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How to Invest in Gold

BOLTING LANDING, N.Y. (Stockpickr) -- Gold seems to be all the rage lately, and the reasons people have for buying gold are various and diverse, even contradictory. Some like gold as a speculative play, others as a hedge against inflation, or against the U.S. dollar, or against the euro, and yet others like it simply as an asset allocation.

Indeed, investing in gold isn't as straightforward as it might seem, and there are many ways to play the shiny precious metal.

Let us begin with gold producers. Two major gold producers reported earnings this week: Newmont Mining (NEM) and Barrick Gold (ABX). Newmont reported earnings of 77 cents on revenue of $2.513 billion. Analysts' consensus estimates were for Newmont to earn 84 cents on revenue of $2.22 billion. Barrick Gold reported earnings of 77 cents on revenue of $2.64 billion. Analysts' consensus estimates were for Barrick to earn 72 cents on revenue of $2.61 billion. Both companies raised their quarterly dividends recently.

Gold producers will mine and sell gold. However, their fortunes are not solely tied to the spot price of gold. Gold producer earnings and revenues are derived from five major variables:

  1. The realized price of gold. This is the actual price on average that the producer will sell its gold for.
  2. The quantity, in ounces, of gold sold, which is based on demand from speculators, jewelry producers and industrial users.
  3. The capacity to mine gold. This comes not only from existing mines but also from the ability to open up new mines around the world.
  4. Byproduct sales. In the mining process, other materials are found. We call these byproducts. For example, one of the most abundant materials that is mined along with gold is copper. The mining companies will sell the copper, and from a cost-accounting perspective, the byproduct sales will offset the cost to produce gold.
  5. Energy costs. While gold may be a commodity that is impacted by inflation and currency movements, so are the energy inputs that are necessary to mine and refine the gold.

Thus, while the revenues and earnings of Newmont and Barrick may be linked to the price of gold, it is not a simple correlation. Both of these companies are well-run. On a P/E basis, I would select the cheaper Barrick over Newmont, but either one would make a fine investment in the world of gold mining.

More on Newmont

Let's suppose that you want to ignore all of the above and just invest based on the pure price of gold. There are ways of doing that as well.

The first place that I would look to is to the fund market. You can buy an exchange-traded fund or closed-end fund that holds physical gold. Two suggestions are the SPDR Gold Trust (GLD) and the Sprott Physical Gold Trust (PHYS). While there may be some slight discount or premium of the fund price to the price of gold, in general, GLD equals approximately 1/10th of an ounce of gold, and PHYS equals approximately 1/100th the price of gold. I find the GLD, with its better track record and larger market capitalization, to be a better trading and investment vehicle.

Who Owns GLD?

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