A Golden Investment in 2009 and Beyond

When previously writing about where I would invest $50,000 in the year ahead, I had discounted gold as an investment because in essence it is a speculative commodity with little utilitarian purpose beyond that of jewelry. I may have been wrong as gold was one of the few "investments" that held up amid all the economic turmoil. But will the trend continue in 2009 and beyond?

In 2008, with markets and real estate collapsing around the world, gold on a per ounce basis posted a near 5% gain (the Dow was down by over 30% in comparison). If it wasn't for the unexpected appreciation in the US dollar, as global investors flocked to the safety of US treasuries, gold could have performed even more strongly. So far this year, gold is up about 2% to around $900 an ounce. However, gold critics argue that it should have performed even better given the state of the local and global economies, while advocates of the yellow metal argue that the worst is still ahead of us and that the best gains for gold are still to come with $2,000 not beyond reach in 2009.

Will Gold Shine in 2009 and beyond?

What might happen, no one knows. But for investors who want to hedge against potential economic turmoil, buying gold could be a good diversification plan in 2009. Like 2008, it may be one of the few asset classes that holds up at year end barring a miraculous economic recovery.

The case for gold is this: The government is injecting trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reviving the economy and combating deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation. Increased investor interest, driven by the forecast depreciation of the U.S. dollar, low international interest rates and investor diversification in the face of a severe international economic slowdown are also likely to be supportive for the gold price.

Fundamentally, gold prices also have support as well. Since about 2001, gold production has been declining - despite increasing prices. Basic economics tells us that as the price of a commodity goes up, supply should increase as companies seek to maximize profits. However, that hasn't happened. The reasons behind this are that it's getting harder and harder to find good gold deposits at prices which it is economically feasible to extract the metal.

The opposing view: Critics say that gold prices may have peaked in 2008 and that as the global economy recovers in 2009 investors and central banks will start selling gold to restore cash reserves. This will drive gold prices down to the low $200 levels seen earlier this decade. Further, the argument that inflationary pressures will drive gold prices up (as the US dollar weakens) seem to have lost merit in the current environment where inflation is no threat at all. Also, once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy and sell shares of institution it assisted negating US dollar money over-supply concerns.

How to Buy or Invest in Gold

If you decide that gold prices are in fact on the way up, then your next decision is how to actually best invest in the commodity. These days investors have a variety of options to invest in the yellow metal, which include:

Bullion. This is the pure metal, typically cast as bars or coins in weights ranging from a single gram to one kilogram. Possessing gold in physical form offers some means of retaining control of your wealth in an economic disaster. However keeping bullion opens you to the threat of theft and the cost of keeping and insuring the physical asset can add up.

Pooled Accounts: These are sort of like a gold bank account in that your gold is held in a vault. The markup per ounce is usually less than 1% of gold's current market price, making this cheaper than owning physical bullion. Depending on the provider, pooled accounts are either "allocated," meaning that specific, numbered bars are allocated to you, or "unallocated," meaning you're assigned a sum of gold, though not specific bars. Allocated accounts charge annual storage and insurance fees. Unallocated accounts generally don't, but you are an unsecured creditor meaning that if the firm goes bust, creditors can grab the company's assets - including your gold.

Exchange-Traded Gold Funds: These trade like shares of stock on a stock exchange, with each share representing some fractional portion of an ounce of gold. For instance, each share of the SPDR Gold Shares ETF (GLD) represents 0.1 ounce, and thus trades at about a tenth the price of gold. The shares are typically backed by physical gold held in vaults in London, New York and Zurich and audited regularly. ETFs offer a relatively cost-effective way to own gold, since you're not paying insurance and storage costs. Nor do you take physical possession of the metal, so there are no fabrication costs or risk of loss or theft. Buying and selling are instantaneous like other ETFs. From a taxation perspective, government treats gold as a collectible, and thus capital gains on a gold ETF are taxed at a flat 28%, nearly double the long-term capital-gains rates on stocks (a fact often overlooked by ETF investors!).

The most common and widely held Gold ETF's are: SPDR Gold Trust ETF (GLD) & iShares Gold Trust ETF (IAU) & Market Vectors-Gold Miners ETF (GDX). For a detailed of review of these and other Funds and ETF's go to funds review site Morningstar.

