We’ve been asked, “Is gold a good investment?” and we always give investors this answer.
Is gold a good investment? It can be, but we recommend that you stick with shares of gold-mining firms when investing in gold and you’ll find it’s a better investment than bullion.
We feel that investing in gold in the form of bullion, instead of in shares of gold companies, is not the preferred option. Bullion doesn’t earn income, but instead consumes funds for storage fees, insurance and so on.
If you want to own gold bullion, there are easy and low cost ways to do it. Look into investments like SPDR Gold Shares (symbol GLD on Nasdaq). You can buy and sell SPDR Gold Shares through your broker. SPDR Gold Shares goal is to match the price of gold bullion. Its only assets are gold bullion, and, from time to time, cash.
A far better way to profit from rising gold is by investing in the stocks of gold-mining companies. That way, you benefit from increases in the price of gold, and you give yourself the potential for capital gains and income. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.
Even so, because of their volatile nature, we continue to recommend that gold stocks only make up a limited portion of your portfolio’s Resources segment.
The surprising truth about mining stocks
Mining stocks play an important role in your portfolio even when commodity prices are down. Pat McKeough tells you why in this special report—and gives you the outlook on gold, copper, uranium, and the remarkable story of Canadian diamonds.
That’s because, if you hold speculative investments like gold inside your RRSP and they drop in price, you not only lose money, but you lose the opportunity for tax-free compounding of the money within your RRSP.
Always remember that the price of gold feeds on economic uncertainty. We encourage you to also read this frequently asked questions article about investing in gold in your RRSP too.
Is gold a good investment if you’re in futures and structured products?
Investing in gold futures
Rising gold prices can make trading gold futures look more attractive. However, you can only profit in future-linked deals by out-guessing other futures traders by a wide enough margin to cover commissions and other trading costs. When you dabble in commodity futures, you are betting against professionals who make a full-time occupation of studying these markets, who have better access to information than you do, and pay much lower commissions.
Most futures traders start out with a planned limit on how much they are willing to lose before they quit. In six months or so, most lose that amount, and quit trading. What’s more, because futures traders tend to trade often, a surprisingly large number find that the total brokerage commissions they pay during their trading career is close to the total losses on their commodity investments.
Structured investments
Brokers sell various structured products for investing in gold and other commodities, while supposedly limiting risk. Most participants will ultimately lose money in these investments, as well. Or they will make a poor return in relation to their risk.
The difference between structured products and gold futures trades is that the losses won’t happen so quickly. However, more of the money you lose will flow into brokers’ fees and commissions, while you’ll typically lose less on the commodity investments themselves.
Guidelines we use to pick gold-mining stocks
To profit in gold stocks, look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
High-quality gold stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
Ultimately, is gold a good investment for investors?
Gold is different from other commodities due to its scarcity, its special physical characteristics like freedom from tarnishing and malleability (the ability of a metal to be hammered into thin sheets), its unique suitability for use as a medium of exchange, and its place in the world’s financial history.
But keep in mind that no matter how appealing they look, you should limit gold stocks to a modest part of your portfolio.
Do you invest in gold-mining stocks or hold gold bullion? Share your experience with us in the comments.
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