Investing In Gold
Alexander Green: 'Enormous Opportunity' in Blue-Chip Gold Stocks
by Alexander Green, Investment U Chief Investment Strategist
For the last two years, I've been encouraging investors to reduce their gold holdings. But today we have an enormous opportunity developing in blue-chip gold mining shares. And there is one easy way to play it.
Let me begin by detailing a few of the many reasons to have gold in your portfolio. There are seven key reasons that "the barbarous relic" has long been sought after as a store of value:
- Unlike wheat, corn or rice, it is durable.
- Unlike artwork, it is divisible.
- Unlike lead or copper, it is convenient.
- Unlike real estate, it is consistent.
- Unlike paper, it possesses value in itself.
- Unlike aluminum or copper, the supply is greatly limited.
- Unlike molybdenum or rhodium, it has a long history of acceptance.
However, gold is unique in other ways that make it an exceedingly tricky investment. Unlike cash or bonds, gold doesn't accrue interest. Unlike a business, it does not generate earnings. Unlike a stock, it does not pay dividends. And unlike real estate, it does not generate rental income. That makes gold difficult to value even under the best of circumstances.
Yet everyone should have gold in their portfolio, just as every driver should have a spare tire in their trunk. It is not just a valuable commodity. It is a hedge against economic or political calamity. Still, you don't want to overdo it, especially now that the financial crisis is well into the rear-view mirror.
Why are gold shares a screaming "Buy" right now? Because the relatively modest percentage decline in gold has led to a route in gold shares. For the first time in a long time, gold stocks are inexpensive relative to their traditional valuations and to the price of gold itself.
A Gold ETF Worth Looking At
That makes now an excellent time to pick up a few shares of Market Vectors Gold Miners Fund (NYSE: GDX). This exchange-traded fund (ETF) has significant advantages over open-end funds:
- It has a lower expense ratio compared to mutual funds.
- It can be traded continually throughout the trading day.
- It is linked to an index as opposed to being actively managed. (So you don't have to worry about the fund manager underperforming his benchmark.)
- The shares are highly tax-efficient.
- You can use trailing stops, something that is not possible with open-end mutual funds.
- And, unlike many gold stock funds, like those offered by Vanguard or American Century, it will not close to new investors.
Market Vectors is linked to the NYSE Arca Gold Miners Index. It owns virtually all of the world's leading precious metals mining companies. That means you can capture the performance of the entire sector with a single, well-diversified investment.
The Top 10 holdings include:
- Barrick Gold (NYSE: ABX)
- Goldcorp (NYSE: GG)
- Newmont Mining (NYSE: NEM)
- Silver Wheaton (NYSE: SLW)
- AngloGold Ashanti (NYSE: AU)
- Kinross (NYSE: KGC)
- Yamana (NYSE: AUY)
- Agnico-Eagle (NYSE: AEM)
- Eldorado Gold (NYSE: EGO)
And these stocks are cheap. They sell on average for just 10 times earnings and only 1.2 times book.
The annual expense ratio of the fund is just half of one percent. Shares can be margined. And there are call options available for traders who prefer to play the sector more aggressively.
Gold stocks have traditionally been an excellent inflation hedge. They also move independently of both the stock and bond markets. (For instance, gold stocks have plummeted since November while the broad market has soared.) Gold-related investments have a near-zero correlation with other assets.
One Last Note on Gold
I'm not saying that gold is going to turn around next week or next month. The metal itself is almost totally unpredictable. But it will rally again. And when it does, you'll be glad you bought these gold shares so cheap.
However, with that said, don't go all-in. As with every other investment out there, there's such thing as being over-invested in this sector.
Investment U and its parent company, The Oxford Club both recommend following a trusted asset allocation model which entails a mere 5% of your portfolio going towards precious metals such as gold.
So be careful about how much weight you put into this volatile but profitable market. It can get you far, but it still has its risks, as evidenced by its actions in 2011, 2012 and even the beginning of 2013.