Which Type of Gold Should I Buy?

From the time of ancient civilization to the modern day, gold has been a prized commodity. Once gold functioned largely as currency, but today, many investors buy gold as a diversifying asset, or as a hedge against economic uncertainty, political unrest and inflation.

In this article, we will consider the different types of gold investment on the market to help you decide on how best to meet your financial goals.

Why do investors choose gold?

Nowadays, you can buy gold in many different forms. These range from physical coins and bullion to exchange-traded funds, derivatives and digital gold. Knowing which is the best gold investment option is right for your portfolio is key.

Here are just some examples of why investors might choose to invest in gold:

1. Wealth protection 

Gold is often the asset investors turn to when the economy or political environment turns volatile, making it a strong, defensive investment. This is because gold often has a low correlation with movements in the broader stock or bond markets, making it a good hedge and way to diversify a portfolio. 

2. Liquidity

Gold is becoming a more accessible choice for the everyday investor, as options like digital gold are making the precious metal a more liquid investment option.

Particularly for those just starting out in gold investment, these options with no “lock-in” terms are much more attractive than other traditional assets like bonds, where the waiting period until maturity greatly defers investor’s realisation of capital returns.

3. Inflation proof

Over the last 50 years, gold has proven to be a solid hedge against inflation, particularly when it is notably elevated. Furthermore, when inflation is high, gold also has significantly higher returns in comparison to other traditional investment vehicles.

The figures prove it. In January 1971, the gold price stood at $34.00. Today, it’s at $2,301.18, a rise of 6,600+%. If gold had gone in value at the same rate as inflation in the U.S., it would be worth $255.85 an ounce today. So, once you’ve factored inflation in, the gold investment would now be around 800% higher.

4. Growing demand

Demand for gold has also grown among investors in developed markets. This is reflected not only in holdings of physical gold bullion but also in the increasing number of investors in gold ETFs.

5. Portfolio diversification

A sound investment portfolio is well-diversified, which means that the underlying assets do not all react the same way to economic and political events. The key to diversification is finding assets that are not closely correlated to one another. 

Gold has historically had a negative correlation to many stocks and other financial instruments, making it a good way to diversify any investment portfolio.

What type of gold is the best to buy?

Nowadays, you can invest your money in gold in many different ways. These range from physical coins and bullion to exchange-traded funds, derivatives and digital gold. Knowing which is the best form of gold to buy for your portfolio is key. To work out the best type of gold to buy, you need to consider your investment objectives.

1. Physical gold: coins and bars

For many people, the best type of gold to invest in is bullion. They enjoy having bullion they can hold in their hands. They appreciate gold for its status as a symbolic and literal symbol of wealth.

Gold bullion refers to any form of pure (or nearly pure) gold that has been analysed and certified for its purity and quantity. While large bars may be impressive, their size (up to 400 troy ounces) makes them illiquid assets, and therefore costly to store.

Small bars and coins have accounted for a large proportion of annual investment gold demand over the past decade. New markets, like China, have also been established, while older markets, like those in Europe, have re-emerged.

If you are interested in buying physical gold, it is important to keep an eye on the spot price as an indicator for when to buy, in addition to prices from reputable dealers.

Often when buying physical gold, investors must consider the insurance and storage costs of the investment. However, there are options, such as Kinesis, that have completely eliminated the need to pay for storage and insurance, making gold investment more accessible.

2. Gold exchange-traded funds (Gold ETFs)

The best gold to buy for an investment for someone who doesn’t want the responsibility of storing and vaulting the physical asset might be a gold exchange-traded fund. This offers a different way to tap into the precious metals market. 

Each share of these financial instruments represents a fixed amount of gold, such as one-tenth of an ounce. The funds can also be bought and sold just like stocks using a brokerage account.

Gold ETFs make up a substantial proportion of global gold investments. Allocated ETFS are backed by physical bullion and reflect the current price of gold in the market. 

Due to their facilitation of high liquidity, they are often the cause of great fluctuations in the gold market price, due to the ease at which investors can buy and sell.

However, compared to owning physical gold, gold ETFs are not without risk. As Rupert Rowling, Precious Metals Market Analyst, explains:

“With a physical gold ETF, you own a share of a fund that holds physical gold, but you do not own the gold directly.

“If your fund invests allocated gold bullion, it has specific gold bars that it owns and is its property. With unallocated gold, it has a claim to an amount of gold but no claim to specific bars or pieces. In either case, your ownership is indirect. 

“You own a share of the fund, not the gold or the financial instruments it owns or uses.”

3. Sovereign gold bonds (SGBs)

Less familiar to many investors, sovereign gold bonds are government securities denominated in grams of gold and issued by a reserve bank (such as the Reserve Bank of India) on behalf of the government. 

They are substitutes for holding physical gold. Investors pay the issue price in cash and the bonds will be redeemed in cash on maturity.

Some investors believe these bonds are among the best metal investments available on the market as they offer the possibility to both enjoy capital appreciation and also earn interest every year.

One drawback of investing in gold bonds is that SGBs are issued in different tranches during the financial year, meaning they are not always available to buy. Secondly, they come with specific investment terms (such as eight years), so that early sale is not possible.

4. Digital gold

Many analysts and crypto specialists recommend digital gold as the type of gold you should buy. Digital gold, underpinned by the technology of blockchain, has enabled gold to become not only a mechanism for investment, but also a global currency. 

It may be the most accessible and user-friendly option for investors who want to utilise their gold as a fundamental utility. 

With Kinesis, for example, users can buy digital gold that is fully allocated with physical gold bullion, and operate within a system where gold – and silver – can be bought, sold, and traded easily. 

While some argue the best way to buy gold is a sovereign gold bond because it pays a yield, Gold (KAU) offers something similar. 

System users have the ability to earn a usage-based, debt-free yield on their gold investment, whether they spend, trade, or simply hold it within the Kinesis ecosystem. Kinesis secures this yield for investors by giving a proportion of the transaction fees gathered across the entire system, back to investors each month.

The ability to earn a recurring and reliable yield on owning gold offers investors “the best of both worlds”. As stated by Carlo Alberto De Casa, an experienced Precious Metal Markets Analyst, this is not digital gold’s only advantage:

“Rather than waiting to utilise their investment, as is the case when awaiting bond maturity, participants of the Kinesis system experience a sense of immediacy, with the ability to spend, send and transfer their KAU and KAG as physical-digital currencies, just like regular cash. 

Choosing the right gold investment option for you

When thinking about different types of gold as an investment for your portfolio, we’ve explored the four main options: physical bullion, ETFs, sovereign gold bonds, and digital gold.

When considering the type of gold best for your personal circumstances and financial goals, consider your existing assets and how gold can add value to what you already own.

From there, take time to consider your specific needs and investment goals, to select the best gold to invest in for your needs.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The opinions expressed in this article, do not purport to reflect the official policy or position of Kinesis.

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