NEW YORK (
have broken $1,500 and it has many investors wondering if it's too late to
Gold prices have climbed 5.5% year to date, with many analysts predicting continued strength throughout the rest of the year on inflation worries and lose money policies from central banks.
can rise to their inflation-adjusted price of $2,300 within a few years.
"We look at 2011 seeing $1,500 gold," said Jeff Pontius, chief executive officer of
International Tower Hill
although Pontius believes that prices could reach as high as $2,000 an ounce in the longer term as the U.S. dollar continues to lose ground.
Mark Bristow, chief executive officer of
, is betting on a price target of $1,500.
Chuck Jeannes, CEO of
, said reaching $1,500 an ounce is "easily achievable." Jeannes said it's important to consider highs adjusted for inflation, which could push the price as high as $2,300.
Despite volatility, the trend points to long term four-digit prices. The gold price has recently resumed its tight inverse correlation to the U.S. dollar, which
Standard and Poor's
estimates is 32% of the time, and it's this factor coupled with negative real interest rates that should push gold prices higher.
Regardless of gold's price, most portfolio managers recommend that an investor have 3% to 10% in gold. For most, investing in gold isn't a quick trade, but insurance. Here are the top four ways you can invest.
Buy physical gold -- coins, bars and jewelry -- at various prices. Some of the most popular gold coins are American Buffalo, American Eagle and St. Gauden's. You can store gold in bank safety deposit boxes or in your home. You can also buy and sell gold at your local jewelers. Other companies like Kitco.com allow you to store gold with it as well as trade the metal.
When you buy gold coins or bullion, avoid big premiums. You want to buy gold as close to the spot price as possible, or a 10% premium at most. The higher the premium, the higher the gold price will have to rise in order for you to profit.
To avoid getting ripped off, establish why you want to buy gold bullion. If you just want to own gold as a long-term investment then buy gold as close to the spot price as possible. If you want to own gold to use as money -- if you are a "survivalist" as Jon Nadler, senior analyst at Kitco.com, says -- then you need smaller gold coins, like one-tenth of an ounce, and will have to pay the premium.
Most experts advise avoid buying semi-numismatic or numismatic coins, otherwise known as rare coins, which come with huge premiums that seldom recoup their value.
Nadler advises that consumers interested in rare coins go to professional auctioneers like Bowers & Merena or Christie's who have experts on staff and can objectively grade the coins the same way an antique dealer would appraise goods.
"Don't confuse investing in gold with the things being sold as gold investments," cautions Nadler. "You want something that tracks the price of gold as close to dollar to dollar as possible."
Another way of buying the physical metal is through the Perth Mint in Western Australia. You can purchase the metal for delivery or store it there as well. You can also buy into the Mint's unallocated or allocated gold program, which works like a gold bank account.
An investor may redeem his "paper" gold for the physical metal, but needs to allow 10 days for delivery. The special twist is that the government of Western Australia guarantees all gold transactions, the only government in the world to do so. In regards to the unallocated gold program, if the mint went belly up, for example, an investor would become a creditor but a creditor of the triple-A rated Western Australian government.
Gold exchange-traded funds are a popular way to have gold exposure in your portfolio without the hassle of storing the physical metal. First, you can invest in one of three physically backed ETFs, which track gold's spot price.
The most heavily traded ETF is
SPDR Gold Shares
, which has $58.9 billion in net assets. The gold ETF holds 1,230 tons of gold and saw record inflows as fears ballooned over Europe sovereign debt fears and a deteriorating U.S. economy. Paulson & Co., run by legendary investor
, is the largest holder of GLD with over 30 million shares.
iShares Comex Gold Trust
has $6.4 billion in net assets having attracted investors with a low 0.25% fee.
The newest gold ETF is
ETFS Gold Trust
, which launched in September 2009. This gold ETF actually stores its gold bullion in Switzerland, which gives investors access to different types of gold. ETF Securities also launched
ETFS Physical Asian Gold Trust
, which stores gold in Singapore.
For each share of these ETFs you buy, you generally own the equivalent of one- tenth an ounce of gold. If investor demand outpaces available shares then the issuer must buy more physical gold to convert it into stock. Conversely, when investors sell, if there are no buyers, then gold is redeemed, the company must then sell the gold equivalent. All three ETFs have two independent audits a year: one surprise and one scheduled, to guarantee the safety of your gold.
There are also two types of gold stored in the ETFs, allocated and unallocated. Allocated gold is the bullion held by the custodian. Custodians provide a bar list of all the individual allocated bars daily and are typically audited twice a year, paid for by the sponsor, by an independent party like Inspector International.
Unallocated gold relates to authorized participants like JPMorgan or
which trade gold futures. Futures contracts are often bought if the trustee needs to create new shares fast and doesn't have the time to buy and deliver the bullion. Typically allocated gold far outweighs the unallocated gold and the amounts are tallied each day by the custodian.
There are many controversies surrounding gold ETFs. First, the custodians are allowed to store the gold with sub-custodians until the gold is delivered to the custodian's main vault. Sub-custodians do not allow audits, which means that once your gold is stored with them, you're on your own.
