Investing in Gold
It seems that every time I turn on the TV or listen to the radio, someone is talking about gold. That is understandable as gold is up 197% since the end of 2005 (from bigcharts.com through May 31, 2011). The Dow Jones Industrial Average is only up 17% over that same time period. When you add to that the concerns of our county’s deficits and overall debt, the value of a hard asset, like gold, compared to our paper currency has its appeal.
We have held gold investments as part of our model portfolios going back to the beginning of 2006, and so with all the current talk I thought it would be a goood time to explain the different types of gold investments and how much we currently have in each portfolio.
Gold Investment Types: (For simplicity of the writing, I am not including some other more complicated types like gold futures and digital gold currency)
Physical gold: Owning actual physical gold is not all that difficult. Coins (such as the American Gold Eagle, Canadian Maple Leaf, and South African Krugerrand) and bars of varius weights can be purchased, usually with a small mark up from the current price of gold. Storing the gold may be a little more difficult as physical gold is not registered and therefore protecting falls squarely on the shoulders of the owner. If you own or decide to hold physical gold, you may want to talk to your home owner’s insurance company as the normal coverage limits for gold are typically low.
Mining Stock: There are publicly traded companies whose sole job is searching for and mining gold. Owning these companies can be a more volitile way of investing in gold. In a simple view, it cost them the same to mine an ounce of gold, whether gold is trading at $1000 or $1500. If a company makes $200 profit when gold is $1000 an ounce, it would make $700 at a $1500 price. So gold going up 50% increases the company's profit 250%. Many times (but certainly not always) when gold goes up, mining stock goes up even higher, with the inverse true as well.
It is important to note that both physical gold and mining stock are only worth what someone else will pay for them at any point in time. Even their moving in the same direction breaks down at times based on this truth.
Mutual Funds and Exchange Traded Funds can hold phyical gold and mining stock as well. We use mutual funds to accomplish this in our portfolios. They do create a simple tool for participating in gold price movement without having to store physical gold. In addition, they allow for easy diversification and professional selection of mining companies, since there are many companies in that sector to choose from. While mutual funds do not allow you to ever take possession of the share of gold you own, they do allow you to fully participate in the changing US Dollar value of gold.
Our 4 Model Portfolios each have both gold and mining stocks in them. Currently we use two mutual funds, Permanent Portfolio and First Eagle Gold, to accomplish this. The Permanent Portfolio Fund holds a mix of gold, silver, stocks, and bonds. It is committed to holding 20% physical gold and 5% physical silver. Where most gold mutual funds hold all mining stock, First Eagle Gold Fund currently holds 15% physical gold and 85% mining stock (although those percentages can change). We have intentionally included each in our model portfolios based on the risk of each portfolio (more First Eagle Gold for Aggressive and more Permenant Portfolio for Conservative). See the chart below:
Permenant Portfolio First Eagle Gold
Aggressive 0% 10%
Growth 10% 8%
Moderate 20% 6%
Conservative 20% 4%
One of our Core Values is Diversification. We don’t believe anyone knows for sure where the world and economy are headed. In that line, we include gold investments, yet balance them with stocks, bonds, and cash as well. You can see our complete allocations here under “Current Allocations”:
In an effort to keep this an easy read, I have limited the scope and details. If you would like more information on gold investing, I can send you another article that I think does a good job of explaining in much more detail. Email or call if we can help in anyway.
Hope this information brings some peace of mind. Thanks for allowing us to serve. Feel free to pass this along to anyone you think would benefit. If we can help anyone that you know with Investment Management or Financial Planning, we would love the opportunity.