Is it a good time to snatch up some gold? Gold prices fell to six-year lows in November to hover just over $1,000 an ounce. The yellow metal has been tumbling since hitting a high of $1800 in 2011.
Reading Gold Price Signals
The many economic factors that move gold prices often send crossed signals to investors. Historically, gold as a safe haven has done well during times of financial or geopolitical turmoil. Gold, which pays no interest, has not had to compete as hard for investor dollars in the global low interest rate environment in recent years. With US interest rates set to rise, investors are seeking assets with higher returns.
This could help gold recover from a slump since China’s strong demand for commodities has slowed. Long-term gold investors should not be swayed by the current macroeconomic environment. On the demand side, China has increased its gold reserves 60 percent since 2009 to $60.9 billion. Retailers and other gold buyers increased purchases in the latter half of 2015. These factors will eventually put upward pressure on gold prices.
A Safe Haven?
Gold’s role as a safe haven in difficult economic times has been questioned. Gold has been falling as global economic growth has stuttered and made false starts since 2008. Investors still consider gold to be a long-term store of value and a portfolio diversifier.
Many investors feel safe knowing they have a stash of gold coins in their safety deposit box. Another way to reduce risk is to invest in gold assets that are selling at a discount and benefit when gold prices appreciate. If you do not want to physically hold and pay to store gold, you have other options. Here are three ways to diversity your portfolio with gold.
Gold ETFs trade like stocks on exchanges and track gold price indexes. Gold ETFs doing well this year are shorting gold. These short gold ETF funds have correctly bet that gold prices would fall. Risk is very high in the short-term market due to wide price swings.
If you want to avoid short-term volatility in gold prices, some gold ETFs with a long-term view have registered impressive long-term performance. ETF.com’s list of gold ETFs shows 10-year returns on the oldest gold ETFs SPDR Gold and iShares Gold Trust of 7.68% and 7.75%, respectively. SPDR Gold is the largest gold ETF backed by 655.69 tons of gold worth more than $22 billion. Buying shares in an ETF allows you to invest in at least a few nuggets of gold.
Another ETF with modest returns is the AdvisorShares Gartman Gold/Euro ETF. This fund, which buys gold in Euros, has a 3.10% one-year return. Gold trades in US dollars. A rising US dollar will depreciate gold prices.
The fees for gold ETFs include the management fees and the cost of physically storing the gold. Fees range from .25% to .4% (Wikipedia), but can be more than 1%.
Closed-end funds provide an opportunity to swoop up gold at a discount. Investors who expect gold prices to rise, pick up gold on the cheap and profit as gold prices increase. Closed-end funds issue a fixed number of shares and trade on stock exchanges but do not issue new shares to investors. These funds hold a mix of assets providing additional insulation against declining gold prices.
The dip in gold prices at the end of November provided a good opportunity to buy closed-end gold funds at a discount. The Central Fund of Canada is an example of a closed-end fund that has been trading below its net asset value. The fund – which holds gold, silver and some cash – was trading at an 11% discount at the end of November and gold prices.
Gold mining stocks are involved in the exploration and development of gold resources. Gold stocks are cheap when gold prices are low. When prices rise, gold shares provide the opportunity to double or triple your investment. Gold stocks provide leverage on gold prices. In a bull market, the price of gold stocks rises at 2 to 3 times the rate of that of gold.
Gold stocks offer other upside opportunities such as the discovery of new gold resources. Junior gold stocks provide the potential to get in on a growth stock at a cheap price during early exploration years or a bear market.
Diversifying your portfolio with gold takes discipline. Gold is one of the most emotion-driven investment assets but not all these short-term movements are justified. Gold investors often overreact. When Malaysia flight MH370 disappeared in 2014, gold prices fell, even though the event had no real impact on the global economy. Many events that cause short-term volatility in gold prices have little impact on the $20 trillion gold market long term.
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