Also since most custodians are banks, if they fail, the trust becomes an unsecured creditor. There might be a substantial delay or fees associated with obtaining the allocated gold. Granted, the custodians are reputable large investment banks, but as we saw in 2008 any of them can become insolvent.
Another big issue some analysts have with the ETFs is the fact that JPMorgan and HSBC, both custodians, have short positions in the gold market. Chris Powell, secretary and treasurer of the Gold Anti-Trust Action Committee, which argues that governments manipulate the gold price, says "
We doubt the reliability of the major gold and silver ETFs ...
because their metal can be borrowed by parties seeking to drive previous metal prices down, against the interest of ETF investors ...
these short positions are not disclosed in the ETF prospectuses."
Nevertheless, the physically backed ETFs have become one of the most popular ways to buy gold. Profits made off of physically backed ETFs are also taxed like collectibles, around 28% and the fee to buy it is usually more expensive that buying gold futures, for example.
Gold ETFs are not owned for leverage, but simply as a vehicle to own gold. There is the possibility of redeeming shares for physical gold, but that arrangement is conducted with brokers and is typically more difficult.
In terms of SGOL, an investor would have to redeem in whole lots of 50,000 shares (5,000 ounces or $7.5 million), but only through an authorized participant, which is not readily available for retail investors.
If you want the opportunity of redeeming your shares for gold, another option is
Sprott Physical Gold Trust ETV
, which just celebrated its one year anniversary. This
closed-end mutual fund
gives investors the option of trading in their shares for 400-ounce gold bars.
The fund can trade at a large premium or discount to its net asset value at any time and has higher fees, making it a more expensive investment. An investor can obtain physical gold on the 15th of every month, although the holder has to make transportation and storage arrangements.
There are also two other ETFs to consider.
Market Vectors Gold Miners
Market Vectors Junior
is a basket of large-cap mining stocks. Its top three holdings are
is up 1.43% year to date.
Its little brother, the
, is a basket of small-cap mining stocks that are in the early development stages of finding new gold. These companies generate 50% of their revenue in gold or silver, have the potential to make over 50% of their revenue in the precious metals or invest mostly in gold and silver. They all have market caps of $150 million or more and have traded at least 250,000 shares per month for six months.
Its top three U.S holdings are
Coeur D'Alene Mines
. The ETF is up 1.75% year to date.
Both of the ETFs offer exposure to strong Canadian gold producers whose stocks aren't listed in the U.S.
If you want more risk, try exchange-traded notes, debt instruments that track an index. You give a bank money and, upon maturity, the bank pays you a return based on the performance of what the ETN is based on, in this case the gold futures market. Some of the more popular ones are
UBS Bloomberg CMCI Gold ETN
DB Gold Double Short ETN
DB Gold Short ETN
DB Gold Double Long ETN
ETNs are like playing the futures market without buying contracts on the Comex. ETNs are flexible, and an investor can trade them long or short, but there is no principal protection. If the issuer or bank goes belly up, so does all your money.
There are also some question marks surrounding the ETNs in relation to the financial reform law. Regulators might seek to limit the amount of future contracts ETNs can hold, which would severely crimp their profitability.
Do ETNs Make Good Investments?
There are some tax advantages to ETNs, however. If you hold shares for more than one year, your profits will be taxed as capital gains at 15% vs. 28% for the physically backed ETFs, which are taxed like collectibles.
A riskier way to invest in gold is through gold-mining stocks. Mining stocks can have as much as a 3-to-1 leverage to gold's spot price to the upside and downside.
Gold miners are risky because they trade with the broader equity market. Some tips to consider when picking gold stocks are to find companies with strong production and reserve growth. Make sure they have good management and inventory supported by either buying smaller companies or by maintaining consistent production. Global gold production has been declining since 2001 and big miners are keeping their gold reserves flush by buying or partnering with small-cap companies, which are in the exploration or development stage.
As gold prices rise, gold companies can make more for every ounce of gold they produce, but their net profits depend on their cash costs, how much it costs them to produce an ounce of gold. Those factors vary from company to company and are subject to currency issues, energy costs and geopolitical factors.
Also make sure the gold company you are betting on is unhedged. Hedges allow a gold producer to sell product at a set price, which can guarantee a certain profit if gold prices fall. When the spot price soars, however, hedging seriously caps the company's earnings potential.
was the last big gold miner to eliminate its strategic hedges, now those who hedge are forced to do so to secure project financing.
According to GFMS Global Hedge Book Analysis for the second quarter in 2010, the largest hedge is
with just 12 tons of contracts compared to AngloGold which had 95 tons.
Finally, take into consideration how the company grows. There is a finite supply of gold in the ground. According to reports, gold discoveries have been falling by 4 million ounces each year for the past 30 years. Mine supply has been steadily increasing over the past few quarters and companies, in order to meet growing demand, either have to invest in an active exploration unit in hopes of striking gold, or enough cash to buy a smaller company.
have all opted for acquisitions by shelling out cash at hefty premiums.
There are many ways to invest in gold as prices break $1,500. An investor can own gold for leverage, safety or hard cash, but regardless, many analysts call gold a portfolio must.
Written by Alix Steel in
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