The weak U.S. dollar and ongoing Eurozone debt crisis are attracting investors to gold. Bullion and mining exchange traded funds are among the best tools to gain exposure to the precious metal.
"In an attempt to avoid a deflationary spiral the Federal Reserve engaged in successive rounds of economic capital injections called quantitative easing. The broad anti-deflationary monetary policy played to gold's strength, and is certain to have contributed to the metal's rise. The Fed will eventually be forced mop up this liquidity through higher interest rates, but it isn't the most pressing concern. Bernake has made clear that to preserve stability of our financial markets, he will hold interest rates at historic lows for at least the next couple of years. On this basis, we believe a small position in gold should be considered as an insurance policy," Abraham Bailin wrote in a Morningstar fund analysis.
For those investors interested in a gold investment, there are many choices. The two main categories for a gold investment are gold mining shares and gold ETFs, reports John Nyaradi for Wall Street Cheat Sheet.
A gold ETF that physically holds bullion, such as the SPDR Gold Shares (GLD), directly tracks the price of gold per ounce. Gold ETFs give investors the convenience of buying, selling and trading the value of gold through a brokerage account, without ever dealing with physical delivery. As the price of gold rises, gold ETFs rise along with the price of the metal.
A gold fund that physically holds the metal does not shoot up quickly as gold prices rise. ETF investors are a little more protected from price fluctuations due to the built-in diversification of ETFs.
Gold mining shares are stocks of companies that are in the gold mining industry. These companies range from small exploration companies, to large multi-billion dollar companies that have large mines on a global scale. The smaller gold mining companies are a lucrative investment if the company can find a gold spot and mine it. Market Vectors Junior Gold Miners (GDXJ) is an ETF that gives targeted exposure to this group.
A mining company can provide an investor with a good return on investment even when the gold price stays the same or falls in value. The value can be increased due to the payment of dividends or an increase in the production of gold. The advantage with a gold mining ETF such as the Market Vectors Gold Miners ETF Trust (GDX) is that the fund can take off if the price goes up, however, if the prices suddenly fall, returns can disappear quick.
SPDR Gold Shares
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon's clients own GLD.