Add a Little Glitter to Your Portfolio
Now, many investors are questioning – is it too late to get in on this rally?
On the pro side, there is no shortage of folks who say gold is a fool-proof investment. The advantages they tout include:
• Its historic value as an inflation hedge when the purchasing power of the dollar is eroding.
• The scarcity factor – you can’t make gold; it has to be mined, and there is a limit to the amount available around the world.
• Global affluence is growing, creating a booming demand for the metal.
• Uncertain economic and political climates often send investors flocking to gold, driving its price up and frequently leading it to outperform stocks and bonds during those periods.
However, owning gold is not without its drawbacks:
• Its price is very volatile, with its value determined by supply and demand, which is dependent upon the cravings of investors.
• During stock market rallies, the price of gold often declines.
• While frequently a great short-term investment, over the long-run, the return of gold is outpaced by equity returns. A dollar invested in gold in 1969, according to the Wall Street Journal, would have been worth about $20 by 2006. During the same period, $1 invested in the stock market, as measured by the S&P 500 index, would be worth more than twice that amount.
• Although touted as an inflation hedge, gold’s value has not always kept up with inflation.
That being said, the demand for gold is still on the rise. Jewelry accounts for some three quarters of the uses for the metal, with more than 60% of that demand coming from Asian, Indian and Middle East markets. Net retail investment in gold added up to another 19% of demand from 2002-2006. Industrial and dental uses account for around 12%, and new potential in fuel cells, chemical processing and controlling pollution will ensure continued demand.
Consequently, there are some good reasons for holding a portion – albeit a small portion – of your investment holdings in gold. But the question is, what is the best way to do so?
Gold Comes in Many Flavors
Dedicated gold bugs often want to own actual gold and they can do so by buying gold bullion, in the form of gold bars or coins. And while holding those pieces of gold in your hands can certainly be gratifying, actually owning the gold comes with its own set of challenges, including storage, insurance, lack of liquidity, and making sure you are dealing with a reputable dealer.
That’s why many investors prefer to own ‘paper shares’ of gold – either stocks, mutual funds or exchange-traded funds.
Since gold mining stocks can be very speculative for the average investor, and we want to provide information and research on investments that will appeal to a large contingent of our readers, we will focus on the latter two gold vehicles in these pages today.
Gold Mutual funds are relatively safe ways to buy gold stocks, and provide an easy way to diversify into gold, and at the same time, reap the benefit of professional management. Additionally, investors in gold funds don’t have to worry about storage or liquidity. And since the fortunes of mining stocks are dependent upon not just the price of the metal but also company-specific issues, that means the price of the funds can rise even if the value of the metal is flat.
However, investors do need to know that gold funds tend to be more volatile than the stocks in the S&P 500 index. Additionally, although the prices of gold funds generally move up or down with the price of gold, they don’t always do so, and they also usually move proportionally more than gold – in both directions. Many gold funds will also be subject to currency exchange risks as the companies in which they invest are outside the U.S.
On the plus side, investors now have numerous gold funds to choose from. Most gold funds invest in mining companies, but some also put their investors’ money into bullion, as well as other metals and commodities, in addition to gold.
Here are just a few examples of available funds:
| Fund | Symbol | Rating* | 3-yr. Retn. % | Investment Type |
| Vanguard Precious Metals | VGPMX | 5* | 39.83 | Mining Companies |
| USAA Precious Metals | USAGX | 4* | 44.46 | Mining Companies |
| Oppenheimer Gold & Spcl Minerals | OPGSX | 4* | 38.48 | Metals & Miners |
| Fidelity Select Gold | FSAGX | 3* | 35.50 | Metals & Miners |
| U.S. Global Investor’s | USERX | 3* | 39.3 | Metals & Miners; the oldest gold fund in the US |
Source: Morningstar.com
As you can see, the range is wide. But that raises the question – how do you choose which is the best fund for you? We recommend that you:
1. Decide how conservative or how speculative you want to be
2. Don’t chase returns – look at long-term performance.
3. Analyze the loads and expense ratios which can vary widely, from .4% to more than 2%.
4. Look at the portfolio turnover, which can range from 2% to more than 500%.
5. Find out if the fund is well-diversified or concentrated in too few companies.
6. Check out the funds’ management for tenure, experience and track records.
Funds come and go, and since 1989 sixteen gold funds have been dissolved – the last one as recently as November 2001, according to Eagle Wing Research.
As with any investment, make sure you investigate prior to plunking your money down. Fortunately, the Internet makes that easy for you. My favorite is: www.Morningstar.com. And don’t forget to call for a fund prospectus before investing. That way, you can decide if the fund’s management policies and investment objectives agree with your goals.
Gold Exchange Traded Funds (ETFs) differ from gold mutual funds in that many of them hold physical gold bullion rather than the gold stocks held in mutual funds. The World Gold Council safeguards this gold in their vaults.
ETFs have become very desirable for investors without the deep pocketbooks required to invest in bullion, as they can make purchases in small increments. Additionally, investors don’t have to worry about insurance, storage or unscrupulous dealers. And since the gold ETFs trade on major stock exchanges, liquidity isn’t a problem. Lastly, like mutual funds, ETFs provide portfolio diversification, professional management benefits, as well as certain tax efficiencies.
However, there are some disadvantages. Investors do have to pay commissions, or transaction costs when buying or selling gold ETFs, as well as management expenses along the way – although the costs and fees are generally lower than investing in similar mutual funds. Also, ETFs are securities and the prices will therefore rise and fall with investor demand.
Gold ETFs were first issued by the Australian Stock Exchange in 2003. Today, they are readily available in the U.S., Australia, the U.K. South Africa, Singapore, France, Italy, Germany, Japan, and India.
Here is a sampling of the gold ETFs you can purchase in the U.S.:
| ETF | Symbol | Rating* | 1-yr. Retn. % | Investment Type |
| streetTRACKS Gold Shares | GLD | 3* | 54.30 | Bullion; the most widely-held gold ETF |
| iShares COMEX Gold Trust | IAU | 3* | 54.32 | Bullion |
| Market Vectors Gold Miners | GDX | Not rated | 53.41 | Miners |
| PowerShares DB Gold | DGL | Not rated | 50.11 | Gold Futures |
| PowerShares DB Precious Metals | DBP | Not rated | 51.55 | Gold & Silver Futures |
Source: Morningstar.com
Because so many ETFs are new to the market, they haven’t been in business long enough to warrant a rating – or for 3-year return figures. Therefore, you will need to be cautious. To find the best ETF for you, make sure you do compare expenses – not just performance figures. Morningstar is also my favorite Internet site for researching gold ETFs.
As you can see, for most investors, buying a gold fund or ETF, rather than bullion or gold coins, probably makes a lot of sense. And both funds and ETFs have their advantages. If you do decide to invest in gold funds or ETFs, we recommend that you do so with just a small portion of your overall portfolio. That way, you can take advantage of any further appreciation in the metal, but you won’t be risking the majority of your funds on a very volatile sector.
We certainly can’t make any promises for the continued meteoric rise for gold. But most investors may find that adding a little glitter to your holdings may be just what you need to ‘shine’ up your returns.
About the Author
Nancy Zambell, Contributing Editor to BrokerAdviser.com's Financially Fit, has enjoyed a diversified career in the financial services industry.
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