I was asked by a friend of mine if it was a good idea to buy gold coins. I had a hard time answering because I know the general consensus is that gold is a precious commodity that is rare and will only continue to increase in value, especially with the current state of the economy.
Why does the economy effect the price of gold and other ‘precious’ metals? Basically it all boils down to fear. When the economy is good gold drops precipitously when the economy is not so good, as it is now, gold goes through the roof taking the Santa next to the chimney with it.
Watching the evening news every night we see the stock market being celebrated every time it barely moves upward (even if the volume is very light). This small movement means more people will put their hard-earned dollars into the equity (stock) market and less into alternatives like Treasuries, bonds, and precious metals, thus the price of these instruments goes down.
When the market news shows panic and the world is about to end the price of alternative investments goes skyrocketing like a space shuttle to the moon (even though the space shuttle can not really go to the moon). This is basic human nature and perception of the market.
The stock market is based on fear and greed. When the news is good greed kicks in and everyone starts buying everything that even resembles a well-run company. When the news turns ugly, such as another European country defaulting on it’s loans, people will panic and fear sets in causing a colossal swooshing sound in the market as investors (professional and amateur) flee the market and into other investments that they deem as ‘safe’. The only safe investment is your home, err, well that is what we used to think before we lost half the value on our house recently along with half the wealth of the nation, there are not any really safe investments out there. Are are there?
The supply side of things
Gold is bound to go up because it is a RARE Earth element and there is only so much that can be brought out of the ground. Think about that: why is Gold so precious? Because it is worth so much? Is it because it is shiny and looks nice on wedding bands? Because it is an excellent conductor of electricity? Because we have been told since we were knee high to a grasshopper that gold is valuable?
Gold is valuable because of the intrinsic value placed on it, nothing more. It is the same value that makes a highly over-priced stock continue to go up (check out Netflix): because investors believe it to be valuable it continues to go up. The stock market is highly leveraged to perception and human psychology. Things that ordinarily would not cause a panic or a rush get completely blown out of proportion due to our basic perceptions of the value of a thing (or company).
Analysis: Historic Gold
I will look at what it takes to buy gold in several forms including gold coins advertised on TV, gold bullion, gold certificates, gold stocks (companies that invest in gold), gold companies (companies that mine and refine gold).
A quote from yesteryear (2007):
“Though the slowing domestic economy has many people unconcerned about inflation, the fact remains that energy prices remain relentlessly high. Meanwhile, the costs of imports are starting to pick up, and that could give U.S. companies the leverage they need to raise prices. It's early, and there's no real reason to get alarmed about inflation, but changes at the margins could improve the overly bearish sentiment in the gold sector.
Finally, the dollar will continue to deteriorate in value due to mounting federal budget deficits and a high current-account deficit. Traditionally, gold moves in the opposite direction of the dollar. Spot gold can rally only so long while leaving gold companies in the dust. A move back to the $700 level should spark renewed interest in the sector, especially if the rest of the stock market is in the midst of a nasty correction.”
This will take some research as I truly do not know that much about Gold.
Then I will ask the $10,000 question: If I had $10,000 to blow would I buy Gold (and which instrument would I use)?
GLD – Gold Spyder Shares
I looks like GLD is just on a direct course to the moon…
What other stocks are tied to GOLD that we could invest in?
Newmont Mining (NEM, news ) Gold Fields (GFI, news)
Barrick Gold (ABX, news) Meridian Gold (MDG, news)
Goldcorp (GG, news)
With a target price of over $65 GG may be a good stock to look at – solid fundamentals play a big part in it’s success; The fact that the market has been in panic mode for some time (and a Secular Bear market) has also played into it’s hands.
- Goldcorp is slated to report second-quarter results July 27 and analysts are predicting a 93% increase.
- Sales growth came in at 69% last quarter.
- But remember: mining companies are cyclical so they have ups and downs. And just last year in the first quarter, Goldcorp saw its earnings shrink 4% while its sales rose an anemic 15%.
- Still, for now, analysts see that robust growth continuing with a 66% increase in earnings 2011. They also see earnings growth cooling to 23% in 2011.
- Goldcorp's price has more than quadrupled from the low it hit back in October 2008 (Point 1).
- But it's also worth noting that although it's gradually climbed higher, many of its recent breakouts haven't lasted long.
- So with that in mind, let's take a look at the latest pattern it's formed. Goldcorp has carved out a cup-shaped base (Point 2).
- The buy point is calculated by adding 10 cents to the peak on the left side of the base (Point 3). That makes the ideal buy point 56.30.
- The stock has moved within striking distance of that buy point (Point 4), so watch to see if it can break out and climb past it on volume that's at least 40% above average. If it does it could give investors a chance to get on board.
Building a CUP-SHAPED BASE and working on a handle!
I think GG is a buy on a pull-back!
Mutual Funds
There are over 2o families of gold related mutual funds with about 50 separate gold mutual funds
See: http://www.eaglewing.com/fundlist.html
Physical Gold ETF
State Street's Gold Shares (NYSE: GLD)
GLD is the most popular and liquid of the gold ETFs, GLD is also the oldest and the biggest of these funds. It lets investors participate in the gold bullion market without having to physically hold the metal, each share representing one-tenth of an ounce of gold. Launched at the beginning of 2004, GLD has ~$19 billion in assets. Expense ratio is 0.40%.
IAU was launched in Jan. 2005, one year after GLD. IAU has more than $1 billion in assets 0.40% expense ratio.
Gold Miners ETF
Van Eck's Market Vectors Gold Miners ETF (AMEX: GDX)
GDX tracks the performance of the Amex Gold Miners Index, which is made up of 38 stocks. Started in May 2006 with ~$2 billion in assets. The fund yields around 1.4%. Its expense ratio is 0.55%. Canada makes up 60% of assets. South Africa accounts for about 20%, while the U.S. is 16%. Large-cap companies account for about 70% of the fund, while medium caps make up 28%, and small caps are slightly less than 10%.
Some other Gold Stocks to consider:
COMPANY (Symbol) % Assets
AGNICO EAGLE MINES (AEM) 4.87
ANGLOGOLD ASHANTI LT (AU) 4.58
BARRICK GOLD CP (ABX) 16.1
GOLD FIELDS LTD ADS (GFI) 4.36
GOLDCORP INC COM NPV (GG) 10.28
HARMONY GOLD MNG A (HMY) 3.96
KINROSS GOLD CORP COM NPV (KGC) 5.61
NEWMONT MIN CP HLDG (NEM) 9.62
YAMANA GOLD INC COM (AUY) 5.14
Gold Futures ETF
PowerShares DB Gold Fund (AMEX: DGL)
DGL began January 2007. The fund is designed to track the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold Excess Return, which is composed of futures contracts on gold. $84+ million in assets. This fund invests in gold futures, collateralizes futures contracts primarily with short-term Treasuries. The fund's Treasury investments generate interest income.
DGL's expense ratio is 0.50%.
If I had $10,000 to blow would I buy Gold (and which instrument would I use)?
I would be worried that we are hitting a peak here (7/20/2011) while the economy seems to be picking up the last couple of days there has been a major sell-off of stocks. Gold still is moving up overall but very slowly. If I had $10K I would probably not invest currently due to the abundance of other good stocks that are better bets in the near future.
If you are adamant about investing in Gold then please do NOT buy gold bullion, gold coins, etc. the margins and commissions on these instruments are astronomical. A good gold ETF would serve you better in the LONG RUN for capital protection (don’t count on appreciation).
Maybe I should add some facts to this rhetorical statement…
