Time for Some Gold?

 

By Nancy Zambell

Editor, Investment Digest and Dividend Digest

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A Contrarian Play: Time for Some Gold?

Why Invest in Gold?

Four Ways to Buy Gold

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It seems only yesterday that I was going through my jewelry box, gathering up broken necklaces and earrings that had lost their mates-cashing in on the spectacular rise in gold in 2011 and 2012. But the chart below shows that the old adage is true-what goes up (especially so rapidly!) must eventually come down.


Most people believe that the primary reason for the spike in gold during that period was the result of the recession that came close to a worldwide depression. The stock market's precipitous drop left investors devastated, so it was no surprise that they would flee to the perceived safety of hard assets such as gold.

And that's true. But as the following chart demonstrates, the rise in gold prices was not exactly overnight-and also not initially sparked by the recession. Instead, the metal began to strengthen in the early to mid-2000s, as the U.S. began military operations on several fronts around the globe, creating long-lasting economic uncertainty and political unrest.
It's clear that economic uncertainty and fear create opportunities for investors to buy gold. But there are additional reasons for investors to hold gold-along with other catalysts that can boost gold prices, including:

Demand and supply. As demand rises-whether for industrial or personal uses-gold prices generally rise.

U.S. dollar leverage. When the dollar declines, it creates uncertainty also, and investors tend to sell more dollars and buy gold-making gold increase in value.

Gold investors. Banks around the world-as well as the companies that dig the gold out of the ground-have tremendous reserves of the precious metal. And they constantly buy and sell (large quantities)-creating price fluctuation.

Today, gold hovers around $1,268-about midway between its lows and highs for the year. That seems cheap, especially when compared to the nominal value for stocks.

Gold prices have risen this year due to the uncertainty surrounding the tapering by the Fed and unease in places around the world like North Korea, Ukraine and Iran.

And I continue to see some "bright" spots ahead for gold.

* According to the World Gold Council, gold demand in 2013-at 1,074.5 tons-was exceptional. And 2014 has started out well. In the first quarter of 2014, jewelry demand increased by 3%. And central banks continue to buy gold for its diversification and risk management properties, increasing by 122 tons in the quarter.

* In the first quarter of 2014, net ETF flows were zero, compared to 177 tons in outflows in Q1 2013.

* According to BullionVault, more private investors are beginning to return to the metal, for a safety hedge. Its Sentiment Index reads 52.8, with numbers above 50 indicating more buyers than sellers.

* Mega-investors John Paulson and George Soros continue to maintain large stakes. Paulson is the largest investor in the SPDR Gold Trust (GLD), where he holds 10.2 million shares, and Soros recently bought 6.3 million shares in Barrick Gold (ABX).

* The International Monetary Fund confirmed the same pattern by central banks-led by Iraq and China purchases.

Being contrary to the general trend can pay off big. And the tremendous rise in the stock market-although I don't believe it is in any danger of falling off a cliff anytime soon-may give you another reason to hedge your bets by adding some gold to your portfolio.

And there are a variety of ways to do just that. You can buy the physical gold, coins, stakes in mining companies and exchange-traded funds.

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Here are four ways to buy gold:

Gold Bullion

True "gold bugs" buy the actual gold bullion bars, as they feel they are the strongest inflation hedge. In the U.S-as in Canada, Austria, Liechtenstein and Switzerland-investors can buy gold bars through any large bank. Or you can purchase them through a bullion dealer.

One challenge is where to store them, as gold bars can range from a gram, an ounce, a kilo or even 400 troy ounces (12 kg). The other is the potential for forgery, in which fillers are added to increase the weight. Savvy bar buyers often have their bars re-assayed to determine the quality. If you purchase the bars through the London bullion market (LBMA) system, you will have a verifiable chain of custody.

Investors may also purchase gold rounds, which are gold pieces the size of gold coins, but manufactured by a private mint and not an actual numismatic coin. The majority of gold rounds have .999 purity, so-like bullion-you are buying pure gold. But be sure you are not paying a premium for a commemorative or special piece. The rounds should be priced similar to the cost of a gold bar, relative to their weight.

Gold Coins

The Krugerrand is the most common of the gold bullion coins desired by investors. But there are other varieties, including the Australian Gold Nugget (Kangaroo), Austrian Philharmoniker (Philharmonic), Austrian 100 Corona, Canadian Gold Maple Leaf, Chinese Gold Panda, Malaysian Kijang Emas, French Napoleon or Louis d'Or, Mexican Gold 50 Peso, British Sovereign, American Gold Eagle and American Buffalo.

Like the rounds, they are priced according to their weight, with a small premium, depending on supply and demand. Numismatic gold coins (collector items) are primarily priced relative to supply and demand (based on rarity and condition).

Investors may buy coins from the U.S. mint and also from coin dealers, but should make sure they are dealing with a reputable dealer, as fake gold coins are plentiful.

Mining Shares

Gold exploration and mining is not for the faint-hearted. Companies operating in this arena need lots of cash and plenty of time. Gold is scare, deposits are remote, and bringing the shiny metal out of the ground is time-consuming (sometimes, as much as 10 years) and very costly in terms of capital investments.

Throw in political uncertainty, labor problems, environmental hazards, weather, accidents, etc., and you can see why mining companies come and go.

There are many, such as Newmont (NEM), Barrick Gold (ABX), Goldcorp (GG) and Agnico Eagle (AEM) that have been around for a long time. And there are also plenty of "juniors" to choose from-companies that do nothing but look for new deposits-and consequently, are much more speculative than the old hands.

The industry has been in a period of consolidation, due to low gold prices. Consequently, shares in gold mining companies may hold some investor appeal-if you buy the right company. I know plenty of folks who do buy the shares of mining companies, but they are generally well-versed in the industry. Most investors would be better-served to go for diversification and, instead, invest in exchange-traded funds (ETFs).

Exchange-traded Funds

Gold Bullion Securities (GOLD) was the first bullion ETF. It was launched in March 2003 on the Australian Stock Exchange. At my last count, there were dozens to choose from.

ETFs have several advantages for gold purchasers:

* Exposure to the price of gold at a relatively low cost, and the opportunity to accumulate gold over a long period of time with small cash outlays

* The ability to participate in the growth of a variety of companies in the gold arena

* Liquidity, as the largest gold ETFs trade on the major stock exchanges, meaning you can buy and sell them all day long

* No need for storing bars, rounds or coins

But gold ETF buyers do need to know that the ETFs include asset management fees, as well as storage costs, so you won't see the full return you would have if you bought the bullion.

For most gold investors, buying a solid ETF like GLD, GDX or the iShares Gold Trust (IAU) would be an easy way to get started with gold. It's as simple as buying shares in any listed company. If you're feeling contrary about stocks hitting new highs, or just want some diversifications, consider putting a little "glitter" in your portfolio this year.

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 Sincerely,

Nancy Zambell
Editor of Investment Digest and Dividend Digest

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