The Best Gold Your Money Can Buy

By Victor German and Igor Zhitnitsky

NEW YORK ( TheStreet) -- The popularity of gold has soared in recent years, as investors fearful of market uncertainties sought the safe haven of the world's oldest form of wealth.

But not all gold investments are created equal, and in this article we'll critically compare the merits of three different ways to expose oneself to the precious metal: exchange-traded funds including SPDR Gold Trust ( GLD) and Market Vectors Gold Miners ( GDX), physical ownership of bullion, and coins.

ETFs: SPDR Gold Trust GLD is perhaps the most popular index among those looking for gold exposure, but it isn't the only one. Gold miner ETFs GDX and Market Vectors Junior Gold Miners ( GDXJ) are two alternative indices tied to the performance of companies involved in gold mining, and so offer an additional way to bet on the precious metal.

Long story short, the bottom line is GLD wins in the long run in this comparison, with GDX a sensible alternative in only some specific short-term scenarios.

While it makes sense that when gold goes up miners should similarly do well, unfortunately that basic premise doesn't hold up well practice. GDX and GDXJ tend to consistently underperform GLD, and are generally more volatile. The fortunes of miners are not as closely tied to the value of gold as one would expect, because of exposure to a variety of additional risks.

Whatever the fundamental reasons, the chart below is all the empirical evidence an investor needs to conclude that if you're bullish on gold and want to go the ETF route, GLD wins hands down over miners.

With that in mind, we also note that because of recent slides in gold prices and the emerging perception that miners may run into operating problems, GDX and GDXJ may be oversold at current prices. If gold is to start a rally sparked by the Federal Reserve's announcement last Wednesday, the two gold miner ETFs may well emerge as winners in the short term.

Bullion: An alternative to GLD is the ownership of actual gold bullion. By owning physical gold, one can avoid the 0.4% annual management fee built into the ETF, as well as the inherent counterparty risk in a derivative security like GLD.

It's worthwhile to note that oversight of GLD custodians' holdings is very limited, so there's little guarantee that the gold backing your paper holdings will actually be there in some improbable (but not impossible) scenarios. Owning the gold directly diminishes those risks.

In a recent interview, precious metals portfolio manager Grant Williams asserted there have been at least some instances of custodians refusing to honor redemption requests on GLD. If true, that's a troubling development for owners of the ETF, and a good reason for long-term investors to consider bullion instead.

On the other hand, owning gold directly bring with it practical matters like insurance and storage costs. Perhaps even more significantly, spreads on buying and selling bullion can be as large as several percentage points.

Bottom line, the more liquid GLD wins over bullion for investors interested in a short to moderate-term play on gold. For those interested gold as a long-term asset preservation measure, management fees and counterparty risk are good reasons to go with bullion instead.

Coins: These come in two varieties -- bullion coins and numismatic coins. The former is largely indistinguishable from buying gold ingots or bricks, and so the analysis above applies.

Numismatic coins, on the other hand, are a more complex and speculative investment that requires developing considerable expertise.

Overall, numismatic coins suffer from relatively lower liquidity compared to bullion, and considerably higher spreads. This is an investment area suitable for expert speculators with a deep understanding of numismatic grading standards and collector demand, not for precious metals investors.

There is, however, a solid way to bet on the popularity of gold coins -- investing in companies that facilitate the exchange of coins between collectors and provide related services.

A notable example is Collectors Universe ( CLCT), which runs a coin exchange and provides professional coin grading services. CLCT benefits directly from increasing volumes of coins exchanged, which is, in turn, tied to public interest in gold investment.

As shifting Fed policy and market uncertainties continue to drive the markets, gold is sure to remain a popular safe haven for the foreseeable future. In a market that offers a number of ways to bet on the precious metal, we encourage the savvy investor to look beyond hype and critically compare the available options.

At the time of publication the authors had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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