Gold is currently reeling under interest rate fever, with the U.S. Federal Reserve expected to raise rates in December. Gold is now at its lowest level in six years, near $1,050 an ounce.
A rise in rates would result in a stronger dollar, pushing gold in the opposite direction. The fact that gold has to compete with rising bond yields doesn't help either.
But when the world was shunning equities in the wake of the financial meltdown of 2008, gold was the one asset class that continued to profit -- the savior of portfolios even as investors frantically took refuge in its safe-haven status. Gold is a proven hedge, when weak and vulnerable stocks take a nosedive. It's the kind of investment that finds many takers, largely because it's simple to understand.
Here are three ways you can use the Midas metal to make your portfolio crash-proof.
1. Gold You Can Touch
If the sheer tangible quality of gold is what reassures you, jewelry is not your only option. Countries often mint bullion and gold coins, which can be bought from official dealers and traders, a list of which is available with the U.S. Mint.
The American Eagle, Canadian Maple Leaf, Chinese Panda, and South African Krugerrands are the most popular coins which contain one ounce of gold.
While these coins are the most direct exposure you could ask for, they come at a slight premium. For instance, when gold traded at $1,200 an ounce, dealer Harlan J. Berk was quoting $1,270/oz for the American Eagle, $1,285 for the Chinese panda, and $1,260 for the Canadian Maple Leaf.
Another deterrent to physical gold is the cost associated with physical handling -- ranging from safe storage to transportation and insurance. If these aspects are taken care of, go right ahead with the purchase.
2. The Simplicity of Stocks and Derivatives
For those who can manage the risks, holding stocks of big gold miners is another lucrative option, with the smaller, riskier ones known as junior gold stocks. The same rules of single-stock equity investing apply here, but the high leverage of these stocks is what magnifies gains or losses. Gold mining stocks may have a 3-to-1 leverage to gold's spot price to the upside down and up.
Apart from operating and management decisions, gold mining stock prices are also influenced by the price of gold. And in the event of a company crisis, even the rising price of gold may not help. So, while owning tangible gold is only tied to macro-economic risks, owning securities adds company-specific risks as well. (That's especially true in the context of fundamentally weak stocks that will probably crash before the year ends.)