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Want to Invest in Gold? You Have Options

Oct 21, 2010

By John Waggoner
 

Gold has soared more than 400% since its low of $255.95 on April 2, 2001, driven by fears of inflation and the declining value of the dollar on the global currency markets.

If you want to invest in gold, you have several choices: collectible gold coins, gold bullion, gold-mining stocks, gold mutual funds and gold exchange traded funds. Which is best? It depends on how much money you have, how long you plan to hold your investment, and why you're investing in the yellow metal. Here, then, is a rundown of your many options in buying gold.

Be aware, however, that gold was much more appealing at $255.95 than it is at more than $1,300. And don't go overboard. A 5% to 10% position in gold is enough for nearly everyone.

Gold-mining stocks

Pros: Easily traded; tend to rise more than the metal itself; may pay dividends.

Cons: Not gold. If you're worried about the U.S. dollar, owning a stock isn't the answer.

Most times, gold-mining stocks rise more than the metal itself. Suppose your company could produce gold for $500 an ounce. If gold were $600 an ounce, your gross earnings would be $100 an ounce.

Now let's say that gold rises to $1,000 an ounce, or a 66.7% increase. Your company's gross earnings, however, have increased from $100 an ounce to $400 an ounce, a 300% increase.

Because stock prices typically follow earnings, a gold-mining stock may rise more rapidly than the metal itself. This year, gold bullion has risen 23.8%, while the Dow Jones gold mining index has gained 24.7%.

Although there are a handful of publicly traded large U.S. gold-mining companies, there are many more small gold-mining companies, and investing in those companies can be fraught with risk — and outright fraud.

Collectible gold coins

Pros: Intrinsic beauty; scarcity.

Cons: High markup over value of gold in coin; difficulty for novices to master coin grading; storage.

Buy gold coins because you like their looks and you're interested in collecting, not if you're just trying to be in on the price of gold rising. "You need to understand coin grading and have some idea of where the coin market is trading," says Beth Deisher, editor of Coin World.

Grading is crucial. Consider a 1925 St. Gaudens with a Denver mint mark trades for $7,250 if it's graded MS 62. At MS 63, the price leaps to $13,500. Both grades are uncirculated grades, and it's hard to tell the difference with an untrained eye — which is why many people pay to have coins professionally graded.

Major coin graders:

Professional Coin Grading Service.

Numismatic Guaranty Corp.

American Numismatic Association Certification Service.

What about the claim that collectible coins can't be called in by the government, as gold coins were in 1933? "That's really a misunderstanding of history," Deisher says. And Congress could pass a law confiscating collectible coins if it wanted to.

Gold bullion coins

Pros: Don't need to be tested for purity; portable; available in many sizes.

Cons: You have to store and insure your coins.

Most developed countries sell government-made gold coins. The U.S. coin is the Gold Eagle, which comes in sizes ranging from one-tenth of an ounce to 1 ounce.

Eagles are 22-karat gold; the mint mixes in some copper to ensure durability. Gold is a relatively soft metal and dents easily. You can find a list of Eagle dealers online at the U.S. Mint.

Other countries have their own gold coins:

•Canadian Maple Leaf coin. Unlike the U.S. Eagles, Maple Leafs are 99.99% gold. They come in sizes ranging from one-twentieth of an ounce to 1 ounce.

•South African Kruggerands. The original gold bullion coin, Kruggerands are 22-karat coins that come in 1-ounce denominations.

Once you own a gold coin, you have to figure out where to store it. Most people prefer a bank safe-deposit box. If you don't trust banks, find a secure place where robbers can't get your coins.

Gold funds

Pros: Diversified portfolio of gold-mining stocks.

Cons: Management fees; not the metal itself.

Most gold mutual funds invest in gold-mining stocks, and if you're not interested in picking individual stocks, then a gold fund is the logical choice. The top-performing gold funds the past five years:

•Van Eck International Investors Gold (INIVX). This broker-sold fund has 85% of its assets in foreign gold stocks.

•USAA Precious Metals and Minerals (USAGX). This no-load fund also has most of its holdings in foreign gold stocks. Its 1.21% expense ratio is well below the average gold fund's 1.58% annual charge.

•Oppenheimer Gold & Special Minerals A (OPGSX). The fund can also put some of its assets in platinum, palladium and other metals producers.

Be careful: Gold funds have huge swings up and down. The largest three-month gain for precious metals funds was 52.75% in 1983, says Morningstar, which tracks the funds. The worst three-month loss: 51.56% in 2008. You'd need to earn more than 100% just to break even after a loss like that.

And, like most specialty funds, gold funds aren't cheap. The average gold fund charges 1.58% a year to manage. A high-ranking, low-cost gold fund: Vanguard Precious Metals and Mining (VGPMX), which charges just 0.27%.

Gold ETFs

Pros: Easily tradable; low-cost; diversified.

Cons: Easily tradable; and not the metal itself.

Gold exchange traded funds come in two flavors: those that buy gold bullion and those that don't.

If you want to own gold but don't want to have to deal with storing it, buying it, or selling it, then a gold ETF that buys the physical metal is for you. The big daddy of all physical gold ETFs is SPDR Gold Shares (GLD), which owns more than $50 billion of gold bullion. You can also buy ETFs that buy silver, such as iShares Silver Trust (SLV); platinum, such as ETFS Physical Platinum (PPLT); and palladium, such as ETFS Physical Palladium Shares (PALL). If you're looking for an ETF that owns gold-mining stocks, consider Market Vectors Gold Miners ETF (GDX).

The problem with gold ETFs, and it's common to all ETFs, is that you can trade them frequently or even sell them short. Although there's nothing illegal or immoral about that, frequent trading can lead to frequent losses, as well as large commissions. If you buy a gold ETF, try not to succumb to the temptation to trade them too frequently.

And bear in mind that if you're investing in gold ETFs or gold stocks, you won't get protection from a catastrophic financial meltdown. "You're betting on the direction of gold prices," says Gregory Marshall, CEO of Global Asset Management, a Hollywood, Fla., precious metals dealer. "You can't turn in shares of an ETF for bullion."

These articles are provided for informational purposes only and were obtained from publicity available sources on the Internet. These articles do not constitute financial advise or trading recommendations by Global Asset Management ("Global"). Global neither warrants the accuracy or completeness of the information contained in these articles, undertakes to update them, nor is it responsible for any omission or error contained in these articles. Viewers are encouraged to conduct, and should only rely on, their own independent research.
The purchase or sale of precious metals involves substantial risk and volatility. If you are contemplating purchasing and/or selling precious metals, you should consult with an independent financial advisor to learn about the inherent risks. Global does not render, and nothing in this website should be construed as, financial advise, a trading recommendations or a solicitation for the purchase or sale of precious metals.
 
 

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