Most investors have read articles on the merits of investing in gold. Normally used as a hedge against inflation, gold has been attracting much attention in 2010 and 2011 with the price hitting new all-time highs. Most financial planners suggest that a portion of any investor’s portfolio be invested in commodities, especially gold. Gold does not move in concert with stocks and bonds, which makes it an excellent investment for portfolio diversification.
There are a number of ways to invest in gold. Some investors like to buy the metal outright. Buying and holding physical gold can be tedious and needs careful selection of the custodian and the manager.
Most investors prefer the easier method of gaining exposure to gold by investing in gold mutual funds or gold ETF’s (Electronically Traded Funds). Both types of funds are easy to buy and sell each day if desired.
Gold Mutual Funds
These mutual funds invest in stock of gold mining companies. When the price of gold goes up, the stocks of these companies also usually go up. Assuming the price of gold is higher than the cost of mining the gold, every dollar increase in the gold price means a dollar of pure profit to the mining company. Of course, investing is stocks comes with the same industry and company risk as any other stock fund. One company could be badly managed and therefore not perform well relative to the price of gold. However, this is why the mutual funds are professionally managed by experts who know the industry and each of the companies.
Most of the gold ETF’s hold actual gold and maybe some mining companies. These funds will track the price of gold a bit closer than a mutual fund since they are holding the actual metal.
A Mutual Fund or ETF?
Most investors are comfortable with mutual funds since they have been around for many years. New money can be added easily and the customer service staffs are there to help novice investors.
Gold stocks can be more volatile than actual gold. The stock of a mining company can rise more than an equal percentage rise in gold. For this reason, the NAV of the gold mutual fund may be more volatile than the price of gold. If investors believe the price of gold will keep rising, possibly due to expected inflation or world events, the gold mutual funds should be a better investment than a gold ETF.
If the price of gold should start dropping for an extended period a gold ETF will tend to smooth out loses better than a gold mutual fund.
The choice really comes down to the investor’s view of future gold prices. However, one would question why an investor is investing in gold if he feels the price of gold will be dropping in the future. Therefore, the ease and comfort of investing in gold mutual funds should and is making these funds the preferred method of investing in gold for the long term.