Have you heard that gold’s going to $5,000 an ounce? Well, that projection sounds a bit off the wall and shouldn’t we wait for $2,000 first? A decision to invest in gold demands an assessment of the factors that will influence prices in the near to medium-term.
Since the credit collapse of ’08 to ’09, currencies around the world have been pressured by fears over government debt and even the threat of default in the case of some countries. When investors lose faith in currencies or the credit system, money flows to gold as an alternative currency or hard asset to protect cash against erosion in the dollar. The logic here is that if it takes more dollars to buy Euros or loaves of bread three years down the road, investors can benefit from exchanging their dollars for gold, which should hold its own against loaves of bread. Otherwise put, those who choose to invest in gold believe that bullion’s impressive returns reflect weakness in the U.S. dollar as much as ongoing strength in the price of the precious metal.
Today many innovative investment products make it possible for individuals who want to invest in gold to control risk and minimize fees. Here are four ways to join what’s been called the ‘slow gold rush’ of our generation.
- A gold-focused Exchange Traded Fund aims to follow the price of gold as determined through the global over-the-counter market. As the name would suggest, investors exchange units of an ETF in the much same way that shares of stocks are traded on an exchange. People choose to invest in gold through ETFs because of the ease of buying and selling over mutual funds and physical gold and the typically low cost of management fees. The SPDR Gold Shares Trust, which trades on the New York Exchange under the symbol GLD, seeks to achieve a high correlation with the performance of gold in over-the-counter trade.
- Precious metals mutual funds are simply specialty mutual funds made up of the stocks of gold mining companies. The manager of the fund chooses the stocks in the portfolio, which may or may not track the spot price of gold, depending on the manager’s skill. People invest in gold through precious metals funds because they prefer active management of their money. Although precious metals funds can outperform gold and silver, management fees and other less obvious expenses can eat into your gains by 2% to 5% a year.
- The stocks of gold mining companies present the greatest risk, while offering the possibility of the highest return. Despite the uncertainties associated with investing in individual stocks, gold mining companies can grow their earnings, discover new deposits and add to their assets in the ground. From a trader’s perspective, growth in the assets of a gold mining company at a time when gold prices are climbing creates a perfect storm for the mining company’s stock, which may double and triple in a matter of months. Considerable knowledge is required to invest in gold stocks, but knowledge pays dividends over time. You can invest in gold stocks through a discount brokerage for $5 to $20 per trade. This approach appeals to frugal investors who pay the same small fee for a $50,000 as a $100 trade.
- Those who prefer assets that they can hold in their hands can invest in gold bars or coins. Although the market for coins is somewhat more complex, gold bars will track the price of gold bullion reported in the newspaper every day. Some investors balk at fees for security deposit boxes and the inconvenience of transporting bars to and from a secure location. In addition, the five-figure cost of a ten-ounce bar gives some investors pause. While no one has reported a rush to melt down old gold, those who married in 1990 and divorced in 2010 may consider that jewelery is an ideal way to invest in gold.
Depending on their commission structure, full service brokers and financial advisors can help you reduce costs and minimize risk when you invest in gold. As a rule of thumb, you shouldn’t allocate more than ten percent of a portfolio to a single area or market group. With this approach, management of risk and a dedication to following prices will be worth their weight in--well, you know what.
Paula Wendland - Paula Wendland
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