Saturday, August 1, 2009

Options for Investing in Gold

There is a great deal of interest in gold these days as an investment or a hedge against inflation and a debasing of world currencies. My purpose here is to describe some of the options available to investors. Perhaps investment is not the correct term for those who desire to purchase gold. It does not pay dividends. Unlike investments in common stocks, there are no earnings on which to base ones purchase price. Much of the rationale for the purchase of gold is based on the worry that perhaps other forms of storing value such as currency, savings accounts, and even other forms of investment will be worth much less in the future than currently due to governments debasing their currencies. Recently with the extremely large budget deficits being accumulated by government entities and the attempts to re-inflate the economy there is a great deal of basis for such concern.

Following is a discussion of alternatives available to those wishing to purchase gold or invest in gold as a hedge against inflation and the debasing of currencies.

First where are places one can purchase physical gold? One option is through dealers on Ebay. Every day there are a number of bullion bars and gold coins available for purchase. This is an attractive option for small quantity purchases of gold, but one needs to be careful about making such purchases and check the reliability of the dealers carefully. One also needs to refrain from bidding more than the gold is worth. This happens quite frequently on Ebay. Another option is through local coin dealers and also through coin shows that come to a near by town. Many times coins and bullion can be purchased at attractive prices by this means.

For larger purchases a good option is through one of the large volume coin dealers. Two that deal this way are Monex.com and Tulving.com. There is retail mark up on such gold purchases.

An option that has been available for a few years is an ETF that holds gold bullion. GLD is the ticker symbol. It currently has assets of about $31 billion and is 2nd largest ETF behind SPY. John Paulson, a prominent hedge fund manager recently holds nearly $3 billion worth of GLD his largest holding. Thre is also a closed end fund that holds gold bullion--Central Gold Trust GTU.

There are three other ETFs available that hold futures contracts on gold--DGL, UBG and IAU. UBG is by far the larger of the three with over $4 billion in assets.

Another option which if the price of gold were to increase dramatically is worth considering is an investment in gold mining shares. There are two diverences between investing in gold mining companies and investing in gold itself. First is that an investment in a gold mining company is by definition an investment whereas buying gold itself is not really an investment but more or less a hedge. 2nd is that such an investment is highly leveraged. Gold mining companies operate under a high fixed cost. Even the very largest, Barrick Gold, has a cost per ounce of $443 per ounce up 58% in two years. Many of the smaller miners have a much higher cost. What that means is that if the price of gold increases 10%, say from $950 an ounce to $1045 an ounce, then the profit per ounce for Barrick Gold increases from $507 to $602 an ounce assuming cost per ounce remains constant an increase of 38%. For higher cost producers it becomes a much greater increase. If of course the price of gold decreases, then many gold producers can loose money.

Here is a list of some of the gold producing companies.

Barrick Gold--ABX market cap $30 billion
Goldcorp-GG market cap $27 billion
Newmont Mining--NEM market cap $19 billion
Anglo Gold Ashanti--AU $13 billion
Kinross Gold--KGC $13 billion
Agnico Eagle Mines--AEM $9 billion
Gold Fields--GFI $8 billion
Yamana Gold--AUY $7 billion
Compania de Minas Buenaventura--BVN $6 billion
Lihir Gold--LIHR $5 billion
Randgold--GOLD $5 billion
Harmony Gold--HMY $4 billion
Eldorado Gold--EGO $4 billion
IAMGOLD--IAG $3 billion
Royal Gold--RGLD $1.6 billion
Allied Navada Gold-ANV $0.6 billion

There are a number of index funds and mutual funds that invest in gold mining stocks. Here is a list of some.

Market Vectors TR Gold Miners--GDX $2.6 billion
Powershares Global Gold and Precious Metals--PSAU $1.6 billion
Gabelli Gold and Natural Resouces--GGN $99 million
Tocqueville Gold Fund--TGLDX $550 million
Fidelity Select Gold Portfolio--FSAGX $2.4 billion
AIM Gold Fund--FGLDX $120 million
GAMCO Gold Fund--GOLDX $367 million
American Century Global Gold Fund--BGEIX $830 million
Evergreen Precious Metals--EKWAX $900 million
First Eagle Gold--SGGDX $1.6 billion
Franklin Gold and Precious Metals--FKRCX $1.8 billion
USAA Precious Metals--USAGX $1.2 billion

3 comments:

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  2. An excellent discussion of the options. Thanks.

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