Buy Gold Stocks

With global financial markets experiencing elevated volatility and multiple crises in recent years, gold has seen a considerable increase in popularity. However, many investors remain uncertain as to why gold would be a good investment and the best ways to purchase the asset. The key is to understand both gold investment and the different methods of investing so that you can make a purchase that aligns with your specific goals.

Steps

Understanding The Risks And Rewards Of Gold Investment

1. Learn the history of gold as a currency. Gold has been used as currency longer than nearly any other substance. While not every culture has deemed gold to be the ideal currency, many of them have, resulting in the establishment of the gold standard as the de facto world currency beginning in the 19th century. While that has changed in more recent times, many people believe that gold should once again be used as currency.
   • Most of the major economies in the world cut their currency ties to the gold standard during the Great Depression. The United States partially cut the cord under Franklin Roosevelt and completely abandoned the gold standard during Richard Nixon's presidency.
   • Nearly all modern currencies are fiat money—that is, their value is guaranteed by the issuing government. Many of the critics of the gold standard said the same of gold (i.e., it had value only because some government said it did).
2. Understand why gold may be a good investment. Gold is typically purchased as a "hedge" against various forms of market risk. That is to say, gold can provide some protection against poor performance in various markets, inflation, and currency fluctuations. The price of gold is set by supply and demand, not currency valuations or market declines.
   • Gold can add to a well diversified investment portfolio. One key to financial diversification is to hold different kinds of assets (stocks, bonds, real estate, precious metals, various commodities). It is important when diversifying to hold asset classes whose prices do not move together (that are "uncorrelated"). Traditionally gold has a low correlation with the U.S. stock market, emerging markets, and high-yield bonds. In fact, gold has a lower correlation with these assets than any of them have with each other, meaning it has excellent diversification potential.
   • Gold also functions as a hedge against inflation. The price of gold tends to increase with the rate of inflation. This is because as inflation increases investors drive up the price of gold by buying it as an alternative to cash.
   • While gold's merits as an investment are highly debated, it is generally regarded as a good repository of value. While the purchasing power of cash erodes over time due to inflation, gold will generally maintain its value.
3. Understand why gold may be a bad investment. There is a growing consensus among many investors that gold is neither a safe investment nor the best hedge against inflation.
   • Some investment researchers observe that demand for gold does not actually rise when stocks decline or currencies lose value. Many believe that gold rises simply due to the momentum of scared investors rushing to buy it because they expect general prices to rise. If this is true, gold is not the safe investment many have claimed.
   • A thorough examination of its track record shows that gold has only occasionally performed well in times of severe inflation or market decline. While some expect that gold would become the alternative currency in the event of an economic collapse, others are skeptical.
   • Gold does not provide the guaranteed return on capital that many well-known securities do. Famed investor Warren Buffett refuses to have anything to do with gold investment. According to him, it makes no sense to invest in a material of little utility when you could instead buy shares of a profit-making company.
4. Learn the factors that affect the value of gold. No matter what the critics say, gold purchases have been a popular tool for generations of investors. There are several factors that tend to affect the price of gold:
   • The Washington Agreement of Gold, originally negotiated in 1999, was a gentleman's agreement among fourteen nations to limit the amount of government-owned gold to be sold in any calendar year. The motive for the agreement was the fear that a market oversupply of gold would send the price down. Critics have attacked the agreement as interfering with the normal forces of supply and demand.
   • Economic downturns may cause investors to sell their gold commodities or securities for cash, increasing supply and lowering demand, driving the price down.
   • National crises or wars tend to increase investor demand for gold, largely due to the fear of currency depreciation. Investors purchase gold stocks and commodities to safeguard against economic crisis and support the value of stocks in general.

