity transactions, gold ETFs and futures do not require the implementation of complex and expensive operating procedures. In addition, they strictly follow the dynamics of gold prices and provide quick and effective access to the asset within the framework of the usual exchange infrastructure.
As we have already found out, buying and selling and investing in precious metals is one of the least risky ways of investing. In this article, you learned about the types of investments in gold, mutual funds, shares of mining companies, as well as futures and ETFs. Be prepared for the fact that this investment will be long-term. Our company’s specialists will help you understand this topic in more detail.
What are the benefits of purchasing gold and silver through the Moscow Exchange?
Purchasing gold and silver through an exchange is always more profitable than through a bank. Exchange commissions when selling gold are about 0.015%, when buying - 1 ruble for any amount of the precious metal purchased. Commission payments to a brokerage firm can amount to thousandths of a percent of the contract value, taking into account the tariffs specified in the agreement with the broker. The costs of paying value added tax, capital management and holding assets when purchasing precious metals on an exchange are usually zero.
In addition, gold and silver are sold on the stock exchange in any volume and on almost any day due to the participation in trading of a large number of manufacturing companies and credit organizations.
What are the benefits of a portfolio containing gold or silver?
The 2021 coronavirus crisis once again confirmed that investing in gold and silver is necessary. In the period from July to September, the demand for shares of exchange-traded investment fund structures operating in gold metal increased by 12% compared to 2021 figures. The increase in global demand for investment gold or silver coins and bars amounted to 62.5%.
Investing money in such a protective asset as precious metals has allowed many to save and even increase their savings. By the end of autumn 2021, the dollar price of silver rose by 36.4%, and the gold precious metal by 23.4%.
Investments in precious metals bring maximum income if they are designed for the long term. In the 70s of the last century, gold cost about $40 per ounce. In 2021, its price rose above $2,000 USD per ounce. Even if we don’t take a period of half a century, but consider the last decade, gold has risen in price by 81%, and silver by 36% in dollar equivalent.
By the end of autumn last year, the ruble price of gold increased by 51%, and silver by 69%. This confirms the anti-crisis properties of precious metals as the most reliable protective asset that saves savings from inflation.
Spot trading precious metals is an exciting, intelligent process. It can be both a means of earning money and a gambling hobby. The necessary training materials for this type of activity, as well as all the required information, including current quotes, forecasts and analytics, are publicly available today.
Clearing operations
The currency exchange and the precious metals exchange use a common clearing mechanism and joint risk management. Failure to perform under contracts is governed by general rules.
When entering into any partially collateralized contracts and using updated or existing settlement codes, the client has the right to use the general ruble collateral provided by the brokerage firm and the exchange.
In the domestic domestic market of gold and silver, the role of the main counterparty and clearing operations was assumed by the organization NPO NCC, part of the association. At the same time, the taken into account risk coefficient for exchange and over-the-counter transactions reaches 5%, and not 20%.
Assessment of the current state of the gold price
Making a forecast for the price of gold is a completely thankless task. Today we’ll say one thing, and tomorrow Trump will sneeze on Twitter and it will grow by 4%. And the day after tomorrow it will fall by 6%. In general, this is pointless. In general terms we can say the following:
- The situation in the Middle East is far from calm, incidents with Iran occur regularly, Saudi Arabia is attacked by drones, and from time to time someone detains someone’s oil tankers. All this, of course, suggests a possible flare-up of the conflict and possible military action.
- US-China negotiations are not making much progress in 2021. The balance of payments is changing, and it is completely unclear what will happen next. There is no talk of military action, but the “trade war” and reproaches from the Americans are spurring investor interest in defensive assets.
- The course towards de-dollarization has not been a local trend in Russia for quite some time. More and more countries are refusing to use the dollar in payments, so its role is decreasing. We have agreements with India, China, Iran. The list of countries will only continue to grow.
From all that has been said, we can draw a simple conclusion, which suggests itself - gold in the range from $1400 to $1450 can be called attractive for purchases. And you can do them by dividing the total amount into components. For example, buy a little at 1450 and wait, maybe they will let you buy at 1440, and so on.
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Safety regulations
A few safety rules when buying and storing gold bars:
- It is safer to buy bullion in banks. To do this, you need to choose the most reliable bank that trades gold.
- You cannot purchase bullion from private individuals. This is considered a violation of the law. In addition, this is how you can buy fake gold.
- When buying a bullion from a bank, you need to carefully inspect it. It should not be dirty or damaged.
- Store in original packaging to protect from damage.
- For complete safety, bullion should be stored in a rented safe deposit box after purchase.
