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"So hey Boris -- should I buy gold?"
Yes. You should buy gold. But not to make money. To keep money.
"But Boris -- I want to make money. That is why I invest -- to make money."
Not always. Sometimes you invest just for safety -- to keep what you have, if possible. As I talked about in my last column, the world grows more unstable. Moreover, here in the United States, we have reached the monetary endgame -- QE Infinity. Ben Bernanke has announced that he is going to just keep printing money until he sees something he likes, i.e., he is going to print up $40 billion a month, until "substantial" improvement in the labor market. No, don't ask what "substantial" means; Helicopter Ben refused to be pinned down in the press conference following last week's big Federal Reserve QE Infinity announcement.
"$3000 Boris? Gold closed on September 26th at $1753.10!!!"
Right. But the analyst may of course be overly optimistic with these specific price targets. But let us assume that the analyst is right about the market direction for gold -- it is going up. If that turns out to be the case, which would you be better off owning, gold itself, via the SPDR Gold Trust ETF(NYSEMKT: GLD) or one of the gold miners, such as Coeur d" Alene(NYSE: CDE), Barrick Gold(NYSE: ABX), or Newmont Mining(NYSE: NEM)?
But, before we try to answer that specific question, we need to consider gold's relationship to the diminishing dollar: gold isn't actually "moving up" as much as it looks like. Gold's "price movement" is part illusion. Gold is at least partly standing still while the dollar falls down. If we look at the price of gold in dollars, compared to the purchasing price of the dollar, we can see clearly that while gold has in fact gone up, much of it's "rise" is really the dollar's fall.
Now, if we do get another big inflation spike courtesy of the money-printing federal reserve, what might we expect? Relevant recent history looks like this, the decade from 1975 to 1985:
Let's zero in on that really ugly part of the chart, the ramp up from May 1978 to May 1980:
Say -- where does that nice pretty ramp lead to, anyways?
But . . . I thought all that money printing was supposed to be stimulating! No. Not stimulating. Only in Fantasyland. But, Ben has control of the printing press, for now, so if you can't beat them, join them:
"Ok Boris, your cool Motley Fool charts convinced me. I'm going to buy some gold. Any suggestions as to the GLD ETF versus one of the miners?"
Glad you asked, chum. My suggestion is to buy both. Here's why: the GLD ETF directly tracks the price of gold as it buys gold and puts it in a big vault under Manhattan. Each share of the GLD represents 1/10th of an ounce of gold, so that if gold goes to $2000, each share of the GLD would go to $200, a proportionate, directly correlated rise. As the spot price of gold goes up and down during the trading day, shares of the GLD ETF track it very closely. But unlike holding physical bullion such as bars or coins, with the GLD investors can buy and sell gold very easily, and very inexpensively.
But I also think it is a good idea to get some exposure to the mining sector, because gold mining shares are leveraged to the gold price. To illustrate what I mean, consider this example: if a mining company has a million ounces in the ground, that they can extract for say $800.00 an ounce, and the price of gold shoots up from $1800.00 an ounce to $2400.00 an ounce, then their in-the-ground gold now has a potential profit of $1600.00 an ounce, where before it had a potential profit of $1000.00 an ounce. That is a 60% increase in the value of their gold reserves. But the actual price of gold only went up by 33.33%. That's leverage. Of course, the leverage also works the other way: in the preceding example, if the price of gold were to fall from $1800 an ounce to $1200 an ounce, the potential profit on the hypothetical company's in-the-ground gold would fall from $1000 an ounce to $400 an ounce, a decrease of 60%, even though the price of gold itself only went down by 33.33%. So, while the potential leverage is exciting in a rising market, you might want to modulate the price swings a little with ownership of some of the actual metal itself, as represented by the GLD ETF.
"Ok Boris, sounds good -- I'll get both. Now how do you choose between mining companies?"
Gold is produced world wide, but some of the places where it is produced are politically unstable. That is why I recommend investing in mining companies that are well diversified geographically, in order to minimize any political risk which is specific to one country. Some well-diversified miners include the three I mentioned earlier, Coeur d' Alene, Barrick Gold, and Newmont Mining. Coeur d'Alene operates in Bolivia, Mexico, Argentina, and Australia. Barrick Gold has operations in Peru, Chile, Argentina, Papua New Guinea, and Africa (through a 73.9% ownership stake in African Barrick.) And Newmont Mining is also well-diversified, having operations in Australia, Peru, Indonesia, Ghana, New Zealand, and Mexico.
Additionally, and perhaps even more importantly, each of these companies has significant operations in Nevada, right here in the safety of the United States. Coeur d'Alene has the Rochester mine near Lovelock, Nevada. The Rochester has produced over 128 million ounces of silver and over 1.4 million ounces of gold over the last 25 years. As part of it's extensive Nevada operations, Barrick Gold operates the Cortez mine, which is the longest operating gold mine in the state, as well as one of the lowest-cost gold mines in the entire world. And Newmont has eighteen mines in Nevada, producing gold, copper, and silver.
But, if you really want to get rich, or at least, have someone in your family get rich, and you have a son or daughter in college, or soon to be in college, forget about everything you just read and consider this: the median salary for new graduates of the South Dakota School of Mines and Technology is now higher than the median salary for new graduates of Harvard: $56,700 vs. $54,100.