How To Invest In Gold Related Investments

The gold trend will continue for a number of years.  To capitalize and profit on the metal’s rise we will briefly discuss a few gold related investments and how to invest in them. The previous article discussed the reasons for investing in gold and the conditions to look for that will cause the trend to end.  [Why Investing In Gold Can Be Profitable, and When The Gold Bubble Will Burst] Its a must read for investing in gold related assets!

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There are a few ways that one can invest and profit from the gold trend and the economic conditions that cause it. I’ve briefly mentioned them in an older article [How The Financial Crisis Will Affect The US Dollar, Inflation, Gold, and Oil Prices], but we’ll review them in more detail.

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GOLD INDEX & INDICIES:

An index fund is mutual fund or exchange-traded fund (ETF) that aims to track the movements of a particular index related to a specific financial market.  For a more detailed explanation see:
http://en.wikipedia.org/wiki/Index_fund
http://en.wikipedia.org/wiki/Exchange-traded_fund

Most retail banks now offer their own index mutual funds, that can be purchased directly from them, and usually has no commission or transaction fee.  An investor can use a brokerage account to purchase both index funds issued by a retail bank and those issued by other investment firms (such as BlackRock’s iShares ETF products) on the stock exchange in the same manner as stocks.  There may be specified minimum limit on the number of shares that must be purchased from retail banks, but usually not when purchasing other ETFs.

Gold index investment objective:

• The investor aims to profit directly from the movement of the index (i.e. the trading price of gold).

Gold index advantages/disadvantages & other considerations:

• Easier to select an index fund, if you know little about selecting mining companies.
• Lower management fees and transaction fees compared to mutual funds that hold gold and gold indexes.
• Moves in-tandem with the price of gold.
• Not affected by factors such as good/bad corporate decisions, mergers & acquisitions, mining accidents, etc.
• Capital gains are limited to the movement of the index.  Will not be affected by new discovery, good exploration results, corporate earnings & profits, or mergers & acquisitions.
• Some index funds provide a leveraged feature (where the daily movement of the index is amplified), presenting the opportunity to both profit or lose more than.
• Less data to look at with an index fund (price, volume, etc), compared to common stock (company financial & operating information).
• Variety of gold index funds available from retail banks are limited.
• Inexperienced investors should be aware that because gold has no set value and is based on supply and demand of investors/purchases/buyers, it cannot be valued as easily as a company/business can.  How can one know what exactly the price should be? Some investors uses historical ratios, its purchasing power relative to other assets, inflation related calculations, etc. But again, its value is based on supply/demand that is influenced by economic/geopolitical/monetary issues.
• One can only expect it to continue to move relatively higher from this level, but how much higher is anyone’s guess.  Focus on the conditions as discussed in the previous article!!
• When investing in any index fund (not just gold related), you will need to be able to determine the conditions that you will dispose of the index, because they reflect an index and not any single company/business.  The disposition level may be more difficult to decide upon than for companies (trading over intrinsic value).  In these type of cases, its better to dispose of them earlier (profit) and forgo any extra gains at the very end, rather than lose money (disposing after conditions have appeared for some time and trend reverses).  Again, you’ll need to be able to determine under what conditions you’ll divest (dispose) the asset.

Examples:

– iShares Gold Trust (ETF) [IAU/tse:IGT]
– SPDR Gold Trust (ETF) [GLD]
– Horizons Beta Pro Gold Comex ETF [tse:HUG]
– Market Vectors Gold Miners ETF [GDX]

For more considerations on index funds & ETFs see:

Index Funds & The DIY Investor Herd

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MUTUAL FUNDS INVESTING IN GOLD OR GOLD RELATED STOCKS:

Most mutual fund companies and retail banks offer mutual funds that invest in a number of gold assets and/or gold related securities (such as gold and other mining stocks).  Mutual funds offered by a retail bank can usually be purchased directly from them without a brokerage account, commission, or transaction fees.  Normally, the available funds are limited to those issued by that specific bank.  An investor can use a brokerage account to purchase mutual funds from various retail banks as well as those issued by investment firms (such as Vanguard).  There may be specified minimum limit on the number of shares that must be initially purchased.

Mutual fund investment objective:

• The investor aims to profit from rise in market value of the fund, which holds a specific class or a variety of gold related assets within the mutual fund.  The investor may aim to profit directly (certificates, physical gold bullion, futures contracts, etc) or indirectly (equities, bonds issued by mining corporations) from the rise in gold prices, depending on the the underlying assets held within the individual fund.

