BY ORDERING YOUR FREE GUIDE
Complete the form now...
Precious metals are not popular with financial advisors. You already may have discovered this if you asked your own financial advisor about investing in gold through your IRA, 401(k), or other retirement plan or brokerage account.
If you have asked about investing in gold, chances are you were dismissed with a brief, superficial explanation short on facts. You may have been told about gold’s supposed inability to compete with the stock market over longer periods. Or you may have been steered to a securitized alternative for physical gold, such as mining stocks, a precious metals mutual fund, or an exchange-traded fund (ETF).
If you would like to benefit from gold investment to the fullest extent, be wary of “paper” metals. Many of gold’s benefits come from a single, overriding advantage: low correlation with traditional assets, including a particularly low correlation with U.S. equities.However, gold securities by definition aren’t separated from the stock market as much as physical gold is.
The performance of gold mining companies is dependent on much more than movement in the spot price of gold. The value of gold mining stocks also is determined by an array of managerial and operational factors that affect profitability.
Remember, when you buy shares of a mining company, you’re not buying shares of gold or silver; you’re buying shares of that company. And when the broad stock market is hit with significant volatility and drops sharply, mining stocks can suffer along right along with all other equities.
Precious metals mutual funds offer the same kinds of investment challenges as mining stocks because they are made up primarily of mining stocks. In other words, they may move counter to the price action of physical gold and silver.
The following chart illustrates high correlation between the Dow Jones Industrial Average and Vanguard Precious Metals and Mining Fund (symbol: VGPMX) from December 2007 to June 2009, the official U.S. dates of the 2008 global recession.
During this period, the Dow Jones Industrial Average dropped 35%, while the Vanguard Precious Metals and Mining Fund fell nearly 40%. At one point it dropped more than 70%. The spot price of gold during this period appreciated roughly 25%.
Gold ETFs are investment trusts that own gold bullion. This means the shares issued by gold ETFs are backed by the physical metal owned by the trust.
However, for those concerned about maximizing all the benefits of owning physical gold, ETFs still don’t cut it. For one thing, gold ETFs shares are not tantamount to pieces of physical gold. Even though the ETF issues shares against the gold it owns, the ETF shareholder for all practical purposes has no claim to the underlying gold.
In theory, prosperous investors who own at least 100,000 shares of the popular SPDR GLD Shares ETF can request physical delivery of the metal. The fine print, however, says that even when an investor owns millions in fund shares the trust is under no obligation to meet the delivery request. In other words, when you own shares of a gold ETF, you can’t count on owning anything other than paper gold.
This may be the deciding factor: Gold ETFs are vulnerable to many of the risks inherent to securities, including market risk, even though an ETF owns gold bullion.
In the end, there’s only one way to own precious metals that ensures you’ll retain all the benefits of owning precious metals: by owning physical gold and silver.