Individual Gold or Mining Companies: With publicly traded mining companies, you don't own the metal but you do own the shares of companies that mine it. This is the most leveraged gold play, since a rising - or falling - gold price is spread across hundreds of thousands or millions of ounces the company has in the ground. Mark Johnson, portfolio manager for the USAA Precious Metals & Minerals Fund, estimates that "you probably have to put two times as much money into bullion or ETFs to get the same exposure to gold as you do with mining shares." However, with any single company or stock, you are exposed to all sorts of corporate and geopolitical risks, based on the countries in which a particular gold miner operates. And because mining is so energy intensive, rising energy prices can negate some of the increase in gold prices. Some good gold stocks to check out: Yamana Gold (AUY), Barrick Gold (ABX), Agnico-Eagle Mines (AEM),and GoldCorp (GG).

In Conclusion

I am not as bearish on gold as I once was, but I still see it is a hedging strategy in case stock markets start to tumble, rather than a pure play, long term investment. Gold certainly has both technical and fundamental positives going for it thanks to loose monetary policies (leading to future inflation/currency pressures) of global central banks and limited new supply sources. Or even more simply, gold looks very attractive in 2009 for no other reason other than the year looks bad for everything else.

For the every day, nonprofessional investor (like me) the safest and most practical way to invest in Gold is via one of the ETF's I mentioned above. They are low cost (and $0 to trade by using discount broker Zecco), yet provide good diversification. Like any trade though, do your own homework and pull the buy trigger only when you are comfortable with the merits of your investment.

Stock position: None.

Comments

[GMiki1:]

This will be the year of gold. Whether it will continue thereafter, who can say. But the miners are a buy. And silver. Ah, the wonder of silver, which is in short supply.

Feb 08 11:11 AM

[2old2care:]

Another option exists for Bullion:

Central Fund of Canada (CEF).

October Holdings ratio about 59% Gold Bullion and 38% Silver. The remaining being cash/other per their annual report.

Feb 08 11:38 AM

[Tucsonbill:]

After 30 years as a broker who NEVER bought a gold stock, I changed in 2001 and the gold shares of many companies have done well. Even the drop of 2008 was muted by gold shares and they are rising again. Why? Because fiat currencies are suspicious, being diluted (deflated) and representing falling economies. This trend is still in place. Hold them forever? A one -decision investment? No way. But for now gold is a required part of any portfolio. Seeking out the smaller, junior is quite a bit harder than selecting major producers. And riskier. But bigger rewards are there for the wise and knowledgeable investor.

Feb 08 11:39 AM

[silverwood:]

After reading this article, it appears that the author is writing it to himself. He is trying to decide if he should invest in gold. After all it is apparent that he really doesn't understand gold as he states;

"I had discounted gold as an investment because in essence it is a speculative commodity with little utilitarian purpose beyond that of jewelry."

But now he says;

"I am not as bearish on gold as I once was, but I still see it is a hedging strategy in case stock markets start to tumble, rather than a pure play, long term investment."

Stock market hedge? Gold is MONEY! pure and simple and it trades as such. What gold is reacting to is a global movement by Governments and their central bankers to print more fiat money therefore debasing their currencies. That is why you are seeing new all times highs of gold in terms of Euro, Briitish pounds, Canadian $ etc. Shortly a new higher high coming in US$.

Feb 08 03:30 PM

[PeteK:]

Gold is definately the thing to get, as much as we can.
Been doing that since Oct. this year.
Oil & Gas too.
Check out MDW, something is going on there.
Maybe Big.
Grandma always say "Trust nothing But GOLD."

Feb 08 04:38 PM

[sunny12945:]

A certain % of GOLD in a portfolio is an insurance against BLACK SWAN events and also terrorism of all especially directed at Western Economy.

Feb 08 05:30 PM

[mr freddo:]

I too believe that gold will run well in 2009. I am wary though of the Federal Reserve and other central banks who may intervene in the gold market to keep the price down.

Feb 08 09:10 PM

[jimmy Turano:]

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Feb 09 09:08 AM

[henarl:]

If you are using gold and/or silver as a hedge against the rest of your portfolio, then the mining companies make the most sense because of their leverage to the bullion price. A relatively small investment in mining companies could hedge against a larger portfolio without much downside risk. Long GG, GFI, SLW, CDE.

Feb 09 11:26 AM

[JudeJin:]

i think everybody need to revisit history. gold was money and was not a speculative metal until humans abondoned the gold standard.

but with or without gold standard, gold is still a strategic reserve at all central banks.

it is still a perfect hedge against rotten fiat money.

Feb 10 03:14 AM

[jemp:]

Just an update to Zecco trading being $0/trade. As of March 1, all trades will be $4.50 unless you have a $25000 accounts balance.

Feb 15 06:16 PM

[Ames Tiedeman:]

There is little question that the yellow stuff called GOLD will be trading higher in the coming years. The world wide financial disaster is not going away anytime soon. Budget deficits by Federal Governments around the Globe will only get more vile.

Feb 21 09:35 AM