Gold

I haven't in the past spent much time researching or thinking about investing in gold. But these days it seems every second or third radio advertisement or TV talking head is telling you that the US dollar will be worthless in the next year and you need to buy gold to survive the looming financial crisis. Generally gold is a hedge or safe haven against any economic, political, social or currency based crisis. For example, if the US were to decide to invade Iran, the price of gold would go up; if tomorrow the US GDP growth magically rose to 6%, gold would go down. Gold price changes by sentiment, not growth in production. The price can also change with countries either selling or buying gold. India recently bought 200 tons of gold to help drive the price higher. I have decided to do some research on how to invest in gold and consider possibly making an investment.


There are several methods you can use to invest in gold:

- Directly through ownership.

o Buying gold coins (ie. Canada Maple Leaf) or bullion

- Indirectly

o Gold certificates. You buy a certificate that says you own x amount of gold (you do not need to store it).

o Gold Exchange Trade Funds (GETF). Each share originally represented exactly one-tenth of an ounce of gold (today it is less because fund cost comes out of the gold that is stored).

o Accounts - You can buy gold just like any foreign currency in Swiss banks.

o Derivatives – ETFs that you can short and long (2x) the price of gold.

o Shares

§ Gold mining companies stock

§ Gold mining companies ETFs

Let’s review some of these methods of investing in gold and show the pros and cons of each. You can buy gold coins (ie. Canada Maple Leaf) or bullion from a dealer and have it shipped to you or stored for you. Hopefully you buy it from a reputable dealer. The Canada Maple Leaf is .9999 pure gold; I don’t know how to verify the gold content. Buying coins or bullion is not cheap. The gold end day price was $1097 for 1 oz of gold (January 25, 2010), the lowest price that I could find to buy a Canada Maple Leaf 1 oz gold coin was $1188 (this does not include the 3% brokerage fee or shipping cost). You could have sold it for $1079 that day. You need to make at least a 10% gain just to break even (GETF had a gain of only 14.25% for the last year). You also have to store it and hope that it actually is .9999 gold. I think the only time I'll be buying gold coins or bullion is when I want to get a gold chain and wear the coin on my chest.

There are GETFs that you can buy. A share used to represent exactly one-tenth of an ounce of gold (less today because fund cost comes out of the gold that is stored). GETF GLD (SPDR Gold Shares), a large fund with $42 billion of assets with a low bid / ask spread, sells for $1 below Net Asset Value and has an expense ratio of .40%(which reduces the amount of gold it stores). The year to date performance growth was 14.25%. This is the easy way to buy or sell gold. It’s just like buying or selling a stock. This is also much like buying gold certificates or accounts and you don’t have to ‘trust’ Swiss bankers. I would invest in the GETFs before gold certificates or accounts (I don't have a lot of faith in Swiss bankers).

You can play the derivatives game with gold (like everything else). Long Powershare ETFs would be DGL and double long DGP. DGL gain was 12.82% last year which is less than GLD (GETF). Short ETFs would be DGZ and double short would be DZZ. The only way I would buy gold derivatives ETFs is if I had inside information a big event was going to happen (ie. US are planning to invade Iran) that would affect the price of gold.

Next are gold mining companies stocks or gold mining companies index ETFs. Since I don’t want to do a lot of research on gold mining companies stocks I decided to review gold mining companies index ETFs. For example, Market Vectors Gold Miners (GDX) ETF has a very low bid / ask spread of $.01, an expense ratio of 55% and low turnover of 13% (which is good if you are in a taxable account). The year to date return was over 33%. This ETF follows the AMEX gold miners index and tries to match the index performance. There is a lot of volatility in the price of gold mining stock because of leveraging. The price of gold production is fixed and the price of gold is more variable; this leads to a great deal of instability in gold mining profits. Gold mining companies will hedge gold prices to try to reduce volatility.

At this time I am not interested in gold investing, but I will add the ETF GTX to my blog watch list.

Next week I will write about buying Natural Gas (NG) ETFs. Big US oil companies, for example, Chevron made be looking to do Merger and Acquisition (M and A) of NG companies in an attempt to increase their NG reverses. Future topics may include:

- Review on how derivatives work. Should you be investing in a derivative ETF? What are the rewards and risks of investing in these ETFs?

- Shorting US currencies

- What sector will do the best in 2010?

- Update on performance of blog trades

- Other topics

In April I will be starting a financial website and in the summer I will be starting a financial podcast with Fullstacks and Mr. C (need to talk with him).

Please chime in! I would like to have an on-going discussion of financial and investing ideas.


Paul