September 22, 2020
The price of gold made headlines during the coronavirus pandemic. It exceeded $2,000 when investors flocked to protect against expected inflation.
Trading gold or owning gold are two different things. One can own gold in a portfolio to protect against inflation, but one can also speculate on the price of gold to take advantage of its volatility.
However, owning gold or gaining exposure to gold can be done in different ways. Here are a few things to consider.
Physical or paper gold
An investor may decide that owning physical gold better protects his interests. To do so, there are various online outlets that sell gold bars, coins, etc. and even store it for you for an annual fee. In this way, owning physical gold protects against inflation.
Another way is to own paper gold. Also known as demand from the investment community, paper gold refers to owning exchange traded funds (ETFs) that track the price of gold – or owning ETFs that track the mining sector. These funds represent only an alternative to gold ownership.
Ownership of Shares
As far as ownership is concerned, one can decide to own shares of a gold producer. Many gold miners are listed on international stock exchanges, and owning a share of the company also means being exposed to the gold market.
The currency involved
In all the examples given so far, the currency concerned plays a crucial role. Yes, gold has reached a new all-time high of over $2,000 – relative to the dollar. So has gold appreciated or has the dollar depreciated?
Gold can be exchanged for any fiat currency, so the currency involved affects how gold protects itself against inflation. In other words, gold can appreciate against the dollar and remain stable against the euro, depending on the evolution of the EURUSD rate.
Among all the ways to expose yourself to the benefits of owning gold, it is recommended to choose a combination. By owning physical gold, the exchange rate risk disappears. For example, owning physical gold paid in USD and converting it back to another currency after several years reduces the exchange rate risk.
In addition, by holding ETFs for the entire mining sector, the investor gains diversification benefits. Instead of betting on a single company, the risk is spread over a sector.
Finally, holding shares comes with the advantage of paying dividends. In the long term, the combination of dividends and price appreciation offers the same protection against inflation.