5 Best Ways to Get into Gold

Money Morning Editor’s Note: With stock markets in a downward spiral, gold has emerged as one of the safest and most profitable investments. This report put together by our Money Morning team contains the key steps to profiting in gold - including the five best "profit machines" to buy right away…

When times are tough, gold soars.

And frankly, the economy has been tough: $4 gasoline, the housing crisis, rampant inflation, plummeting stocks… 

But all the while, gold prices vaulted a cool 43.25% in the past year.

Missing out on gold is already costing investors a pretty penny. What’s more, most experts are forecasting gold prices to rise at least another 56% by the end of this year.

So, how does one profit from gold? It’s simple. You don’t have to wade through a plethora of flashy web sites offering bullion or risk it all on a junior mining company.

Instead, this report covers the ideas any investor can use to start profiting from gold right away. It also includes research on the five best ways to profit, from the most lucrative to the least risky.

Gold Play #1: Triple-Digit Production Gains

Many gold investors are innately averse to risk, which is why some don’t consider buying stocks in mining companies as "buying gold," per se.

But unlike many other publicly traded companies, mining shares can rise sharply when the value of what they’re extracting is spiking.

In this case, gold miners today are getting 182% more for the yellow metal compared to spot prices five years ago.

And - barring the increased cost of oil - mining the gold costs relatively the same, further widening a mining company’s profitability.

South Africa’s Gold Fields Ltd. (GFI) is the world’s fourth-biggest gold producer - with about 90 million ounces in reserve from its operations in Africa, South America and Australia.

It recently reported that its fourth-quarter production would beat its previous forecast by up to 120%.

Overall, the company has a solid balance sheet and ample reserves. But if anything scares investors away, it’s Gold Fields’ location.

South Africa mines are frequently a political tool between the country’s labor unions and state-owned utility provider Eskom Holdings Ltd. [OTC: ESKAY], which controls 95% of the country’s power.

Eskom recently jacked electricity prices up 27.5%, and unions decided to hit the government where it hurts - by striking- thus gutting the government of taxes from its vast gold profits.

That is just one example of why this stock is a risky gold play. Gold could reach another record but Gold Fields may not see a penny of it if its miners are on strike.

Gold Play #2: All About "Cash Flow and Earnings"

When gold prices are high, investors should pay extra attention to mining companies with increasing production levels because they translate into a bigger bottom line.

For its second quarter this year, Yamana Gold Inc. (AUY) produced almost 10% more gold than it did in the previous quarter.

What’s more, its gold production is expected to double to 2.2 million ounces per year by 2012, primarily from its Brazil and Argentina mines.

That’s because Yamana Gold went on a spending spree in the past two years, buying up junior mines around the world to lock in reserves.

"Now it is about production, cash flow and earnings," Chief Executive Officer Peter Marrone told Reuters in May.

It’s also about dividends. The company recently kicked up its investor payout by 300%, a strong vote of confidence to its production and stock performance.

Unlike Gold Fields, Toronto-based Yamana Gold has operations in relatively stable parts of the world - making it less risky on the geopolitical front.

But despite its name, Yamana Gold isn’t purely a gold miner. It also produces copper, silver, and zinc. How well the company continues to mine those metals - as well as their fluctuating prices - will also affect Yamana’s stock value regardless of gold prices.

Gold Play #3: Multiplying Profits with "Free Oil"

Imagine how much money you’d save if you owned your own gas station. Just fill up. Go anywhere. Forget worrying about dishing out $100 a tank.

Now, multiply the size of your oil consumption by 3,600 barrels.

Then multiply that by 365 for each day of the year.

That’s how much "free oil" Toronto-based Barrick Gold Corp. (ABX) is going to have now that its $410 million takeover offer was accepted by Cadence Energy (CDSFF.PK), an oil and gas producer.

And that oil is sorely needed.

You see, gold prices have no doubt added billions to the bottom lines of mining companies. But 25% of the cost to mine that gold goes to oil.

Factor in gold’s projected 58% climb, and this company will have a huge profitability advantage over its mining peers and the average S&P 500 Index stock.

Like Yamana, Barrick has also been on a spending spree. Over the past year, it has gobbled up stakes in a half-dozen mines, multiplying its reserves and production capacities in light of record gold prices.

All totaled, Barrick owns 27 mines in five continents and produces over 8 million ounces of gold a year, making it the world’s largest gold miner.

We consider this a medium-risk investment because - despite its solid operations, profitability and efficiency - it’s vulnerable like any tradable stock.