Purchasing Gold Stocks

1. Learn the different ways to purchase gold stocks. Generally speaking, one can invest in gold stocks in three different ways: you can buy stock in gold mining companies directly; you can buy gold exchange-traded funds; and you can buy gold mutual funds.
   • There are pros and cons to each of these methods. Buying mining company stock allows for direct, albeit high-risk, exposure to gold mining, whereas mutual funds and ETF's offer lower risk and better diversification.
2. Analyze specific gold-mining companies. The most direct way to invest in gold stock is to buy gold-mining companies directly. This is both the highest-risk and highest- reward method. Investing in a mining company means you're placing a bet on that company's ability to be profitable, as opposed to spreading your investment over a wide range of firms. Thorough analysis of the company is essential, because you need it to perform better than its peers.
   • When selecting a gold mining stock, it is important to look for a few things. Look at production costs. Gold producers have little purchasing power, so being able to produce gold at a low cost is an essential advantage. This information can be located on the website of the mining company by clicking on "Investor Relations" and then looking at the annual or quarterly earnings report.
   • Look at production. A strong company should be able to increase its production annually. Strong production means both higher revenues and lower costs. See the company's annual report for an indication of production growth. Often companies will present this information in chart form.
   • Look at the company's debt compared to that of its peers. The best way to look at debt is using the debt/equity ratio, which compares what a company owes to what it owns. This information can be found on websites like Morningstar.com. The lower the ratio, the better.
   • Look at the valuation of the company. How expensive is a dollar of one company's earnings compared to another's? Compare price-to-earnings ratios, which divide share price by earnings. This information can also be found on websites like Morningstar.com, and once again the lower, the better.
3. Invest in gold mutual funds. If you prefer a lower-risk option or simply can't settle on one outstanding company, consider a gold-oriented mutual fund. Such funds hold portfolios of companies that mine, process and distribute gold. There are several benefits to owning gold mutual funds:
   • Gold funds provide much more diversification than purchasing one or even several companies. While gold-mining stocks tend to move up and down together -- along with the price of gold -- there are large variations in performance depending on how efficient and well managed the companies are. Buying a mutual fund eliminates the risk of making a poor investment choice (buying a company with very high debt, for example) and limits your risk to broader factors that affect the entire industry.
   • Gold mutual funds are professionally and actively managed. This means you have the luxury of letting a professional select what they deem to be the strongest companies in the industry. An adept fund manager will select a list of stocks that can be expected to outperform the industry as a whole. Be aware that there are fees associated with purchasing mutual funds. These fees cover the costs of running a fund and typically amount to a small percentage of the money you invest. Find a fund that charges fees totaling one percent of your investment or (preferably) less.
   • When selecting a gold mutual fund, look at past performance, fees (the lower the better), and the Morningstar rating (the higher the better). Long periods of time are more pertinent than short ones, and you can research past performance on a fund's website. Morningstar provides a 5-star rating system for mutual funds.
4. Invest in gold-oriented exchange-traded funds (ETFs). An ETF is similar to a mutual fund in that it offers the investor access to a wide array of stocks and bonds at a reasonable price. Some ETFs actually purchase and store commodities, while others primarily trade in futures contracts. Actual purchase of gold involves storage costs and reflects current prices, whereas futures are financial instruments that reflect expected future prices.
   • ETF's differ from mutual funds in that they trade openly on the market like a stock, and the price is set by tracking an index such as the XAU, GDM, or CDNX. (The value of a mutual fund is re-set daily, determined by the value of the assets in the fund.)
   • Gold ETF's typically have lower fees than mutual funds, because they don't employ an active manager. Instead, they passively track an index. For example, the SPDR Gold Trust ETF simply tracks the price of gold bullion. By purchasing this ETF, you indirectly own gold.
   • ETF's are a good choice if you want better flexibility with lower fees. With an ETF you not only invest in gold itself, you invest in gold-mining operations. The major downside is the lack of an active manager. There is thus less chance of outperforming the relevant index, since you are essentially investing in it instead. Conversely, there is also less chance of under-performing the index.
5. Purchase gold stocks. Once you have decided on a particular investment method, it is time to buy. The above three means of investing in gold can be executed through an online broker, such as TD Ameritrade, or E*Trade. You also can find a non-virtual broker.
   • Once you open an account, locate the ticker symbol for the stock or ETF you are interested in. For example, if you would like to purchase Barrick Gold, the ticker symbol is NYSE: ABX. This means that Barrick Gold (or ABX) trades on the New York Stock Exchange.
   • To purchase, simply enter a buy order with your brokerage, enter in the ticker of the stock, ETF or mutual fund you want, enter the number of shares you want, and submit the order. If you have adequate cash in your account, you will then own the shares you ordered. Keep in mind there is usually a commission, which varies by broker.
   • These orders can also be placed by simply calling your broker at the number designated on the broker's website.
   • Mutual funds can be purchased through a financial advisor. Advisors will charge an additional fee beyond those charged by mutual funds. An advisor can be worth the added expense if you need assistance navigating among the many funds available.

Tips

• Rearrange your gold purchases to fit your investment strategy. Gold has not always offered a high, long-term return on investment. As a commodity that is not actually "consumed," the supply is relatively constant, but demand can fluctuate wildly. If you are using gold as a hedge, shift out of gold when the market is strong and back into it during times of instability.
• Ask questions. You are not the professional in this industry, but must handle gold through other certified professionals. Make sure that you trust everyone who is handling your money.

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