Mutual fund advantages/disadvantages & other considerations:

• Very large selection of mutual funds available ranging from retail banks, mutual fund companies, boutique investment firms, that invest in a variety of gold related investments (equities, index, certificates, physical gold bullion, etc).
• Some may be no load, especially from retail banks.
• Management of investment is left to full-time professionals with certifications etc (for what its worth).
• May be affected less by any single negative/positive corporate earnings results, merger & acquisition, corporate management decision.
• With a small initial investment you are usually getting portions of a range of investments, that would be costly to obtain if you were to acquire them on your own.  For example, an initial investment of $2000 would may get you shares of a fund that holds common shares of a few different mining companies.  In order to purchase shares in as few as four companies, your brokerage commission (lets assume $29) on $500 each is a hefty 5.8% of your principle!
• Very difficult if not impossible (much too time consuming to be practical) to valuate the intrinsic value of a fund due to varied holdings (different stocks, indices, other funds, certificates, physical gold) and because positions can change at any given time.  This leads to a similar problem with that of index funds.  Determining at what level to dispose of the fund will be less clear cut (difficult to evaluate when it’s over priced).
• No control over the fund – the purchase/disposition prices of holdings, the assets being held themselves.
• MER management fees are usually built into the fund, even though some do not have any front/back-end load/fee when you purchase or sell your shares of the fund.  Some of the MER fees may be high, and may also eat into your profits.
• Tons of mutual funds out there, difficult to select which may give best return for lowest risks.
• One other thing to note is that there are many precious metal funds that invest in many different investments that may not be related only to gold.  For example, some funds may invest in copper, silver related equities, and/or indexes.

Examples:

– BMO Precious Metals Fund [BMO147]
– Wells Fargo Advantage Precious Metals C [EKWCX]
– Fidelity Select Gold [FSAGX]
– Sprott Gold & Precious Minerals Fund [SPR003]
– Vanguard Precious Metals and Mining [VGPMX]

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GOLD RELATED STOCKS (EQUITIES):

There are many large, mid-tier, and junior mining & exploration companies that are publicly traded on the global stock exchanges.  An investor can use a brokerage account to purchase gold related stocks (and related warrants, etc) issued by the individual corporations.  There is no minimum limit on the number of shares that must be initially purchased. With miners you are buying the operation/business, not just the metal based on the metal price.  They usually mine other metals as well (silver, copper, etc).

Gold related stocks (equities) investment objective:

• The investor aims to profit indirectly from the price of gold, by holding common shares of mining/exploration companies who either explore for gold deposits and/or are actively mining & selling gold.

Gold related stocks (equities) advantages/disadvantages & other considerations:

• It is a lot easier to determine the intrinsic value of stocks, because they are fractional pieces of a business.
• Many companies out there, must filter through them (time consuming, may miss opportunities).
• Need to be able to read financial statements.
• Need to understand the mining industry (business/operations, associated mining/exploration results and data).
• Market price will be affected by quarterly Need to understand the mining industry (business/operations, associated mining/exploration results and data).

Large or Mid-Tier Miners – Most have stable operations & business, and are well financed, and experienced.  Most also have good & proven assets (enough to build operation with).  However, their businesses and mines are more mature.  This will make it harder for them to achieve organic growth and expand.  They are likely to grow/expand by acquiring or merging with other miners.  Acquisitions may be expensive depending on number of bidders, trading prices, etc.  As the gold and other metal prices increase, so will the cost of a mergers & acquisitions.

Junior Miners – The largest returns has been and will likely continue to be from small-cap junior miners. There are more opportunities within this range, due to the many new entrants into the industry.  Many are small, unknown/unfamiliar, and have lower visibility.  This causes many investors to be less aware of the companies out there or what the companies have achieved.  It also causes investors over analyze, hesitate in making investment decisions, make more mistakes in valuation, or simply just pass them up all together for more familiar names.  This creates opportunities for investors who see companies with significant assets, performing good exploration (exploring well), but not getting the same type of investor following.  There are more “sleeper” opportunities, which have given the largest returns.  In the last 12 months many small juniors (Red Back, Andean Resources, etc) have been acquired by the larger players in the industry.  On the down side, they may not be well financed (we seen what can happen to poorly financed juniors during the financial crisis), few or poor exploration results, inexperienced management, or have unknown asset quality.  Due to the large number of junior mining companies, much more time is needed to sift through and analyze/research them.  In many cases, you will need to be the contrarian, investing into something that no one else may invest in or where investors may be jumping out of because you see something that others do not.  Lastly, it requires much patience, as they are smaller businesses and are in early stages of exploration or operation.  For example, it has taken five years for some of my largest mining holdings to really get investors’ attention.  However, setting up the portfolio to take advantage of such opportunities,  uses up capital without necessarily seeing significant capital gains until a few years later.   That is despite the fact that those companies had been steadily reaching their own operational milestones, with impressive results.  Five years may be a long time for many investors, but patience can be handsomely rewarded.  Junior miners are by far my preferred area of investments that are related to gold, for most of the reasons mentioned above.

