The price of an ounce of gold in 1973 was $60 Recently, in March of this year gold sky-rocketed to more than $1,000 an ounce. In recent days, the price of gold has been just above $800. Over the past several weeks, I have been inundated with questions about how to invest in gold. In more rational times, one might dismiss these questions as investor panic. Buying gold might be something reasonable to consider now, and for that reason I have chosen to make it the topic of this week’s blog.
Most traditional financial planners would agree with the idea of a client owning some small percentage of gold. The idea of investing about 10% of your portfolio in gold as insurance against a market downturn, is generally accepted. Many people struggle, however, to find reliable advice on investing in gold. The problem is that the most prominent gold dealers are chronically predicting the end of the world and typically advise people to put most if not all of their money in gold. Of course, they have a vested interest in doling out this kind of extreme advice, so most investors don’t take them all that seriously. I find it fascinating how many of the gold promoters have been recently taking credit for ‘being right’ about the recent collapse. Some of them have been predicting a collapse every year since the 1980’s and now that one has actually happened, they are proclaiming that their prediction was accurate. It reminds me of the old adage about a broken clock being right twice a day.
In my mind, gold is a legitimate investment just as any other commodity. I think there are times that owning more than just a small percentage would make sense as well. Years ago, when I was managing money for clients I regularly invested in gold mutual funds. On one trade I remember making about 40% in a very short period of time. Gold can be a reasonable sector to take a substantial portfolio position in from time to time.
1. Gold Coins and Gold Bars
I am not a proponent of buying gold coins or gold bars. If you don’t know what you are doing you can very easily be taken advantage of when trying to purchase physical gold. Regarding gold coins, you will pay more (‘ask price’) than you are able to receive if you sell (‘bid price’), this is called the spread. Among the most popular gold coins such as the Krugerrand, the Gold Maple Leaf, and the American Eagle, the spread is minimal. These coins are highly liquid and are in great demand. So, if you are going to buy physical gold I would find a well known local dealer and stick with the most popular gold coins as outlined above. I have heard horror stories over the years of people buying obscure gold coins to find out later that they had paid a 50% retail mark up. This meant that they had to see the price of gold double before they would be able to break even. You can also use Google to find any number of websites that will provide up to the minute quotes on the market price for the most popular gold coins (as listed above). It would be prudent to compare the price you are considering paying for a gold coin with the current quoted market price. There will be some disparity between dealers, but the idea here is to be sure you are paying something reasonably close to market value.
Another issue if you buy physical gold, is that you will have to decide how you are going to store it. You can go out and buy a safe and start accumulating gold in your home like Scrooge McDuck, but that is certainly taking a risk. You could be robbed, you could have a calamity at your home like a fire, tornado, or other natural disaster. Of course, you can add your gold to your homeowner’s policy and hope they will pay you if it is stolen or lost in a natural disaster, but that is not a certainty either. An alternative is to store your gold in a safety deposit box at a bank. I think that may be a more secure option than in your home, but what if you are robbed while transporting the gold to the bank? What if the bank goes bankrupt, will you have immediate access to your safety deposit box? These and a variety of other issues make purchasing and storing physical gold very impractical for most people.
2. Gold Mining Stocks
Another way to invest in gold is by purchasing publicly traded stock in gold mining companies. A gold mining operation may have 10 to 15 years of gold in the ground that has yet to be mined. When the price of gold goes up, gold mining stocks go up as well. In some cases, because of the leverage that these companies have with such large gold reserves, you may even see stock in a gold mining company rise a higher percentage than the actual increase in gold itself. Of course, this is not a pure play on the price of gold since you are actually buying stock in an operating company. If the company is poorly managed and has losses, this will trickle down to the stock price. So, you are buying gold but you are also buying into the management of the company and its future ability to conduct a profitable operation. Due to the highly volatile movement in the price of gold, gold stocks can fluctuate dramatically as well. So, unless you have a very large portfolio and can buy multiple gold stocks this is not likely your best strategy. Here is a great article that I just read in Barron’s on gold stocks. Barron’s Article
These Videos Are From A Few Months Back - A Little Dated But Very Interesting
3. Gold Mutual Funds
Of all of the ways to invest in gold, the best in my view is to purchase gold mutual funds. Gold mutual funds buy stock in gold mining companies. Because it is a mutual fund, you have built in diversification and your fund will own a variety of gold mining stocks. You will also benefit by having a professional fund manager following the stocks in the portfolio and making buy and sell decisions as warranted. Here is another article from Barron’s on gold mutual funds. Barron’s Article Of course, you can find gold funds very easily by doing a search in Google. Many large fund families like Vanguard have gold funds available.
Here is an interesting video on the Gold Standard and whether or not the U.S. may go back to it. Click Here For Video
Helping you make the most of God’s money!