It is no longer a matter of whether or not you should buy gold and/or silver but, rather, which type of investment(s) and how much. You don’t need a lot – but you do need some – and here is a primer on just what type of investment vehicles are available and recommendations on just how much you should buy.
Gold is the best hedge against uncertainty there is and it is also a useful thing to have in your portfolio if inflation is rising, as some foresee, or if the U.S. dollar was to decline further, as expected.
How Much Gold Do You Need?
The U.S. firm Ibbotson Associates, in a study for Canada’s Bullion Management Group, found investors can potentially improve their balance of risk and reward with a precious metals weighting of 7.1% in conservative accounts, 12.5% in moderate accounts and 15.7% in aggressive accounts. Precious metals can include silver and platinum, but it’s a term that primarily means gold.
Another U.S. firm, Wainwright & Co. Economics Inc., looked at the need for gold in one’s portfolio from an inflation protection point of view and concluded from their research that “a U.S. equities portfolio in which 15% of the assets are diverted to gold bullion would be effectively immune from damage due to a rising gold price and that is, we believe, equivalent to immunity from inflation.”
Which Vehicle Should You Choose?
a) Physical Gold and Silver
Gold in bars or coins makes sense if you are concerned about the complete breakdown of society but you will have an asset that needs to be securely stored.
b) Individual Gold and Silver Stocks and/or Their Long-term Warrants
Gold and silver stocks have an added degree of risk because you not only need gold prices to rise (and gold stocks and gold bullion don’t always move in unison) but you also need your precious metals company to be a well-run business. For greater leverage on your invested dollars consideration should be given to an investment in commodity-related long-term warrants.
c) Precious Metals Mining Mutual Funds
PM funds hold the stocks and/or warrants of gold, silver and platinum companies involved in the producing, developing, exploring or buying (via royalty payment arrangements) of such metals. While they are among the most expensive in terms of the fees they charge they have a long history of bringing the benefit of rising gold prices to individual investors (and the opposite, of course).
d) Exchange-traded Funds
There are two kinds of gold ETFs:
1. One tracks the price of gold bullion and is thus a clean, convenient proxy for holding physical gold (e.g. the iShares Comex Gold Trust, which trades on the TSX under symbol IGT (IGT-T) and the New York Stock Exchange under IAU (IAU-N) and the NYSE-listed StreetTracks Gold Shares ETF (GLD-N).
2. The other tracks an index of gold mining stocks like, for example, the iShares CDN Gold Sector Index Fund (XGD-T), which follows the S&P/TSX Global Gold Index and Market Vectors Gold Miners ETF (GDX) which tracks the large cap producers in the AMEX Gold Miners Index and the Market Vectors Junior Gold Mine (GDXJ) of mid-cap producers.
e) Closed-end Funds:
Closed-end funds are conventional mutual funds that trade like a stock and thus can be bought or sold any time during the trading day (mutual funds can only be sold at end-of-day prices). Closed-end funds differ from ETFs in that they can trade at significant discounts or premiums to the net asset value, whereas ETFs will veer away from their net asset value only temporarily and mildly. Several closed-end funds offer a way to hold actual gold, including the new Claymore Bullion Trust (CGL-T) and Central Gold Trust (GTU.UN-T).
Two key questions to ask:
1. Am I investing in gold stocks or gold bullion?
2. Am I exposed to Canada-U.S. currency fluctuations?
Gold is priced in U.S. dollars and a rising Canadian dollar will increase your gains.
f) Gold and Silver Coins:
Owning gold and silver coins are another alternative to consider.
The reason why gold’s a legitimate asset class for investors today is its potential to shine when all else is bleak. How much gold and/or silver do you have in your portfolio?