Investing in gold has always been a popular option for people around the world. Buying gold has been a traditional way of preserving wealth and passing it along from one generation to the next. Gold keeps its value better than currency since the price of gold rises along with inflation.
For those looking to make very long-term investments, gold may even be a more preferred option compared to real estate. This is because gold is a more liquid asset and you can buy as little or as much as you want, whereas investing in property can be a highly cumbersome experience.
In this article, we’ll cover everything a beginner needs to know about gold investing in Nigeria including the benefits and the ways of gold investing.
A Brief History of Gold
In order to understand where the value of gold comes from and why it is a preferred investment vehicle, we must know the history of gold investing.
Gold has been in use since 2000 BC when the Egyptians first started to use it to make jewelry. At this time, the only known use of gold was to make jewelry, a use that still stands to this day.
Gold was not used as a currency until 500 BC. Gold was seen as an acceptable form of currency for imports and exports since all trading countries already using it as jewelry and considered it a substance of high value. The stamping of gold and forming it into coins made cross-border trading much easier and gold became a widely accepted form of currency.
Soon, gold began to be seen as a symbol of wealth across the world.
Much later, in the 7th century, paper currency was invented in China since it was impractical to keep using gold as a currency. In 13th century the paper currency was introduced to Europe. US first started using the paper money in 1690. However, the paper currency was backed by the “bi-metallic” standard. This means that for every paper currency in circulation, the government had an equivalent amount of gold or silver in the bank.
By the 20th century, it was felt that gold was no longer necessary to back paper currency. After a series of important monetary reformations, the US gave up the use of the “gold” standard in the year 1971.
However, gold still plays a significant role in global finances. Most central banks around the world continue to hold large quantities as insurance for the future. The amount of gold kept as such amounts to almost one-fifth of all the gold in circulation.
Benefits and importance of gold investing – Why is gold a popular investment among investors?
- Gold is still Widely in Demand
As already mentioned, the reserve and federal banks of countries around the world still store large quantities of gold. The primary reason for this is that it acts as a safe bet for the future. Gold is still considered to be valuable since there is high demand for this precious metal in the global market.
In addition to central banks, almost every financial organization also holds large amounts of gold like the international monetary fund (IMF). This shows the high importance of gold in the modern economy even though gold no longer directly backs the value of currencies.
- Gold Holds Value Over Generations
The primary reason for the importance of gold in the modern global economy is that gold has managed to preserve wealth of hundreds of generations, whereas paper currency has not. Hence, gold is still seen as the most popular way of keeping wealth intact through very long periods.
If you want to pass down wealth to your children and your children’s children, then rather than simply holding cash in the bank, a much better way to do it is to store the wealth by investing in gold. Investing in real estate has also been seen as a good option, however, it is more cumbersome and risky when compared to investing in gold.
- Gold Protects Against Inflation
Inflation is the enemy of paper currency. Almost every country in the world, including Nigeria, experiences inflation. Inflation means that the value of your money decreases over time. For example, N500 will not have the same value in 10 years as it does today. If you can buy 6 bananas with N500 today, then you will be able to buy only 3 bananas with Naira 500 in 10 years.
Hence, in order to protect the value of your wealth, the best option is to buy gold with your money and store in a safe place. This is because the value of gold will not erode over time since gold is not subject to inflation.
- Helps Diversify Investment
Another advantage of investing in gold is that its value does not depend on the value of other securities like stocks, commodities, or currency. If your aim is to create a diversified portfolio of investments to hedge against risk, then investing in gold is a great option.
For example, you can store 20% of your wealth in gold and 80% in other securities like stocks and bonds. This will allow you to build a portfolio that is more future-proof and less risky.
How can you Invest in Gold?
There are several different ways of investing in gold. The method you choose depends on your requirements and needs.
- Buying physical gold – Gold Coins, Gold Bullion, Gold Jewelry
The most common and popular way of investing in gold is to buy it physically. This means that you go to a jewelry shop and purchase gold over the counter. Major cities like Lagos, Abuja have gold traders or dealers that deal in jewelry.
The popularity of this method stems from the fact that it is so simple and direct. You do not need to open a stock trading or CSCS account or hire a financial manager to keep track of your investment.
The main drawback of investing in physical gold is that you will need a safe and secure place to store it. Keeping a large amount of gold at home may be a bad idea due to the risk of robbery. Also there is a risk of fake gold dealers which is why you have to be cautious while buying physical gold to ensure it is original. A good option is to buy gold only from registered dealers and open a safety locker at a bank for storing gold.
