Daily Gains Letter

Investing in Gold: ETFs or Individual Stocks?

By for Daily Gains Letter | Apr 1, 2013


Lots of investors believe investing in gold as an investment theme is a good idea. But I would bet that a lot of those investors don’t have any exposure to the commodity.

The track record of gold prices is self-evident, but it is a market that is controlled by speculators. Even if you think spot gold should be at $2,000 an ounce, it certainly could drop to $1,250 an ounce if futures traders wish it to.

So investing in gold comes down to just one thing—the amount of risk and exposure you are willing to have in your portfolio.

Gold stocks have certainly been hit hard in recent months. The whole sector has suffered from rising costs and a weakening spot price. One of the things that could be holding a lot of investors back from investing in gold is the fact that so few gold stocks pay dividends.

Barrick Gold Corporation (NYSE/ABX;TSX/ABX)) is currently yielding around 2.7% on the stock market. But the company is still a huge risk; it’s been going down on the stock market for ages now, and who knows where it will end up? Barrick’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

Those in retirement aren’t likely to be interested in junior gold mining stocks. A collection of gold coins, however, might be stashed away in the dresser drawer.

Investing in gold or any commodity that trades on the futures market has always been a high-risk endeavor. The prevalence of gold exchange-traded funds (ETFs) certainly has made it a lot easier for investors to express an investment view regarding the commodity. And today, there are all kinds of ETFs that allow you to invest in gold using leverage.

Near term, if you are interested in investing in gold and following large-caps, the group will probably head lower. Even with junior gold mining stocks, the trading action is mostly terrible for the simple reason that spot gold isn’t moving. That’s the way virtually all resource stocks trade.

The spot price of gold is actually holding up extremely well, in my view, especially considering its long bull market run. Being above $1,600 an ounce is actually a major accomplishment, given how unique this bull market run really is.

Investing in gold really is the kind of thing you only want to do just to have a little hedge against currencies, stock market crashes, and unrest in the rest of the world. For most people investing in gold, given current market conditions, it probably makes more sense to consider a gold ETF over speculating in individual gold stocks. The trend of growing costs in the mining industry is going to stick around for quite a while yet.

The one thing that I can’t say for sure is when the spot price of gold will go higher. All eventualities for the commodity are valid near-term.

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