About four years ago, Jim Black, a real estate agent, used some of the money in his individual retirement account to buy shares in Vanguard Special Gold and Precious Metals mutual fund.
Black does a lot of his investing through mutual funds and liked the idea of diversification-spreading his investment among stocks of several mining companies, bullion and coins as the fund does.
“It just spreads the risk,” he said. And dividends are reinvested in more shares of the fund.
Having about 2 percent of his IRA money in a precious metals investment, he says, gives him an added hedge against inflation (gold prices normally rise when inflation rates increase). Black plans to hold on to his investment for a long time. With the fund up 49 percent so far this year after “languishing at best” since he bought it, Black said he is pleased with the investment.
Indeed, in the last six months, gold-based investments have come back to investor attention after more than a decade of relative dormancy. Investors were hot after gold in the 1980s, but turned their attention elsewhere after prices of the yellow metal stagnated in the mid- and late 1980s.
Since last fall, gold prices have rallied, moving up about 15 percent. Stocks of gold mining companies and mutual funds that invest in them have soared as well, some doubling in value since November.
Regardless of market conditions, advisers believe every investor should have at least some stake in the precious metals market-5 to 10 percent of your portfolio is what most recommend. And, they say, you should buy a combination of gold-mining company stocks or shares of mutual funds that invest in those companies and gold bullion or coins, such as the American Eagle or Canadian Maple Leaf.
Gold has always been considered the ultimate store of value-universal money, especially in times of worldwide crisis or upheaval.
“When other investments fail, very often it’s gold that goes up,” says Betty Raptopoulos, senior metals analyst for Prudential Securities Inc. in New York. “In the worst-case scenario, which I don’t advocate buying it for, if there is a financial crisis, gold retains its value versus paper money.”
Besides the general case for owning gold, analysts believe market conditions are right for a runup in gold prices.
“People forget gold is a commodity and it works off of supply and demand,” says Emile Bizot, branch manager in Memphis for A.G. Edwards & Sons, a St. Louis brokerage firm.
Gold demand is about 90 million ounces per year, while about 60 million ounces come from the mines annually, Holmes adds. Third World countries and central banks selling to raise cash have made up the difference, but it is only a matter of time before those stockpiles run out.
Meanwhile, the Chinese are finding gold increasingly attractive, says Raptopoulos. China’s economy is growing rapidly and the nation’s inflation rate is high, with some Chinese now buying gold to protect their purchasing power.
Economics and metals-market conditions also make gold look good now, says Franklin Sanders, a Memphis precious metals dealer.
The United States has been on an 80-year debt binge, and as the debt shrinks, the money supply will fall, too, a pattern Sanders sees continuing over the next 10 years. The economic term for that is deflation. He pointed to a study published in 1977 by British economist Roy Jastram that measured gold prices against the prices of a group of other commodities from 1560 to 1976.
It showed that gold gained in purchasing power during periods of deflation and lost ground during major inflationary times.
Sanders also says the movement of gold prices indicates gold is either coming to the end of a 13-year down market or is ready to start a new up market.
If you agree with the experts and decide to invest in gold, there are several ways to do it-and you can use a combination of them:
– The metal itself, in bullion form or coins. People who want to own the bullion can buy it-1-ounce versions, some even smaller in “wafers”-from dealers. You can also purchase it in larger quantities and have a storage company keep it for you for a fee. You don’t need a lot of money to buy. Holmes recommends buying an ounce of gold a year-these days an investment of about $380.
Sanders suggests a lower cost idea: buying the British Sovereign coin for about $95. Coins often sell at a premium, a figure above the market price of gold bullion. American Eagle and Canadian Maple Leaf 1-ounce coins usually go for 7.5 percent above the market price of gold, but the the South African Kruggerand and Austrian Corona, other major 1-ounce coins, carry lower premiums, he says.
The downside of gold or coins is they pay no interest or dividends. The only way to profit is for the price of gold to rise, and then your returns will be limited to the percentage increase in the price.
That’s where other gold-based investments come in.
– Stocks and mutual funds. Stocks in gold-mining companies or mutual funds that buy those shares are an indirect way of investing in gold.
“You can get some that pay dividends, so you have something coming in while you wait (for gold prices to rise),” says Bizot.
Because there are not many high-quality gold-mining company stocks relative to companies in other industries, shares of those companies tend to start up even before gold prices.
But stocks carry with them an extra layer of risk: management of the company. You may be right on your prediction for gold prices to rise, but pick the wrong company and fail to make money.
Where mining companies do business is also important in choosing stocks. Bizot favors U.S. or Canadian operators. South Africa is the world’s leading producer, but many experts believe political risks there remain great.
– Options and futures contracts. A futures contract obligates you to buy or sell gold for a set price at a particular time in the future. An option gives you the right to buy or sell gold at a set price for a certain period of time.
Both carry high risk-you could lose your entire investment in an option, you could lose more than what you invest in a futures contract-and should only be used as gold market investments by sophisticated people who understand how they work and can afford to lose the money.
Gold rush
Gold is a hot commodity again, with the price of th previous metal having risen 15 percent since last fall. Here are some ways to invest in it.
– The metal itself, in bullion form or coins.
– Stocks of gold mining companies or mutual funds that buy those shares.
– Options and futures contracts though both can carry a high risk.