- Gold ETFs
An ETF or exchange-traded fund is a pooled fund that invests in securities like stocks or assets like gold, real estate on behalf of their investors. An ETF is managed by a professional investment manager who takes a cut from the investors for providing active investment management services.
Since ETFs are professionally managed and regulated by Exchange where it is traded, there are many risk management techniques put in place so that you do not have to worry about counterparty or market risk as much as you would were you managing your own investments.
ETFs track underlying assets and provides an option for passive investing for holding the assets like if you want to invest in basket of shares from top companies or in shares of companies of tech sector or if you want to invest in gold. ETFs can be bought sold at any time on Stock Exchange like normal shares providing instant liquidity. ETFs are denominated in small values like a price of share and you can buy ETFs from brokerage authorized by exchange like NGX where ETF is traded; this involves small brokerage fee and can be sold at any time you want.
A gold ETF is an ETF that only invests in gold securities or assets. Hence, investing in a gold ETF is a good option for those who want their investments to match the price of gold.
NEWGOLD ETF is a major Gold ETF that trades on NGX exchange. It is managed by NewGold Managers Limited backed by Vetiva Capital Management Limited and Gold is held by custodian Brinks Limited. It tracks current rand price of Gold and is currently trading at N8800 per share.
- Gold Mutual Funds
Mutual funds are similar to ETFs except that mutual funds are even more actively managed. The goal of the mutual fund is to deliver a profit for investors.
A gold mutual fund is a mutual fund that only invests in gold securities like ETFs or shares of gold companies or physical gold assets. There are several kinds of mutual funds like open-ended mutual funds and close-ended mutual funds. You should pick a reliable and popular mutual fund which is backed by a large financial institution like a bank. You must ensure that the fund manager is licensed by SEC to ensure reliability.
The primary advantage of investing in a gold mutual fund is that you can expect to beat the market performance of gold.
- Gold Derivatives: Futures, Options, and Forwards
Gold derivatives are meant for advanced investors and traders who speculate on asset movements. A derivative is a financial instrument that mimics the price of the underlying security. There are 2 types of derivatives that are commonly traded i.e.: Futures and Options. Futures give you right to buy/sell asset/security at certain price in future while with option you can decide not to exercise that right if price is not right for you.
Gold derivatives were first invented to act as a hedge against market risk but now they are popularly used by speculative traders as well. The advantage of gold derivatives is that you can make bets on the future pricing of gold. You can even sell gold today to buy gold tomorrow, without actually touching any physical gold.
NGX plans to introduce Commodity Derivatives like Gold Futures in future pending approval from SEC. Lagos Commodities and Futures Exchange, LCFE now offers gold backed derivatives and ETNs comprising Gold Future Contracts.
- Gold CFDs
CFDs or contracts for difference are another type of derivative product that mimics the pricing of real gold. A gold CFD is a CFD that matches the performance of gold.
The primary advantage of trading Gold CFDs is that you can trade using a margin. This means that you can trade with a large amount of gold while only investing a fraction of the cost. Hence, the potential for profit and for losses are much higher.
Gold CFDs are mainly used for speculative intraday trading purposes and not suited for regular investors due to high risk involved. CFDs are not yet regulated in Nigeria. You can trade Gold CFDs with foreign licensed forex brokers accepting Nigerian Traders.
- Investing in Gold Mining Companies
Investing in the stocks or shares of gold mining companies is a good way to indirectly invest in gold. These shares usually go up when the price of gold rises. Gold mining is a sector whose performance is directly proportional to the price of gold.
The primary benefit of investing in gold mining companies is that they are relatively low risk.
Example of Gold mining company shares include JAPAUL GOLD & VENTURES PLC that is traded on NGX Exchange whose subsidiaries are involved in various mining operations and has licenses for Gold exploration and extraction. You can trade shares of listed companies on NGX via licensed brokers.
Conclusion – Is it the right time to invest in gold and what are the risks?
It is always a good time to invest in gold since gold is seen as a safe haven asset and is less risky than most other marketable securities. The best time to invest in gold is when the prices are low so that you can get the maximum benefit when the price rises.
However, there are certain risks that are associated with investing in gold. The price of gold does not uniformly rise all the time. The price of gold depends on supply and demand, just like any other precious metal. Hence, you should consider the overall market condition when investing in gold.
Further, your means of investing in gold also determines how risky it is.
The least risky and most long-term way to invest in gold is to buy physical gold that you can hold on to for decades. The most risky way of investing in gold is to buy gold derivatives or gold CFDs. These are risky financial instruments that can see high potential losses if a trader is not very careful.
Overall, even though investing in gold can be risky, there are many ways to mitigate this risk. Nigerians looking to beat or match inflation should consider buying gold as a way of maintaining their wealth.
