With many of our experts here at Profit Confidential touting gold as a wise investment at this time, readers are wondering exactly how to invest in gold. To offer some general information on this topic, here are three key ways you can invest in gold.
Buying Gold Based on Portfolio Diversification
Before deciding how to invest in gold, you may first want to consider how much of your portfolio should be devoted to this precious metal.
Since the beginning of 2013, the price of gold has fallen roughly 30% from $1,676 an ounce to approximately $1,180 per ounce. That doesn’t mean gold has fallen out of favor. In fact, buying gold can be a prudent investment; it can protect an investor’s portfolio in times of extreme uncertainty and can be used for diversification purposes.
Portfolio managers suggest keeping anywhere from 5% to 10% of your assets in gold in some capacity. Not having all your “eggs” in one basket helps improve returns and limit risk; hence, the need for diversification. For example, in the stock market meltdown of 2009, key stock indices fell a whopping 57%. Gold prices declined, too—about 29%—but rebounded much faster than the market. Simply put, gold preserves wealth.
There are many different ways you can invest in gold, but the best ones I believe in are gold bullion-backed exchange-traded funds (ETFs), gold miner ETFs, and shares in gold mining companies.
1. Gold-Backed ETFs
Buying physical gold often presents the average investor with problems like finding a reliable dealer, getting a fair price, and storing their purchase. Many of these difficulties can be overcome with the purchase of gold-backed ETFs.
Exchange-traded funds are much like stocks in that they can be bought or sold through your broker. ETFs can track an entire index or the futures price of gold or silver, or they can be similar to a mutual fund that holds a portfolio of stocks.
Gold bullion ETFs give an investor the opportunity to purchase the physical commodity. The largest of these is the SPDR Gold Trust (ETF) (NYSEArca/GLD). By purchasing a share of the trust, you gain fractional ownership in the world’s largest bullion-backed fund.
Ownership entitles you to gold bullion without having to worry about storing it; plus, you are able to buy and sell at a moment’s notice. This may not be possible if you were investing in gold via physical gold bullion.
Another popular physical bullion ETF option is iShares Gold Trust (NYSEArca/IAU), which is managed by BlackRock, the largest asset manager globally.
2. Gold Miner ETFs
The other group of ETFs includes those that allow you to purchase stakes in gold mining companies. The advantage comes from owning several miners, not just one; returns improve by spreading out risk.
Two heavily traded ETFs in this category to consider are Market Vectors Gold Miners ETF (NYSEArca/GDX), which holds 39 of the world’s largest miners, and the Market Vectors Junior Gold Miners ETF (NYSEArca/GDXJ), which is focused on the junior players in the industry.
These ETFs allow an investor to get a stake in many gold miners with the purchase of a single unit and are readily tradable through your broker.
A major, often unnoticed drawback is that ETFs are more volatile than the underlying commodity or the underlying companies. The increased volatility stems from their advantage—the fact that they are so easy to trade. This often leads to short-term traders jumping in and out of the exchange-traded fund en masse, causing the price to fluctuate wildly.
On that note, let’s move on to what I consider the best alternative to gaining exposure to gold—gold stocks.
3. Gold Mining Companies
Individual gold companies can provide leveraged returns on gold prices. The reason behind this is very simple: they can extract gold from the ground at a lower price than the spot price. With this, the higher the spot prices go, the more their profits improve.
Investors also have to know that gold companies differ by geography, quality of reserves, amount of production, and costs associated with that output.
Your due diligence should focus on quality above all else, especially given the muted state of gold prices. As my fellow colleague Moe Zulfiqar points out in his article, “Investors can still get great mining companies with massive reserves, increasing production, and solid balance sheets for pennies on the dollar—you just have to look.”
Some examples of companies that retain enviable quality characteristics are large players like Barrick Gold Corporation (NYSE/ABX) and Goldcorp Inc. (NYSE/GG). For example, Barrick forecasts all-in sustaining costs (production costs over the lifecycle of a mine) for 2015 of $725.00–$775.00 an ounce. (Source: Barrick Gold Corporation Investor Relations web site, last accessed March 19, 2015.) Goldcorp projects its total costs per ounce to be in the $875.00–$950.00 range. Both estimates are below the current spot price of gold, which stands at roughly $1,200 an ounce, giving room for profits. Moreover, both players are looking to grow their production in 2015.
The reason for pointing out the larger players in the industry is that they have the highest chance of surviving over a bull and bear market cycle.
If choosing to purchase gold stocks, investors are encouraged to conduct further due diligence; searching for quality names with strong balance sheets is an excellent starting point.