Adding Gold to Your Portfolio
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We've all witnessed the surge gold has made in price over the last few years. With central banks continuing to print money, and interest rates at all time lows, it's hard to see a reason for that trend to end. We can all see the signs of inflation all around us, even if it's not being admitted by the governments behind the policies that are creating it. We are all constantly bombarded with advertisements either wanting to buy our gold, or offering to sell it to us, but what's really the best way to use gold as a way to diversify our portfolio? Let's look at some options.
Buy Physical Gold: This seems like the most obvious option, as gold is a physical commodity that you can buy, you hear the ads for it all the time. However buying and owning physical gold bullion has it's disadvantages. First, there's the matter of buying it at the wholesale, and not retail cost. Retail gold is a lot more expensive than what the current gold price that you see reported on the news indicates. Then there is the matter of storage. You can take it home and store it, or pay a dealer to store it for you, or keep it it in a safety deposit box, but all of those have inherent risks or costs involved. Lastly, there is the matter of liquidity. Selling physical gold isn't as easy as selling a stock, and depending on where you live, can incur different tax and paperwork requirements.
Buy a Gold ETF: This can be a lot more simple, and something I'm a big proponent of. You must however, know what exactly it is that you are buying. There are different types of ETFs available, some trade in gold futures contracts, some in physical bullion, as well as some with a mix of the two and even holding some shares of gold miners. If you're after a pure gold play, then I highly recommend the SPDR Gold Shares Trust: (NYSEMKT: GLD). This ETF is 100% gold bullion, with a very low 0.40% MER. It seeks to replicate the performance of gold bullion, nothing more, nothing less, so you know exactly what you are getting. If you're looking to diversify your precious metal exposure, I also recommend the IShares Silver Trust (NYSEMKT: SLV) which seeks to do the exact same thing with silver bullion, though it's MER is 0.50%.
Buy Shares in a Royalty Company: In my opinion, this is like buying a super etf. My recommendation on this front is Franco-Nevada Corp. (NYSE: FNV) Franco-Nevada is a gold focused royalty and stream company. Basically what they do is finance gold mining operations in return for a percentage of any minerals mined. They are the leading company in this business, and also have some income from silver, platinum and oil and gas royalties. If you compare a chart of (NYSEMKT: GLD) and (NYSE: FNV), you will see why myself, among others, consider it like a super gold etf. And it pays out a little bit of a dividend as well, which you won't get from the ETF.
Buy Stock in Gold Miners: This play on the commodity hasn't done very well over the past year as gold itself, for a number of reasons. Capital costs involved in gold mining are very high, and can fluctuate. This can drive down the value of the mining stocks. Also, there have been labor disruptions in South Africa, some of them violent, which has caused increased pressure on the mining sector overall. However there is a growing opinion that the mining stocks have lagged the mineral itself so much that they are now undervalued, and could provide solid returns for people wishing to invest in them. If gold miners are what you are looking for though, there are some good ones out there:
Barrick Gold Corp (NYSE: ABX); is the worlds largest pure gold miner. Based out of Canada, they have a portfolio of 27 operating mines around the world, which produced 7.7 million ounces of gold in 2011. They currently have a 2% dividend yield, and an attractive PE ratio at just over 9.
Newmont Mining Corp (NYSE: NEM); is another of the worlds largest, with operations around the world. Based out of the U.S., their current dividend yield is better than Barrick`s at 2.6%, however their PE is a lofty 114.
Goldcorp Inc (NYSE: GG): is unique in that it is based only in politically stable areas in the Americas. It is also considered one of the fastest growing senior gold producers as well. They netted just over 2.5 million ounces of gold in 2011. They have a 1.2% dividend yield, and a PE ratio of 23.4.
There are a lot of other gold mining stocks out there, including quite a few speculative micro caps trading under a dollar per share. Some of these can be extremely risky, and I highly advise anyone thinking of investing in them to dig very deep when researching, and know that they're going to be a speculative gamble, not a real investment. If I were going to invest in a gold miner, I would stick with big, well run companies like the three I listed here. My personal favorite of the 3 is (NYSE: GG), as it's growth prospects are good, and its strategy of staying in politically stable countries in the Americas is a good indication of lower capital costs in the long run. My final caution on the gold miners is this, if you are looking to gold as a way to diversify with hard assets as a hedge against inflation. the mining stocks are probably not what you are looking for, as they don`t mirror the base asset, and are likely to be far more volatile, and in different ways.
So there you have a variety of ways to diversify your portfolio with the power of gold, and hedge against inflation. I hope you found this helpful, and remember, always invest practically.
Patrick
Adhamhnon has positions in GLD, SLV and FNV. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
