play-gold

It can be frustrating to invest in gold stocks, or even to try and trade its volatile swings.  Some people say the metal will go to $2,000 and others say it will crater back to $500.  Wouldn’t it be great to just invest in one gold stock that fits your risk profile?

Fortunately, the stock market has evolved to the point where many different types of gold stock investments exist.  From individual companies that are somehow involved with gold, to gold ETFs that offer diversified plays, to holdings that are devoted to owning actual physical gold, there’s something for every investor.

The gold stock investment you make depends on a few factors.  It is important to remember that gold is considered a precious metal, but its relative availability influences its price.  Economic uncertainty, moves by the Fed, and civil unrest can cause spikes and rapid declines.

However, if you intend to invest in some form of gold stock or gold ETF for the long term, the single most important thing to know is that it is a hard asset.  A hard asset is something that has intrinsic value, such as real estate or rare coins.  The underlying value of that asset may fluctuate over many decades, but it will always be worth something.

The Risky Gold Play

The riskiest gold stock is a leveraged gold ETN, which multiplies the effect of the movements in the price of gold.  VelocityShares 3x Long Gold ETN (NYSE:UGLD) are linked to the S&P GSCI Gold Index, which is an index that essentially tracks the price of gold over time using futures contracts, and multiplies the effect by a factor of three.

A gold futures contract is an agreement to buy or sell a certain amount of gold at a certain set price in the future.  It has a fee of 1.35%.

Remember, this is a leveraged gold stock that will respond with three times the price change of gold.  So if gold is down 9% (as it has been over the past year), this gold ETN will be down 27% or more.

The Diversified Gold Play

Rather than be exposed to the exact movement and volatility in the price of gold, you can choose to have exposure to an investment that is one step removed: gold miner stocks.

There are several advantages to owning the Market Vectors Gold Miners ETF (NYSE:GDX). 

The first advantage is that gold miners can start and stop operations, or vary their mining rates, depending on the price of gold.  If gold explodes to the upside, mining can go into overdrive. If gold crashes, miners can slow their pace.  Of course, if demand for gold remains slack for a long time, the miners can lose a lot of money.  Their equipment can’t be left idle forever and their employees can’t be held on the job forever, either.

This ETF has 66% of its assets invested in its largest ten holdings, which include Barrick Gold (NYSE:ABX), Goldcorp (NYSE:GG)  and Newmont Mining (NYSE:NEM).  Because the price of gold has stagnated over the past few years, these companies have suffered.  However, they are now returning to their former glory.

The diversification of this gold ETF further flattens out gold price volatility.

The Conservative Gold Play

The safest bet in gold stocks is Central Fund of Canada (NYSE:CEF).  This security literally holds physical gold and silver bullion in Canadian vaults.  You literally own that bullion if you own shares in CEF.

This differs from many other gold stocks, such as the VelocityShares stock, which merely owns contracts on the delivery of gold.  The gold is never actually delivered, however.  Instead the contract is traded in for the cash equivalent of its value.

With Central Fund of Canada, the idea is that you are buying both gold and silver (for diversification), and you simply hold the shares for the long term.  You are simply storing a portion of your portfolio is a hard asset, as opposed to sitting in cash.

Lawrence Meyers does not own shares in any security mentioned.

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Published by Wyatt Investment Research at