As rapidly and relentlessly as gold has been advancing, I imagine some investors might be scrambling to gain some exposure in a hurry. Others, perhaps shell-shocked by the idea of a gold price at around $1,850 per ounce, may be concluding that they're just too late.
To both groups of investors, I offer a more methodical approach.
There is no necessity for extreme moves of any kind here. Leave the extreme moves to Venezuelan President Hugo Chavez, who announced his intention this week to nationalize that country's gold industry and repatriate some $11 billion worth of gold reserves that are currently stored in U.S. and European banks.
Although I remain resolute in my long-term outlook for gold (and silver) to continue their historic climb, that does not mean I advocate a rushed or wholesale reallocation of one's investment capital toward gold. To the contrary, because gold is recording fresh all-time highs day after day, and the potential for gut-wrenching volatility must be taken very seriously, I advocate a gradual and systematic approach for entry into the sector to avoid getting burned. While there are many more elements to consider when crafting an overall strategic approach to investing in gold and silver, this brief discussion will help you get started.
Step 1: get involved
Because no one can predict with certainty whether gold will offer a better entry price, I believe the best way enter this market is to initiate some sort of starting position. If a small initial stake in the Sprott Physical Gold Trust (NYSE: PHYS ) is just too scary to consider at these seemingly high prices, keep in mind that I have identified a long list of quality gold-mining stocks that I believe are akin to gaining exposure to gold at a price closer to $1,250 per ounce.
For those seeking exposure to gold at a discount to present prices, a low-cost marvel like Yamana Gold (NYSE: AUY ) may be just what the doctor ordered. Fools may recall I highlighted Goldcorp (NYSE: GG ) as a gift beneath $50, but it's important to note the price for an ounce of gold was about $230 lower at the time (less than eight weeks ago!). The stock has inched a little higher, but the move remains dramatically muted compared with the accompanying surge in the gold price.
Step 2: continue to study up
Once you've gotten your feet wet with a modest initial exposure to gold, the next step is to spend lots of time researching the gold market and studying the fundamental factors responsible for the metal's 10-year secular bull market. I recommend that newcomers consider the full range of arguments (both bullish and bearish) relating to gold's longer-term outlook and draw their own independent conclusions with respect to their degree of personal confidence in a given long-term price target. That process -- a process that must never cease throughout the period that one holds gold exposure -- is the primary means by which one will shape one's own custom strategy and determine an appropriate allocation toward gold.
Step 3: add into weakness
Now that you have a long-term target price for gold in mind, along with your desired allocation to gold, it's time to execute that plan by taking advantage of relative weakness either in the gold price itself or the related mining shares. Using the watchlist feature at Motley Fool CAPS, keep a close eye on the mining stocks that interest you most, and consider taking advantage of noteworthy dips. If you get lucky, and gold happens to drop significantly in one of the many corrections we've seen to date within the longer-term trend, that might be an opportune moment to gain a little bullion exposure. I prefer Central Fund of Canada (AMEX: CEF ) , which offers roughly equal exposure to reliably "unencumbered" silver and gold.
Step 4: don't forget the "poor man's gold"
Successful hedge fund manager Eric Sprott intends to move about $32 million in assets from gold into silver. Why? Let's let him explain: "I have opined very often that I think silver should trade at a 16:1 ratio to gold. That would imply a price today of something like $110 or $120, (and today) it's $40." That suggests the potential for some very serious upside for silver, and, like Sprott, I maintain that silver's inevitable rise is likely to have a profound impact on valuations for quality miners like First Majestic Silver (NYSE: AG ) and Alexco Resource (AMEX: AXU ) . To that list, I would add one of the most exciting growth stories in the silver-mining space: Great Panther Silver (AMEX: GPL ) .
Finally, I reiterate this standing caution from a piece I wrote many moons ago, when gold was beneath $950 per ounce: "Be brave, Fools. There will be corrections along the way -- some of them substantial. Investing in this sector requires strength and conviction, and short-term movements are nothing but noise within the broader trend."