Examples:

Large-Cap or blue chip: Capitalization over approximately $10 billion.
– Goldcorp [GG/tse:G]
– Barrick [ABX/tse:ABX]
– Newmont [NEM/tse:NMC]
– Kinross [KGC/tse:K]    – $13.4B
– AngloGold Ashanti Limited [AU] – $17B

Mid-Cap: Capitalization between approximately $1 billion and $10 billion.
– IAMGOLD Corp [IAG/tse:IMG] – $6.55B
– Yamana [AUY/tse:YRI] – $8.37B
– Osisko Mining Corp. [tse:OSK] – $5.83B

Small-Cap: Capitalization between approximately $250 million and $1 billion.
– US Gold Corp [UXG/tse:UXG] – $650M
– Rubicon Minerals [RBY/tse:RMX] – $839M
– VG Gold Corp [tse:VG] – $120M
– San Gold Corp [cve:SGR] – $1.01B

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PHYSICAL GOLD BULLION:

Investors can purchase physical gold bullion in various forms and weight.  The most common being coins, wafers, bars, and ingots.  With physical gold there are a variety that are fabricated from gold that has been sourced from different regions and countries around the world including Canada, US, China, South Africa, Mexico, England, Austria, etc.  With bars, there are a variety of products and sizes available.  Physical gold can usually be purchased from the national mint, certain banks, and dealers.  When purchasing gold bullion be sure to take note of the associated purity, weight, assay certificates, and the details of the specific product you intend to purchase.  Also ensure that the place you are purchasing from is reputable and trustworthy (lowest price may not be the best).  All sales are usually final. Gold and other precious metals are usually sold in standard weight increments, with a minimum purchase weight.

Physical gold bullion investment objective:

• The investor aims to profit directly from the movement in the price of gold, by holding physical gold bullion directly.

Physical gold bullion advantages/disadvantages & other considerations:

The benefit in buying physical gold is that it is real tangible gold, (you can see, touch, and hold in your hand).  The downside is paying fees for shipping and finding appropriate methods of storage.  Selling physical gold may also be difficult (finding buyers, assay fees, other transaction related issues) when you want to divest or dispose of the asset.  Trying to find the best price/value when purchasing or selling the product may be time consuming and difficult.

Examples:

Scotiabank (Scotia Mocatta)
–  http://www.scotiamocatta.com/products/investment.htm
Royal Canadian Mint
http://www.mint.ca/store/coin/1oz-gold-bullion-wafer-prod850001
The United States Mint
http://www.usmint.gov/
J&M Coin & Jewelery Ltd
https://www.jandm.com
Border Gold Corp.
http://bordergold.com

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GOLD CERTIFICATES:

Investors can purchase gold certificates, that are convertible to physical gold. Certificates are essentially paper that represents the physical gold bullion.  It details the exact specifications (purity, weight, etc).  Some certificates may be RSP/401k eligible.  Gold certificates are usually sold in standard weight increment representations, with a minimum purchase weight (ex: 10oz). Certificates can usually be purchased from certain banks and dealers.

Gold certificates investment objective:

• The investor aims to profit directly from the movement in the price of gold, by holding certificates that represent physical gold bullion.

Gold certificates advantages/disadvantages & other considerations:

Certificates allows the investor to hold physical gold without the hassle of shipping, insuring, and storing physical bullion.  Other benefits include no fabrication costs, sales tax, or assay fees.  They are also fully transferable.  Certificates can also be converted to gold bullion, but usually for additional fees. It may be difficult to sell (finding buyers, other transaction related issues), as well as to convert the certificate into physical bullion.

Example:

Scotiabank (Scotia Mocatta)
http://www.scotiamocatta.com/products/investment.htm

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GOLD FUTURES (and Futures options):

Investors can trade gold futures contracts.  A gold futures contract is basically a contract between two parties to buy or sell gold (the underlying asset ) at a specified quantity, at a specified future date, and at a specified price (futures price). Futures contracts are a type of derivative contract traded on an exchange, but are not direct securities like stocks, bonds, or warrants/rights.  Options are also traded on futures as well.  To minimize credit risk to the exchange, traders must post typically 5%-15% of the contract’s value (a margin).

I personally do not recommend this, as it is much easier to lose money by placing bad bets.  Warren Buffett does not recommend individual investors trade options and futures, without first having a very very large sum of money, as protection in the case of bets going sour (protection from the capital calls that credit risk entails).

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This article briefly introduces different gold related investments and describes some aspects of each, in order to provide investors with a starting point. Keep in mind that different investments are just different tools, each with their own pros/cons and its usefulness varies with the individual who will be using them.  They are also sometimes more effect than other tools in under different conditions.  Remember that before investing in anything, its important to ensure you have a solid understanding investment principles, the types of investments and their underlying assets, as well as the limitations of them. Research and analysis should always be performed prior to investing.  Specific companies, dealers, brokerages, and/or investments mentioned in this article should NOT be taken as specific recommendations and are for illustration purposes only.

Investors may also be interested to know that other precious metals such as silver and palladium have also risen considerably in price and may be worth some consideration and research as well.

DISCLOSURE: I hold shares in RMX, UXG, and VG.

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Update: How To Pick Great Junior Mining Stocks [How to pick and evaluate junior mining stocks]

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Thanks and Happy Investing!  – [Follow Me On Twitter! –– RSS Feed]

Author: The Investment Blogger

I’m a private investor, who developed the “function-centric investing” paradigm. I am an investor who blogs a little here and there, rather than a blogger who invests a little here and there. I'm passionate about investing and sharing investment knowledge!

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