'Gold's a devilish sort of thing," a crusty old prospector named Howard says at one point in the movie Treasure of the Sierra Madre. Investors who bought the precious metal back in 1980 would surely agree.
The price of gold bullion peaked in that year at $850 (U.S.) an ounce and then plunged so long and hard that as recently as 2001, it lurked around $270. Now, gold's on the march again. It touched a 17-year high of $470 this week and there are forecasts that it will rise to $500 by year's end and eventually to anywhere from $600 to its old high of $850.
A cynic might conclude that owning gold over the long term is the very definition of investing hell, but never mind. Good money is made in gold periodically, and right now could be one of those times.Before we get into the various ways to invest in gold, let's talk strategy. Are you planning to take advantage of the current rally and then flee, or do you want to make gold a longer-term part of your portfolio?
On the side of the short fling with gold is David Whetham, manager of the $80-million Scotia Resource Fund. "It's a momentum trade," he said. "When things are going up, you want to own it, but when the momentum slows, it's probably time to move aside. There are too many factors that affect the price of gold and most of them are emotional rather than fundamentals that you can analyze."
On the side of the long-term enthusiasts is Hans Merkelbach, an investment adviser with Dundee Private Investors from Bowen Island, B.C., who believes gold and other commodities are on an upswing with five to seven years still to go. Mr. Merkelbach has about 20 per cent of client portfolios in precious metals mutual funds and rejects the conventional view that 5 per cent is enough.
"I don't believe in this 5-per-cent nonsense, that you should have a little bit of gold," Mr. Merkelbach said. "A gold fund is considered a high-risk fund. But in good times like now, where the metals, resources and energy are all in play, they're really not aggressive. If you do your analysis, a gold fund is really a medium risk."
Your preference for short-term speculating or long-term investing in gold will be a major factor in deciding which of the many gold investment options to use.
There are generally two ways to get into gold -- by investing in the actual metal with the purchase of wafers, bars and coins, or through stocks and mutual funds that either expose you to moves in gold bullion or to companies that mine gold.
Owning actual gold sounds like a kick, but there are fees and storage issues to consider. You'll need to start by finding someone to sell you the gold, which you can do by looking in the Yellow Pages under gold, silver and platinum dealers. Some of the big banks, notably Bank of Nova Scotia, also sell gold. Use the Google.ca search engine and you'll find dealers who have websites with live pricing and will ship gold anywhere in the country.
Montreal-based Kitco is typical in that it sells bullion in the form of bars of varying sizes and a selection of coins that include the Gold Maple Leaf coins issued by the Royal Canadian Mint. Quoted prices (you can check them at online.kitco.com) include a premium that reflects a markup over the spot price of gold and any applicable fabrication fees for processing gold into bars. Shipping costs $30 (Canadian) per order, with an additional $4 per $1,000 in order size to cover insurance.
You'll need a place to safely store your gold, maybe a safe in your home or a bank safety deposit box. Obviously, there are liquidity issues here. Gold and coin dealers will buy your bullion, but you'll have to transport the gold to the firm doing the buying.
A less cumbersome option is to invest in gold certificates and gold bullion funds. The certificates represent an interest in gold stored by a dealer, which eliminates storage problems but doesn't really address the problem of not being able to quickly sell your holdings because you'll still need to take them to a gold dealer.
For the ultimate in buy-and-sell flexibility, take a look at two new exchange-traded funds that act as a substitute for a direct investment in gold bullion. The StreetTracks Gold Shares (GLD-NYSE) and the iShares Comex Gold Trust (IAU-American Stock Exchange) invest directly in bullion and their unit prices directly reflect changes in gold prices, minus fees (both have management expense ratios of 0.4 per cent).
ETFs trade like stocks, which means these two gold funds can be bought and sold any time during market hours. Also, you can short them if you want to bet on falling gold prices.
There's a mutual fund that works along the same lines as these ETFs -- the Millennium BullionFund, which holds gold, silver and platinum bars that are stored in the vaults of a major bank. A closed-end fund -- basically a mutual fund that is listed on a stock exchange -- with much the same mission is the Central Fund of Canada (CEF.NV.A).
The easiest way to invest in gold for most people is to buy a precious metals mutual fund. Mr. Merkelbach uses these funds extensively and has four favourites -- AGF Precious Metals, Dynamic's Canadian and global precious metals funds, Mackenzie Universal Precious Metals and Sprott Gold and Precious Minerals. His main criteria for choosing a fund? The manager.
"The best manager that I have found today is John Embry at Sprott Asset Management," Mr. Merkelbach said. "He is a seasoned manager, and he understands the market."
Precious metals funds are widely accessible -- most bank families have them, for example -- but they're not ideal for short-term investing. The reason is that virtually all fund families have commissions of 1 to 3 per cent that apply if you sell your holdings within 30 to 180 days of purchase. Don't buy one of these funds without checking the prospectus for the lowdown on short-term trading fees.
Precious metals funds usually hold the shares of gold-mining companies, which themselves are a liquid and sometimes lucrative way to benefit from rising gold prices. In fact, the share price of gold producers sometimes moves higher than the actual price of gold.
The reason is leverage, or the opportunity for gold miners to gain or lose in a big way from relatively moderate moves in gold prices. If a gold producer makes $50 an ounce in profit today and gold prices rise by $50, then the company's profits have doubled. If you own bullion, a $50 increase from today's level amounts to 10.6 per cent. That's the theory, anyway. In reality, gold producers sometimes lag the price of bullion because their profits are eroded by rising costs.
Mr. Whetham of the Scotia Resources Fund said three of his favourite gold stocks right now are:
Barrick Gold (ABX-T): Barrick is the biggest gold producer listed on the Toronto Stock Exchange and it also offers significant production growth as a result of new mines coming into production. "It's hard to argue with Barrick just because of the size and quality of their assets," Mr. Whetham said.
Bema Gold (BGO-T): Solid upside potential as a result of a big gold discovery in Russia that should provide good growth potential over the longer term.
Goldcorp (G-T): Good assets, plus a desire to make acquisitions and $1-billion in funds to pay for them.
If you want to buy gold shares but don't want to be a stock picker, consider the iUnits S&P/TSX Capped Gold Index Fund, or iGold (XGD-T). This ETF holds shares in 17 gold producers, with Barrick and Goldcorp dominating as a result of their weightings of 25 per cent and 17 per cent, respectively.
Whatever vehicle you choose for riding the gold rally, be prepared for wicked volatility and confusingly contradictory forecasts from pundits. The only certainty is that gold can amaze you with its returns in good years and then bury you when things go bad.
Moiling for gold
While some might argue that owning gold over the long term is the definition of investing hell, good money is made in gold periodically and right now could be one of those times.
Barrick Gold
DAILY CLOSE (ABX - TSX)
Yesterday's close $33.76 up 16 cents
Gold price
DAILY CLOSE ($US an ounce)
Yesterday's close $467.30, down $3.00
I UNITS
DAILY CLOSE (XGD - TSX)
Yesterday's close $54.45, unchanged
Streettacks Gold
DAILY CLOSE (GLD - NYSE)
Yesterday's close $46.28 (U.S.) down 8 cents
RBC Precious Metals Fund
DAILY CLOSE
Latest close $21.88, down 46 cents
© The Globe and Mail
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