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Is It Time to Invest in Gold? - 6342 views
By Jonas Elmerraji
Posted on May 12, 2010
Gold’s been on fire in the past two years. Since May 2008, the spot price of the yellow stuff has risen in value by 43% -- during a time when stocks were crashing all around it. The increase in volatility stocks are seeing in May has already sent investors flocking toward gold. But in today’s world of complex investment choices, does it make sense to load up on gold right now? And if it does, what’s the best way for a stock market investor to take a position in the stuff?
Here’s everything you need to know about investing in gold right now.
For stock investors, there’s often a big disconnect between investing in productive companies and investing in commodities such as gold. As with stocks, the value of gold comes from what others are willing to pay for it in the market, but unlike stocks, gold has no intrinsic value to support those prices.
Because of that, it’s hard to make a “value” argument for gold any time.
While silver is used in scores of manufacturing processes that drum up demand and reduce available quantity permanently, gold has relatively few industrial uses to support its price. The gains gold investors saw back in 2008 and 2009 weren’t because gold was suddenly being used up faster; they came about because investors were buying gold en masse in an attempt to add a hard asset to foundering stock portfolios.
That makes the future price of gold very difficult to predict from a fundamental perspective. But gold’s ability to act as a strong currency hedge the world over adds a bit of understandability to its price. Predicting how the dollar or stocks will move gives us a way to base our investment in gold.
When the market is as volatile as it has been in the past couple of weeks, people turn to gold to avoid its unpredictable whipsaws. But the idea that gold keeps you free of speculators’ influence is dead wrong.
Still, who owns gold is a good indicator of how prone it’ll be to spikes and valleys in 2010. Since gold is held in large quantities by governments, financial institutions, and long-term investors, the metal tends to be more stable on a day-to-day basis than the broad market. And with countries such as China loading up on all the gold they can find, now’s a good time to reap the benefits of gold.
So how can you get exposure to gold in your portfolio?
Generally, there are three http://www.stockpickr.com/problog/2208/ "> gold plays that investors turn to: gold, gold equity, and gold miners.
While purists will advocate investing in real gold -- and taking physical delivery of it -- that strategy is a little involved for the casual gold investor. Today, we’ll just focus on the latter two strategies.
Gold equity is an attractive alternative to physical gold. Through a slew of ETFs and mutual funds, investors can purchase stakes linked to real physical gold, albeit at faraway locations. While that means you’ll have to pay the fund’s expense ratios, for most investors, it'll be a lot less expensive than installing a floor vault in the den.
One of my favorite gold equity plays is the SPDR Gold ETF (GLD). GLD is one of the most popular gold investments out there right now, and for good reason: The fund’s price translates into more than 31 million ounces of gold stores in high-security vaults in London. The fund’s access to gold is also significantly more liquid than physical alternatives; GLD trades for around a tenth of an ounce of the spot price of gold (minus some inherent tracking error), and high volume ensures that prices stay within realistic bounds.
GLD’s large size has presented some issues in the past. As investors pile into this exchange-traded fund, its managers are forced to buy more physical gold, actually increasing the price of gold -- a tail-wagging-the-dog scenario.
Who Owns GLD?
http://www.stockpickr.com/port/Paulson-amp-Co-Inc-Holdings/ " target="_blank" class="subheaderts">John Paulson
http://www.stockpickr.com/port/Wilbur-Ross/ " target="_blank" class="subheaderts">Wilbur Ross
http://www.stockpickr.com/port/George-Soros/ " target="_blank" class="subheaderts">George Soros
There are alternative ETFs worth looking at -- namely the iShares COMEX Gold Trust (IAU) -- but ultimately any similarly constructed fund will trade almost identically.
ETFs aren’t the only option for gold funds, of course. Mutual funds such as top-performing http://www.stockpickr.com/port/Tocqueville-Gold-TGLDX/ "> Tocqueville Gold (TGLDX) offer different management styles to investors.
Gold producers are another way to play the metal, offering investors plays that range from tried and true companies to more speculative http://www.thestreet.com/story/10753190/1/three-junior-miners-to-watch.html "> junior miners . Unlike gold itself, producers do have intrinsic value -- and they produce income and dividends regardless of where gold’s short-term price is going. Don’t think that producers will take the speculative risk out of gold, however. Since gold is the main business of these stocks, their prices are tied to the performance of actual gold.
One of my favorite gold producers is Yamana Gold (AUY), an $8.4 billion Canadian-based miner. As a proven producer of gold, Yamana enjoys a more stable gold price than smaller, more speculative plays, but that comes at a premium. All told, the company expects to increase its gold output by nearly 50% in the next three years, effectively quadrupling its margins in the process.
Because much of the firm’s growth won’t be seen until 2012, some decent upside potential still exists in the stock. Even though shares of Yamana trade at a relatively high earnings multiple, the fundamental change this stock is facing more than justify it.
And with bullish pressure on gold right now, the stock could see even more upside in 2010.
To see these gold stocks in action, check out the dedicated portfolio on Stockpickr.
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