Ever since ancient civilisation first used gold as a currency, the precious metal has maintained an important role in the orderly function of commerce and markets all over the world. With its scarcity and distinctive qualities playing a central role in its underlying value, gold has long been viewed as a ‘safe haven’ due to demand for the rare earth metal.

When it comes to financial markets, few assets are viewed with any sort of ‘safety’ and defensive resilience as that of gold. In fact, the commodity is typically a hedge against inflation, and it is often in high demand during ‘risk off’ periods. At the same time, the price of gold has increased nearly 500% since the year 2000.

After a period of dormant activity for several years, gold suddenly burst into favour during the pandemic, following the trends seen back in the GFC, Dot-com bubble, and in the wake of September 11. During these periods, gold was viewed as a hedge to mitigate the impact of a falling market. However, since late 2021, the precious metal has traded in somewhat of a holding pattern, despite renewed bouts of volatility across the stock market.

For more information on managing the risks of a market downturn, read here.

Whether you want gold to play a small role as you build your share portfolio, or an integral investment, here are two options you can consider to invest in gold on the ASX.

Gold ETFs

While it isn’t overly practical for many investors to hold physical gold as an investment, ETFs provide significant liquidity and ease of access to invest in the rare earth metal. In fact, ETFs are considered the fastest-growing financial instrument across Australia. In 2021, the ETF industry grew from $95 billion to $136.9 billion, with growth accelerating versus the year prior.

The ASX was actually the first market to introduce a gold-oriented ETF, the ETF Securities Physical Gold ETF (ASX: GOLD). This ETF debuted back in 2003, and since then, it has spurred on the creation of a number of other gold ETFs.

Investors who invest in the ‘GOLD’ ETF own units assigned over more than 350,000 ounces of physical gold bars held with HSBC. Each unit is equivalent to approximately one-tenth of the spot price of gold in Australian dollars. It goes without saying, a rise in the gold prices results in the ETF price increasing.

BetaShares also operates a gold ETF, the BetaShares Gold ETF – Currency Hedged (ASX: QAU). As gold is typically priced in US dollars, the structure of this ETF involves currency hedging for local investors. This is designed to offset the impact of any foreign exchange fluctuations.

Units in ‘QAU’ are purchased with Australian dollars, however, the ETF tracks the US gold spot price, and it is also 100% backed by physical gold bullion.

Another option is the Perth Mint Gold ETF (ASX: PMGOLD), which is structured differently to those mentioned above. ‘PMGOLD’ acts as a ‘call’ option. It gives investors the right to acquire a quantity of gold that has been assigned to the fund manager overseeing the ETF. Unlike ‘GOLD’ and ‘QAU’, you do not have direct ownership of gold through the ‘PMGOLD’ ETF. The Perth Mint holds gold on behalf of investors, and the physical gold may be borrowed to third parties without your consent.

And finally, for a different take on things, the VanEck Vectors Gold Miners ETF (ASX: GDX) invests in a basket of gold miners rather than the underlying commodity.

Gold Mining Stocks

Investing in gold mining companies won’t give you direct ownership of gold, however, it does offer exposure to the commodity by way of a company’s operations. As gold miners specialise in extracting and selling the precious metal, your ownership in a gold mining stock is not only linked to the projects they own or operate, but also the gold they extract from the ground.

The above point explains why gold mining stocks can sometimes be quite risky and volatile. Gold miners may even move in the opposite direction of the broader stock market as investors grapple between a ‘risk on’ and ‘risk off’ mentality. As such, mid-to-large cap gold miners sometimes outperform when the market sees greater risk and falls, but even gold stocks can get caught up in a sell-off.

Australia’s largest gold miner is Newcrest Mining (ASX: NCM), valued at around $21bn. However, the ASX is also home to well over 150 other gold-oriented mining stocks, with a number currently valued in excess of $1bn. Apart from Newcrest, these include:

• Northern Star Resources (ASX: NST)

• Evolution Mining (ASX: EVN)

• Regis Resources (ASX: RRL)

• Perseus Mining (ASX: PRU)

• Silver Lake Resources (ASX: SLR)

• Gold Road Resources (ASX: GOR)

As well as the above names, there is a long list of companies that are active in gold exploration and mining, ranging from mid-tier producers, to speculative explorers valued at just a few million dollars. As one might expect, there is always risk when investing in shares, particularly those at the smaller end of the market with unproven operations, no discoveries, and limited cash. 

Does Gold Have a Place in Your Portfolio?

Gold may be considered a more conservative investment than many other asset classes. However, the historical performance of gold shows that it has the potential to outperform across both short and long timeframes. In more volatile times, the value of gold sometimes becomes more desirable, prompting capital flows towards the asset, but this is not a strict rule.

Like all investments, you should weigh up the positives and negatives of holding an investment that offers exposure to gold. Even if you believe gold is a more defensive asset, gold mining stocks are not immune from wild swings across the stock market. There may even be an opportunity cost holding gold ETFs when the market is in full swing. Ask yourself, what benefits might exposure to gold provide you, and how diversified is your portfolio?