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Thursday, 13 May 2010

How to Buy Record-High Gold

By Alix Steel

NEW YORK (TheStreet ) -- Gold prices are setting new record highs after conquering the $1,227 level, which has many investors wondering if it's too late to invest in gold.

Gold prices -- which closed at $1,233 Tuesday -- have popped over 9% year to date, with many analysts predicting prices have a lot more room to run. Many predict gold prices can rise to their inflation-adjusted price of $2,300. Others like author Mike Maloney argue that gold will cover all the money in circulation, including credit, and climb to $15,000 an ounce. Some are more conservative. Scott Redler, chief strategic officer of T3Live.com, is looking for $1,400 gold.

"Every day we stay above $1,000 the stronger that floor becomes," says David Morgan, founder of Silver-Investor.com. "I just don't see gold with all this going on in the markets right now, worldwide, globally getting below the $1,000 level. I think it's there to stay."

Not all analysts are gold bugs. If you take out the speculation in gold, many analysts believe gold is worth $800 an ounce.

Michael Crook, vice president and strategist at Barclays Wealth, believes that prices will fall to $800 once the crisis premium comes out of the market, and investors buy equities rather than gold.

Regardless of gold's price range, most portfolio managers recommend an investor have 5%-10% in gold. More bullish managers recommend an allocation as high as 20%.

There are many ways to invest in gold. Investing in gold isn't a quick trade, but insurance. It's a hedge against inflation, currency debasement from euro to yen to U.S. dollar, and global uncertainty. Here are some ways you can invest.

Gold Bullion

Buy physical gold at various prices: coins, bars and jewelry. Some of the most popular gold coins are American Buffalo, American Eagle and St. Gauden's. You can store gold in bank safety deposit boxes or in your home. You can also buy and sell gold at your local jewelers. Other companies like Kitco allow you to store gold with them as well as trade the metal.

ETFs

Gold ETFs are a popular way to have gold exposure in your portfolio without the hassle of storing the physical metal. First, you can invest in one of three physically backed ETFs, which track gold's spot price.

The most heavily traded ETF is SPDR Gold Shares, which has over $45 billion in net assets. The gold ETF has a record 1,192 tons of gold, and the stock is up 8% year to date. Paulson & Co., run by legendary investor John Paulson, is the largest holder of GLD with over 30 million shares.

iShares Comex Gold Trust is up 8.8% year to date with net assets of $3.1 billion.

The newest gold ETF is ETFS Gold Trust, which launched in September 2009. This gold ETF actually stores its gold bullion in Switzerland, which gives investors access to different types of gold. The stock has risen 8.8% year to date and is the cheapest to buy with an expense ratio of 0.39%.

For each share of these ETFs you buy, you generally own the equivalent of one tenth an ounce of gold. The more investors buy, the more physical gold the issuer must buy. Conversely, when investors sell, if there are no buyers, the company must then sell the gold equivalent. Gold ETFs are not owned for leverage, but simply as a vehicle to own gold. There is the possibility of redeeming shares for physical gold, but that arrangement is conducted with brokers and is typically more difficult.

If you want the opportunity of redeeming your shares for gold, another option is Sprott Physical Gold Trust ETV, which launched in February. This closed-end mutual fund gives investors the option of trading in their shares for 400-ounce gold bars. The fund can trade at a premium or discount to its net asset value at any time and has higher fees, making it more expensive to invest in. An investor can obtain physical gold on the 15th of every month, although the holder has to make transportation and storage arrangements.

There are also two other ETFs to consider. Market Vectors Gold Miners and Market Vectors Junior. The GDX is a basket of large-cap mining stocks. It's top three holdings are Barrick Gold, Goldcorp and Newmont Mining. The GDXhas net assets of $6.40 billion and is up almost 10% year to date.

It's little brother, the GDXJ, is a basket of small-cap mining stocks that are in the early development stages of finding new gold. These companies generate 50% of their revenue in gold or silver, have the potential to make over 50% of their revenue in the precious metals or invest mostly in gold and silver. They all have market caps of $150 million or more and have traded at least 250,000 shares per month for six months. It's top three U.S holdings are Coeur D'Alene Mines, Hecla Mining and New Gold. The ETF is up almost 10% year to date.

ETNs

If you want more risk, try exchange-traded notes, debt instruments that track an index. You give a bank money and, upon maturity, the bank pays you a return based on the performance of what the ETN is based on, in this case the gold futures market. Some of the more popular ones are UBS Bloomberg CMCI Gold ETN, DB Gold Double Short ETN, DB Gold Short ETN and DB Gold Double Long ETN. ETNs are flexible, and an investor can trade them long or short, but there is no principle protection. You can lose all your money.

Miners

A riskier way to invest in gold is through gold-mining stocks. Mining stocks can have as much as a 3-to-1 leverage to gold's spot price to the upside and downside. For example, John Embry, chief investment strategist at Sprott Asset Management, predicts that gold prices will pop 30% in six to nine months and that gold stocks could rise over 60%.

Gold miners are risky because they trade with the broader equity market. Some tips to consider when picking gold stocks are to find companies with strong production and reserve growth. Make sure they have good management and inventory supported by either buying smaller-cap companies or maintaining consistent production. Global gold production has been declining since 2001 and big- cap miners keep their gold reserves flush by buying or partnering with small-cap companies, which are in the exploration or development stage.

As gold prices rise, gold companies can make more for every ounce of gold they produce, but their net profits depend on their cash costs, how much it costs them to produce an ounce of gold. Those factors vary from company to company and are subject to currency issues, energy costs and geopolitical factors.

Another factor to consider when picking gold stocks is how quickly the company will benefit from higher prices. Randgold Resources, a miner in Africa, is almost 100% correlated to gold prices. CEO Mark Bristow says that the company benefits from gold prices in almost two days. When gold broke $1,200 last Friday, Randgold shipped out gold bars for sale on Monday.

There are many ways to invest in gold if prices head to $1,300 or slip back to $1,100. An investor can own gold for leverage, safety or hard cash, but regardless, many traders call gold a portfolio must.

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