Everybody's talking about gold these days. Despite a recent hiccup, the yellow metal's price remains well above the $1,000 milestone, and many expect it to keep on climbing in the months and years ahead.
If you're a newcomer to the world of commodities, though, you might be intimidated by all the different ways you can invest. From buying big bricks of precious metals to trading futures contracts, the choices you make have big implications on how much money you can make -- or lose.
Fortunately, there are some simple ways to tap into gold's profit potential. And while pixels on a screen may not be as shiny as a gold coin in your hand, getting the gold exposure you want can be as easy as making a trade with your online discount broker.
ETFs and gold
This week, I've been looking at how investors can use exchange-traded funds to gain access to all sorts of different kinds of stocks. As I've discovered, it's easy to create a well-diversified stock portfolio that includes companies of all sizes, both within the U.S. and internationally.
But many investors are starting to look beyond regular stocks, toward investments that will give them potential for huge profits while helping them preserve their capital. In these investors' eyes, gold is attractive for several reasons:
- Inflation protection. Many believe that the economic policies adopted during the financial crisis will have major inflationary implications down the road. Historically, gold has served as a hedge against inflation, and investors who remember the inflation crisis of the late 1970s and early 1980s will also recall how well gold did in that environment.
- Getting out of greenbacks. To many, gold is the ultimate form of money. When confidence in paper currencies drops, gold can stand tall. And although the U.S. dollar has gotten the brunt of the devaluation pressure so far, gold advocates predict that competitive devaluations around the world could push gold prices higher.
There are a number of ways to profit from higher gold prices, and you can find ETFs that cover each method.
Ain't nothin' like the real thing
For some, there's no substitute for tracking the price of the metal itself. Although shares of mining companies are sensitive to the price of gold, there's no guarantee that their stocks will closely track gold's price, even over extended periods of time.
That's the rationale behind the SPDR Gold ETF (NYSE: GLD ) . Each share of the ETF is worth roughly the same as a tenth of an ounce of gold. At latest count, the fund has over 36 million ounces of gold worth almost $41 billion held in trust for its shareholders. A similar product, the iShares Silver ETF (NYSE: SLV ) , plays the same role for silver investors. It owns over 300 million ounces of silver worth almost $5.4 billion. Each share has a value that's roughly the same as an ounce of silver.
Go to the source
On the other hand, some gold investors prefer gold mining stocks. At times, they'll enjoy much greater gains than the physical metal. Moreover, you can gain not only from higher gold prices but also from new mine discoveries and other fundamental factors.
For exposure to some of the largest companies in the sector, the Market Vectors Gold Miners ETF (GDX) provides a broad array of mining stocks. Holdings such as Barrick Gold (NYSE: ABX ) , Newmont Mining (NYSE: NEM ) , and Goldcorp (NYSE: GG ) are among the giants in the industry.
Yet the ETF gives a good example of the disparities between mining stock returns and gold bullion prices. Over the past year, the ETF is up 50%, compared to around 31% for the gold-price tracking SPDR Gold ETF. Yet when you look at the past three years, the ETF is up only about 7% annually, versus a 22% annual gain for SPDR Gold.
Meanwhile, those looking for bigger paydays might prefer the new Market Vectors Gold Juniors ETF (GDXJ). In addition to mid-sized miners like Coeur d'Alene Mines (NYSE: CDE ) and Hecla Mining (NYSE: HL ) , you'll also find dozens of smaller companies predominantly from Canada, the U.S., and Australia. Small miners can be riskier than the big names, but their profit potential is also larger, and owning an ETF can help spread the risk.
A golden opportunity?
It's always scary to think about investing in something completely different from the stocks and bonds you're so familiar with. But there are smart ways to invest in gold, and exchange-traded funds can make it a lot simpler to get started.