Precious Metals ETFs: A Less Risky Way to Maintain Purchasing Power?

The worldwide solution to fight deflation is/was government stimulus spending and coordinated rate decreases. Some world powers spent more than others and some spent less intelligently than others. In addition, different central banks cut rates more drastically than their counterparts.

Regardless of political camp or economic orientation, there’s near unanimity that the dramatic efforts by the U.S. government are responsible for significant deterioration in the value and credibility of the U.S. dollar. (Review the reasons that a weak dollar has had advantages as well as disadvantages.) Yet one thing that any investor must consider going forward are ways to hedge against inflationary pressures that stem directly from less valuable dollars in circulation.

The most common guidance are lower risk, inflation-protected securities. Yet the ever-popular iShares TIPS Bond (TIP) relies on the Consumer Price Index (CPI) that always seems to underestimate inflation in the real world. For that reason alone, TIP may have trouble keeping up with actual inflation… and thereby struggle to maintain true purchasing power.

Foreign stocks, particularly emerging market stocks, may be a more potent fighter against the erosion of purchasing power. In fact, the total return that emanates from share price appreciation, dividend yield and foreign currency gains can add generously to a portfolio.

There is one catch, however. For all the “talk” about decoupling, the worldwide linkages in financial markets have demonstrated that U.S. stocks probably wouldn’t collapse in a vacuum; that is, we’d likely see significant foreign stock declines as well.

So when it comes to reasonable-risk returns to overcome inflation/dollar devaluation, one should not ignore precious metals. Even with gold at $1000+ an ounce… even with remarkable gains for silver, platinum and the precious metal combo funds… there’s still plenty of reason to claim a stake.

For starters, the risk of owning gold has frequently been overstated; financial planners, pension committees and “wannabes” often declare that gold is far too risky for clients/beneficiaries.

However, gold has closed higher every year in the 21st century. Its worst drawdown of -30% in 2008’s all-asset liquidation is still less than any country’s stock benchmark’s worst drawdown. And the SPDR Gold Trust (GLD) currently carries a Risk Grade of 76… less than the S&P 500’s SPY grade of 83.

I hardly consider myself a gold bug; that said, I’ll probably be bullish on the yellow metal until one or two things occur. One, if my fellow countrymen start panning for gold in their local streams or mining in their backyards, that would be bearish. (Note: Consider how backyard drilling started hitting headlines when oil hit $150.) Second, if gold falls below a 200-day moving average, I’d be quite cognizant of the metal’s historical downside (drawdown).

Here are 5 ways to invest in the potential success of precious metal ETFs, sorted by risk:

5 ETFs For Precious Metal Investors
				Risk Grade		YTD % (through 10/16)
SPDR Gold Trust (GLD)				76		19.3%
PowerShares DP Precious Metals (DBP)				88		24.1%
iShares Silver Trust (SLV)				150		53.4%
ProShares Ultra Gold (UGL)				151		32.7%
Market Vectors Gold Miners (GDX)				208		42.8%

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[PastTense]

The less risky approach is not ETFs, but rather holding the actual physical metal.

2009 Oct 22 06:08 PM

[Jake2]

Zack's Investments has a different take on gold.

2009 Oct 23 01:08 AM

[Jake2]

"As you can see, while gold has been rallying, it has not given investors the best opportunities to profit. The mixed earnings estimate picture for gold miners suggests that the RISKS OF INVESTING in these companies REMAINS ELEVATED. Though gold mining stocks could still go higher, especially if third-quarter margins are better than expected, there are industries whose short-term prospects are brighter." Zacks (Emphasis added.)

2009 Oct 23 01:12 AM

[AgAuMoney]

Another interesting way to own precious metals is by owning some Silver Wheaton (SLW). They provide funding to miners in return they acquire future silver production at a greatly discounted price (currently about $4 per oz IIRC). I believe SLW is worth investigating. Note that GDX usually holds some SLW and I have a very small position in SLW.

2009 Oct 23 09:39 AM