Gold: Time to Dump or Time to Buy?

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The meteoric rise of gold following the 2008 market collapse had many investors and hedge funds managers clamoring to beef up their holdings. More than four years later, however, the spot light on the precious metal has died in lieu of a recovery across many of the indexes. Have managers given up on gold, or do they see these calmer times as reasons to hold on, or possibly accumulate more?

Kyle Bass, founder of Dallas-based Hayman Advisors, urged fund managers in early December 2012 to not sell their gold holdings, reminding investors that government deficits across many developed economies such as the U.S. are still significant (see Hayman’s current holdings here). Those who do not want to stray too far from their equity accounts can seek out gold ETFs or ETNs, which are exchange-traded funds and exchange-traded notes, respectively. The latter is more of a newcomer in the capital markets but offers the same ease of access and liquidity benefits of ETFs. Whereas an ETF gives an investor exposure to the direct underlying asset, an ETN represents a debt offering by a bank or financial institution that more or less tracks the benchmark it comprises (gold in this case).

Two of the most common gold ETFs are the SPDR Gold Shares (NYSEMKT: GLD), and the iShares Gold Trust (NYSEMKT: IAU). GLD stands as the largest and most liquid gold ETF, which can lead to a more efficient tracking of the price of gold due to the heavy participation (see which heavy-hitting fund manager made $5 billion with gold in 2010 and holds almost 30% of his portfolio in GLD). IAU sees an advantage for the retail investor by creating more shares per ounce of gold than GLD, causing each share to have a smaller exposure to the asset but opening the door for more flexible capital and share sizes.

How can the more aggressive investor get gold exposure?

On the ETN side, Deutsche Bank has structured two gold products for the more aggressive trader or investor. The DB Double Gold Long (NYSEMKT: DGP) and DB Double Gold Short (NYSEMKT: DZZ) give one the opportunity to double his or her view of the gold markets on a per share basis. These are known as leveraged ETNs. The power of these products come from the fact that, for a smaller amount of capital, one can possibly achieve a higher absolute return given a move in Deutsche Bank’s gold benchmark, which is based on the gold futures contract. These carry heavier risks but can help an informed market participant take a long or short bias with an added kick. (Check out DGP’s performance in 2012 here.)

A fourth way to get involved with gold comes in the form of closed-end funds, or CEFs. These have a similar make-up to mutual funds but with a limited number of available shares; fortunately they are traded on global stock exchanges as well. The Central Gold Trust (NYSEMKT: GTU) of Canada gets its value from actual tons of gold held in the Canadian Imperial Bank of Commerce. GTU stands as a secure and low-cost alternative (especially in regards to expense fees), and one can rest easy knowing that the shares are based on actual precious metals held in safe-keeping.

With so many options to invest in gold, those fearing inflation or further potential drops in the stock market have a few alternatives. Having the availability to trade these from a retail account and to trade in either direction are added bonuses, and they can offer a level of protection and sophistication that a jewelry box tucked in a dresser drawer cannot. While gold is still close to all-time highs, further uncertainty in worldwide economies could see it pushed higher.


This article is written by Eric Winter and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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