Market Overview

Investing In Gold

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Gold has been on a 13 year rally dating back to 2001 when it was trading at 271.04.  It currently trades at $1202.80 the troy ounce.  This may be the first time in 13 years where gold closes the year at a loss.  Investors like to have some exposure to gold as a hedge or just to diversify their portfolio with one of the most popular commodities worldwide.  During an economic crisis gold seems to be even more popular that pretty much explains the ascent of the commodity from $695 in 2007 to $1917 an ounce in August 2011.


 


As an investor or someone trying to make some profits there are a few ways to invest in the precious metal.  The most obvious way is through the purchase of gold bars, jewelry or gold coins. Your best bet is to buy the gold bars and store them in a safe box at a bank.  You can also invest in gold without actually purchasing the physical commodity but instead you can buy the futures contract on Comex this will give you the same exposure to the actual price of the commodity which currently trades at $1202.80 (GCG14.CMX).  You can also buy gold through your 401k or through a mutual fund.


 


An investor can also invest in gold exchange-traded products that aim to track the price of gold and are traded on the major stock exchanges such as London, Mumbai, Zurich and New York.  These products include close-end funds CEFs, exchange-traded notes ETNs and exchange-traded funds ETFs.  The most popular exchange-traded product is the ETF which is an investment fund traded on stock exchanges just like stocks.  It can hold commodities such as gold and silver.  Investors like them primarily due to their low costs.  A popular gold ETF is the SPDR Gold Shares (GLD).


 


Another way to have exposure to gold is through an index such as the Philadelphia Gold and Silver index (^XAU) which trades on Nasdaq the index is made up of different companies that mine/produce gold and silver. You can also pick one of the gold mining stocks from the index and invest in that company such as Goldcorp Inc. (GG).


 


If an investor wants to fully invest in gold I would suggest to invest in the actual physical commodity either through gold bars or a futures contract.  Any other investment may be easier and less expensive but it will not move 100% in congruence with the price of gold.  Since the financial crisis started in 2008 gold stocks did not rise in value as much as the actual commodity.  When a recession as severe as the one we just lived through hits, people want the physical commodity not a stock.  This year gold prices have dropped about 25% yet gold companies have lost about 50% of their value.  That is why I prefer to go for the actual commodity I bought gold back in 1998 when it wasn't hot came very close to buying at the 1999 low.  I was just a kid back then I wish I would've had more money but I did buy some more in late 2007.


 


Whether you pick the physical stuff or a mining stock you risk buying high and waiting a lifetime to get your money back or if you buy a futures contract you may get stuck accepting physical delivery of the commodity or with a monetary loss from trading.  The declining prices may be a signal to buy especially for mining stocks yet prices may continue to fall.  The economy is improving which may lead investors to drop gold and move onto other investments.  Buy gold now at your own risk or wait for prices to drop even lower to enter.  As for me I like to buy when no one is interested as I did in 98.  At this point the prices are a bit too high for me and I would invest a very small amount of money if at all.  I believe there are better investment opportunities out there.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Commodities Markets

 

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