As the Federal Reserve continues to maintain its short-term nominal interest rate target near or at zero and political and social unrest continue to spread in North Africa and the Middle East, the appeal for gold and other precious metals is expected to continue to remain elevated, pushing up prices.
Gold has appeal for numerous reasons and will likely continue to be the “go-to” precious metal. The shiny metal offers protection from inflation, which is a fear that many investors have, a hedge against a falling dollar and has long been a safe haven for Central Banks. Additionally, a growing middle class in developing nations will likely support its demand. Good ways to gain exposure to gold include the following:
- SPDR Gold Shares Trust (GLD), carries an expense ratio of 0.40%.
- iShares COMEX Gold Trust (IAU), carries an expense ratio of 0.40%
- ETFS Physical Swiss Gold Shares (SGOL), carries an expense ratio of 0.39%
All three of these ETFs physically holds gold bullion and therefore are treated as collectibles by the IRS and taxed at 28% regardless of holding periods.
To get direct equity exposure to gold, one could consider the following gold mining ETFs:
- Market Vectors Gold Miners ETF (GDX), which carries an expense ratio of 0.53% and focuses on large-cap companies that are primarily involved in mining of gold and silver
- Market Vectors Junior Gold Miners ETF (GDXJ), which carries an expense ratio of 0.59% and focuses on small and mid-cap companies that are primarily involved in mining of gold and silver
For exposure to futures contracts in gold, one can take a look at the following:
- PowerShares DB Gold (DGL) which carries an expense ratio of 0.75%
Gold can also be played using leveraged and inverse ETFs in the following manner:
- ProShares Ultra Gold ETF (UGL), which gives double the exposure to the price movements of gold and carries an expense ratio of 0.95%
- ProShares UltraShort Gold ETF (GLL), which seeks to five twice the inverse daily performance of gold bullion as measured by the U.S. dollar p.m. fixing price for delivery in London and carries an expense ratio of 0.95%
Lastly, gold can be accessed through exchange traded notes, which are senior, subordinated debt instruments. The following are gold ETNs:
- UBS E-TRACS CMCI Gold TR ETN (UBG)
- PowerShares DB Gold Short ETN (DGZ), which bets against gold and carries an expense ratio of 0.75%
- PowerShares DB Gold Double Long ETN (DGP), which seeks to replicate double the performance of gold bullion and carries an expense ratio of 0.75%.
- PowerShares DB Gold Double Short ETN (DZZ), which gives leveraged exposure betting against the gold markets and carries an expense ratio of 0.75%
In addition to the same reasons that gold is expected to remain attractive, increased industrial demand and a diminishing supply will likely further bolster silver’s appeal. Silver has characteristics which enable it to have a high conductivity rate allowing it to be heavily used in the electronics space, which further adds to price supports from a demand perspective.
As for supply, there just isn’t as much silver to be consumed as there is gold and supply is slowly diminishing away.
Ways to access silver include the following:
- ETFS Physical Silver Shares (SIVR), which holds silver bullion
- iShares Silver Trust (SLV), which gives exposure to physical silver bullion
- PowerShares DB Silver Fund (DBS), which holds futures contracts in silver
Like gold, silver can be played using leveraged and inverse ETFs in the following manner:
- ProShares Ultra Silver (AGQ), which bets against the silver market
- ProShares UltraShort Silver ETF (ZSL), which is a leveraged bet against the silver market
For investors that want to grab exposure to both silver and gold, one could consider the PowerShares Precious Metals ETF (DBP), which holds futures contracts in both silver and gold.
Platinum & Palladium
Much like silver, platinum and palladium are both precious metals with industrial applications which makes them even more so attractive than gold.
In fact, in 2009, both metals outperformed gold with palladium showing gains of 118% on the year and platinum posting a 57% jump for the year, compared to about 25% for gold. Additionally, both of these metals are relatively well below their all-time highs and are not considered to be overbought like gold.
Both platinum and palladium’s demand has been primarily been driven by its use as a catalyst in devices that remove automotive pollutants and is expected to continue to increase with heightened automobile emissions standards. Additionally, palladium can be used in electronics, is part of the refining of nitric acid, and is used in dental crowns and bridges.
Investor demand has also been rising for physical Platinum and Palladium. In 2009, investor demand for both metals soared to 6% of annual global supply as compared to 2% and 3% for platinum and palladium respectively in 2007.
Ways to access these markets include:
- ETFS Physical Platinum Shares (PPLT), which holds physical platinum
- ETFS Physical Palladium Shares (PALL), which holds physical palladium
- iPath Dow Jones-AIG Platinum ETN (PGM), which tracks the platinum markets through futures contracts
- UBS E-TRACS Long Platinum TR ETN (PTM), which tracks the platinum markets through futures contracts
- UBS E-TRACS Short Platinum ER ETN (PTD), which is a way to bet against the platinum market
For investors that want to grab broad based exposure to precious metals, the following choices are available:
- PowerShares Precious Metals ETF (DBP), which holds futures contracts in both silver and gold.
- PowerShares Global Gold & Prec Metals (PSAU), which holds stocks of companies that derive their revenues through precious metals.
Precious metals are a commodity which will likely remain attractive as the global economic recovery continues to progress and there are many ways to play them.
Disclosure: Long GDX, SLV