Why Gold Mutual Funds?
you are concerned about what political, economic and market uncertainty might do to your investments,
gold is a time-tested store of value that merits your serious attention. Gold mutual
funds may be the best way to add gold to your investment portfolio. This
website can help you evaluate gold investments based on your own unique objectives, risk profile and time horizon
and compare them to mutual funds based on gold:
The main gold investments are:
Gold mutual funds
Gold ETF or Exchange Traded Funds
Note that each of these gold investment options will very likely have a different result
from the others even though they are all based on gold. This is because of how they invest in gold and the
different levels and types of risks involved. That's why it is important that you are quite clear about your
investment objectives--what you want gold investments to do for you. As with all
investments, each type of gold investment has its pros and cons and this site touches on those too.
We have included a handy primer to help you refresh your mutual fund investing IQ.
Gold funds defined
A gold mutual fund is defined by Morningstar (a mutual fund
rating and research service) as one that:
"...pursues capital appreciation by investing primarily
in equity securities of companies engaged in mining, distribution, or processing of precious metals (ie. gold
stocks) under the classification of "precious metals mutual funds"".
This is why they are sometimes referred to as gold
mining mutual funds and almost never as gold bullion mutual funds. However, mutual funds that
invest in gold bullion do exist and may be a practical option if you are able to make
relatively large investments as these are typically invested in London Good Delivery bars which are quite large--a
minimum of 350 troy ounces--and the minimum required investments are high.
Gold funds are leveraged plays
A gold mutual fund, like a gold stock, is considered a
leveraged play on gold because the underlying mining companies have fixed costs and any increase in the price of
gold can increase the percentage of profit quite dramatically. For example, suppose it costs a mining company $700
to mine an ounce of gold, when the price of gold is $900, the profit is $200 but when the price goes up to $1000,
the profit is $300--a 50% increase in profits caused by a 11% rise in the price of gold. Of course, the opposite
would be true if prices go down. For this reason, the prices of mutual funds that invest in gold mining companies
tend to move about twice as much as the gold price. Other events which can affect the prices
of gold mining funds would be company-specific issues like operational problems or just
the overall stock market--if the market goes down, all stocks go down, including gold stocks regardless of the
price of gold. But overall, this might be the option you would choose if you believed that gold prices were going
to have an extended bull run and the best gold mutual funds for you will be the ones that have the best balance of
leverage for your risk profile.
stocks are a way to invest in gold based on one's opinion of the prospects of
individual mining companies, their management and their mine holdings. Unlike gold funds or ETFs, gold stocks don't
offer broad diversification but they do offer greater leverage on the price of gold--both up and down. They can
also offer healthy dividend income unlike most gold funds and ETFs. If one does one's homework well, it is possible
to uncover a gem of a gold mining company and avoid others that are not as attractive. In a mutual fund or ETF, one
does not have the capability of targeting an investment as precisely.
Owning and handling physical gold in the form of bars and coins has always been a very
attractive idea for most of us because of the sheer psychological effect! While simply
buying bullion gold in the form of bars or coins may sound like a conservative enough investment strategy,
you will run into some real problems after you cross a certain threshold in value. It is fine to own a few
pieces of physical gold for the pleasure of it but you will soon become concerned with safety and safe-keeping
issues. Where will you store your hoard and be able to sleep soundly at night? And if you do choose a
professional custodian, like a local bank, you will need to find out how secure they are both physically and
financially, and how much they charge for their services. However bullion can be a very cost-effective,
attractive and satisfying way of owning gold if the storage and security issues are not a problem for you.
Bottom line: depending on your investment objectives, bars and coins may not be the best idea to base your gold
investment strategy on but they certainly can make up an enjoyable and rewarding piece of your overall
An excellent alternative to holding gold bars and coins are gold ETFs (exchange traded funds) that trade like stocks and have prices that are closely correlated to
the price of gold at any given moment. They are also as liquid as any common stock and can be bought and sold at any
time during market trading hours. However, there are a couple of things you need to watch out for. Being based on
the same commodity, it is a common belief that a gold ETF is exactly the same as any other but this is far from the
truth and the difference is in how their prices are arrived at. For instance, some will own their own gold bullion
(bars and coins) while others will base their prices on gold futures contracts that they trade in. And yet others
will have a combination of the two, leaning more to one side or the other. Obviously, those that own the bullion
will track gold prices much more closely than those that invest in futures. To compensate for this, the bullion
based ETFs will aim to even out price fluctuations but will still suffer from market driven aberrations. If you are
unsure of the price of gold going forward and just want a hedge against market movements and to smooth out the
value of your overall portfolio that includes non-gold stocks and bonds, gold ETFs could be a better fit for you
than gold mutual funds.
Other gold investments
Traders and investors also use some other 'investments' such as options,
futures and commodities contracts to trade in gold for
profit and hedging. These strategies can span the risk spectrum from the ultra-conservative to the
super-speculative and are beyond the scope of this website.
What about gold jewelry? Well, one of the first considerations in an
investment is liquidity--how quickly it can be sold to raise cash if and when required. On the liquidity front, you
will not be able to sell jewelry as quickly as you might be able to sell a gold coin, gold bar or shares of a gold
mutual fund for a whole lot of reasons: the buyer may or may not like the gold content, the styling, the
workmanship or all of these and you could end up either not selling or selling for a lower price than you expect
and deserve. Also, when you buy jewelry, you are paying for the jewelry store with all its overhead (rent,
salaries, security, insurance, profit etc), the design of the piece and the workmanship which can add up to a nice
chunk of the value of the piece beyond the actual gold. So besides the practical needs of vanity and aesthetics,
jewelry may not be a good "investment" either if one thinks objectively. It will however, continue to be an
excellent store of value as it has been for centuries.
As you determine whether gold mutual funds or other similar
investments are right for your situation, you may want to consider consulting with qualified financial
professionals before you make any investment decisions.