Gold is always a hot commodity given it’s perceived storage of value and finite characteristics. If you have decided to add gold to your investment portfolio then the next question one must ask is what vehicle makes the most sense for exposure? Each vehicle has advantages and disadvantages. The key for investors is understanding your risk tolerance and expected rate of return. Here are a couple of ways to invest in gold:
- Gold Futures- This is a standardized exchange-traded contract in which the contract buyer Agrees to take delivery from the seller. Gold contracts can be purchased on the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM). NYMEX futures are quoted in dollars and trade in lot sizes of 100 troy ounces. This is a highly risky investment given the leverage for $1 move is equivalent to $100. For example, if gold runs from $1100 to $1110, then your profit is $1000 move. A tempting pay day for sure. But if gold tumbles to $1075 you are down $2500 in just one contract. Most retail investors are not looking for this type of volatility when buying gold for the portfolio. There are mini gold futures available which trade at $50 per point move. Exposure via gold futures is best left to seasoned traders given the risk and volatility.
- Gold Coins/Bullion- This has a perfect correlation to market prices of gold without the leverage of gold futures. It also lets you take control of your investment by holding a physical asset. There are additional costs associated with buying coins as sellers or distributors (like primary dealers) usually charge a premium for the transaction as they look for compensation for mining costs. There is also the potential for storage fees for those who prefer to keep their investment with a third-party rather than risk the threat of flood, fires, theft, etc at one’s home. There are also the cost of professional graders who will verify the quality of coins or bullions. And finally, there is the transportation and insurance costs. But for investors who, in the spirit of Warren Buffet, prefer to buy things that will hurt their foot when dropped, this is the avenue to pursue.
- Gold Companies- For the stock pickers there is always the route of buying individual companies that mine gold out of the ground. Mining is a front-end loaded business. The cost to secure land, buy equipment to drill and hire the workers to perform the labor are born at the beginning of operations. Thus, companies are forced to borrow heavily to drill. Hedging is also a key activity that needs to be properly managed. Investors going the miner company route need to be sure that they are aware of the operations and balance sheets of companies. There is more volatility in these names which leads to better returns for those savvy enough to pick winners. For those looking for exposure to mining companies but not looking to parse through the individual companies there are Miner ETFs including the VanEck Vectors Gold Miners (GDX) and the VanEck Vectors Junior Gold Miners (GDXJ). In addition, there are a slew of 2x and 3x leveraged Miner ETFs providing leverage for those looking to take on more risk.
- Gold ETFs- A simple way for the average retail investor to gain exposure to gold is through Exchange Traded Funds. This is a convenient and liquid way to own gold futures, bullion, and other vehicles. The most well-known is the Spider Gold Trust (GLD) which has an average daily volume of 15.7 mln. The iShares Gold Trust (IAU) is another popular destination for gold buyers. Other ETFs to consider is the SPDR Gold MiniShares Trust (GLDM) and Aberdeen’s Standard Physical Gold Shares (SGOL). Investors should research these funds to see what is included in each ETF and the methodology for tracking gold. Understanding the ownership and management costs associated with each ETF is key for tracking expected returns.
- Gold Mutual Funds- Similar characteristics to ETFs in terms of liquidity and volatility. Mutual Funds usually hold stocks of mining companies and typically do not hold exposure to physical gold. So mutual funds will track the performance of the market where Gold-based physical ETFs will track gold prices. Like ETFs, investors need to research management fees and the funds exposure to have a better understanding of what their money is buying. Some of the better gold mutual funds are Invesco’s Oppenheimer Gold & Special Minerals Fund Class Y (OGMYX), USAA’s Precious Metals and Minerals Fund Adviser Shares (UPMMX), and Invesco’s Oppenheimer Gold and Special Minerals A (OPGSX).
- Gold Jewelry- Another way of owning physical gold is of course buying jewelry. This is another example of gold being intertwined with the history of man. This can be a key driver of gold as evident by the Indian wedding season phenomenon. India’s demand for gold generally exceeds 514 tonnes per year. The demand picks up at the start of Indian Wedding Season which is October and lasts through early January. Seasonally gold’s strongest performing months are August and September as purchases ramp up during this window. Prices will remain elevated in November and December on historical average.
As you can see there are several ways to invest in gold. Understanding the risks and the rewards of each method is key for investors looking for gold exposure.