Investors use a range of strategies to navigate the gold market, from long-term approaches like buy-and-hold to more active methods such as market timing. These strategies, each with distinct risks and benefits, offer varying opportunities to maximise returns. Understanding the pros and cons of gold investment options—including stocks, ETFs, futures and physical gold—can help investors align their strategies with financial objectives while managing liquidity and risk profiles.
Below are some of the strategies, according to Ahmad Azzam, Senior Market Analyst at Equiti, that investors can use to maximise their returns:
Buy-and-hold strategy: This long-term approach means purchasing gold assets and holding them regardless of market ups and downs. Gold generally appreciates over time, making it a solid hedge against inflation and economic downturns. This method benefits from the long-term increase in value, though patience is essential, as significant gains may take years.
Dollar-cost averaging: This strategy involves investing a fixed amount in gold at regular intervals, regardless of price. By doing so, investors buy more gold when prices are low and less when they are high. Over time, this averages out the purchase cost and reduces the impact of market volatility.
Market timing: Trying to predict short-term gold price movements and making strategic buy or sell decisions can lead to high returns if done correctly. This involves selling gold when a price drop is anticipated and buying it back when prices are lower. However, accurately timing the market requires substantial insight and carries significant risk.
Systematic investment plan (SIP): Similar to dollar-cost averaging, SIP involves regular investments of a fixed amount in gold. This disciplined method helps accumulate gold over time, leveraging price fluctuations to lower the average cost.
Passive investing: Investing in low-cost gold index funds or ETFs that track the gold market allows investors to match market performance. This strategy reduces risk through diversification and is based on the belief that it’s challenging to consistently outperform the market.
Pros and cons of each type of gold investment
The choice between gold stocks, ETFs, futures and physical gold depends on the investor’s objectives and risk tolerance.
Gold stocks (shares in gold mining companies) offer the potential for high returns but also have higher risk. A company’s performance can fluctuate significantly, making it a risky investment.
Gold ETFs provide ease of trading and less need for secure storage, tracking the price of gold without requiring physical handling. However, ETFs involve management fees and potentially lower performance than actual gold prices.
“One common Gold ETF with a one-year return is the Invesco DB Precious Metals Fund (DBP), which delivered a performance of 7.54% in 2023, demonstrating potential returns while also reflecting the impact of management fees,” said Raed Alkhedr, Chief Market Strategist at Equiti. “Gold futures offer high leverage, meaning investors can control large amounts of gold with a relatively small amount of capital, but they also carry higher risk due to the potential for significant losses.”
Physical gold is considered a safe haven, particularly in times of economic uncertainty. The tangible asset is retained by the investor. However, it requires secure storage and typically involves higher transaction fees and premiums.
Liquidity and risk profiles
Gold ETFs and futures typically offer higher liquidity than gold stocks and physical gold. ETFs are traded on major stock exchanges, providing easy entry and exit with relatively low transaction costs, making them highly liquid.
Futures are also traded on regulated exchanges, offering high liquidity but increased risk due to leverage and price volatility. Alkhedr said, “The liquidity of gold stocks can vary significantly depending on the specific stock and market conditions. While they may provide potential dividends, they also carry the risks associated with equity investments, including business and sector-specific risks.”
Physical gold, while less liquid due to the need for secure storage and higher buy-sell spreads, offers a lower risk profile because it does not rely on issuing institutions and is not subject to default risk.
Overall, investing in gold requires a balanced approach, considering its unique benefits and associated risks. As a precious metal with intrinsic value, gold will likely remain a vital component of investment portfolios, particularly in an era of economic uncertainty and fluctuating currencies.
By understanding the nuances of the gold market, investors can make informed decisions that align with their financial objectives, ensuring they benefit from gold’s stability and resilience in a complex economic landscape.