This article is part of our Rising Star Portfolios Series.
Yesterday I told you that I'm shifting my Rising Star Portfolio cash hoard into gold to protect my purchasing power because gold still offers a much better risk reward ratio than cash. Here's how I'm going to do it.
Let's get physical
There are many ways to get exposure to gold, including buying physical metal itself in bullion form, mining shares, mutual funds, and exchange-traded funds (ETFs). The safest option is physical gold because there is no mining or counterparty risk (where the gold is stored), but it can be inconvenient to buy and store. How much better would it be if we could own an interest in physical gold and buy or sell it on an exchange? Luckily, a trust has been created that does just that. It's called the Sprott Physical Gold Trust
Sprott Physical Gold Trust is a closed-end fund that invests almost all its assets into gold bullion that is stored at the Royal Canadian Mint. The fund's units trade on the New York Stock Exchange. Right off the bat, we see three positive attributes: (1) physical gold held by the trust, (2) ability to buy or sell shares on an exchange, and (3) gold not stored in a commercial bank (because you might not be able to get it out).
I've chosen Sprott over the popular ETFs SPDR Gold Trust
Net asset value
Because Sprott trades on an exchange, its price can rise above or below its net asset value (NAV), suggesting it might not track gold's movements perfectly. But I'm not too worried: Since inception in February, the premium to NAV has ranged from 0% to 24%, clustering between 8% and 13%. Right now, you'd pay about a 3% premium, well below that average. I see more upside than downside because in a rush into physical gold the premium could increase, and on the downside the premium would likely not go much lower before opportunistic buyers stepped in. A slight premium also seems fair, given transaction costs with a gold dealer would be at least 3%.
Preserve your fortune
I showed yesterday how even at nominal highs, there is still a very attractive risk/reward ratio on offer with gold and how the real risk is holding cash. Therefore, I'm choosing gold over paper while I wait for excellent investing opportunities. And I'm doing it today: using my cash position of almost $5,000 to buy shares of the Sprott Physical Gold Trust. I don't expect this move to make me a fortune, but I expect it to preserve my fortune in what are challenging times for the fiat currency system.
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Andrew Sullivan, CFA, owns shares of no companies listed above. The Motley Fool owns shares of Sprott Physical Gold Trust. 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.