But since it’s the world largest gold producer, its stock will move closest in line with gold compared to other gold miners.

And as an added bonus, it just kicked up its biannual dividend by 33%. 

Gold Play #4: Tracking Gold Dollar for Dollar

Some investors want to buy gold but feel uneasy about storing it overseas, by another person… and for a commission nonetheless.

But on the same token, not many want to make their homes a burglary target by stashing gold reserves in their basements.

Enter SPDR Gold Trust (GLD), an exchange-traded fund [ETF] that trades like a stock, but whose value directly tracks the price of gold bullion.

Only 1.82 percentage points separate the gains made by gold price and Gold Trust in the past year.

Gold Trust has a $17 billion-plus market cap, giving it ample liquidity.

And with the ongoing skid in the U.S. dollar, investors have been fleeing the greenback and investing in gold. As it gains investors, the Gold Trust has continued to add to its gold holdings.

At the same time, central banks have been selling their gold reserves. That’s important to mention because it elevates Gold Trust’s status on the list of global gold holders.

Right now, it has the eighth-largest gold holding in the world - meaning that it has more gold than 97% of all the countries in the world. What does this mean?

Simply put, it’s the simplest way to buy gold without buying physical bullion or coins.

Gold Play #5: The Safest Gold Play Out There 

Investors often shy away from bullion account providers because of their steep premiums and minimums. And reasonably so…

In addition to charging a 3% commission, Perth Mint also has a $250,000 minimum investment requirement - not exactly an amount many first-time gold investors have in between their couch cushions.

Kitco charges a 6% premium for 1 oz. Gold Eagle coins. Shipping and handling costs are also added, but varies on the size of the order. 

Monex is perhaps the worst. On top of the 3% to 5% difference between what it buys and sells, there are commission rates ranging from 0.5% to 2.0%. Then there are shipping costs of $15 per transaction plus $1 per ounce. Then there are handling charges of $75 per unit ordered.

After all that, it’s hard to get excited about collecting profits.

That’s why we recommend an EverBank Select Metals Account.

First off, EverBank’s minimum deposit is 98% lower than its competitors, and its commission costs are up to 86% lower than other metals brokers and bullion banks.

Second, it offers two types of gold accounts:

• Unallocated: Your purchased gold is pooled with that of other investors, eliminating storage and maintenance costs. The minimum deposit amount for unallocated accounts is a scant $5,000.

• Allocated: You directly own the gold you purchase, held in your own private account. The minimum deposit for allocated accounts is $7,500.

Disclosure: We should point out that the publisher of Money Morning has a marketing relationship with EverBank, but that’s because its products are best in show.

Original post

Comments

[Charlie Str...:]

User 155010, that is a great quote from Jim Rogers. I always listen to Jim Rogers, but sometimes I successfully bet against him. For example, he said years ago to never invest in Russia nor Mexico, but I made a lot of money for my clients by going long both countries.

Disclosure: long Russian, Mexican and precious metals equities since the start of the Iraq War.

2008 Jul 30 09:16 AM

[najdorf:]

Hey guys, the problem with gold (and Mexico and Russia, but they're a different topic) isn't that it's impossible to make money investing in it; the problems are that future returns are almost completely unpredictable and that something you're pretending is a stable store of value is subject to huge crashes and long (like 30 years, or perhaps indefinite) periods of underperformance to stocks or even Treasuries. By living in the developed world in the lifestyle most people choose, you're sort of assuming that our governments and economic systems will continue to function. If you don't think that's the case, you probably should try to buy property in remote locations and items that allow you to be self-reliant like generators, rather than precious metals that you only own on paper. Barring a major collapse of our way of life, stocks and bonds will retain value. Gold is just not as good an investment as stocks and bonds, because it doesn't grow, have a stable value, or produce income. It's like investing in collectible dolls except it's shinier.

Companies that mine gold are a little better, since they actually have cash profits - but current earnings are not sustainable. Think about it this way: if these companies, experts on gold, thought gold was going to increase in value and hold those increases, why would they be selling as much as they can pull out of the ground in exchange for "worthless" paper? Maybe they're selling it because they can't believe their luck and want to convert some assets to cash rather than metals?

2008 Jul 30 09:34 AM

[Charlie Str...:]

najdorf, you may be correct. In February 2003, one of the world's top hedge fund managers told me that the Iraq War would be a total disaster which is the main reason why I went long precious metals equities in March 2003.

Please note that the two biggest drivers of gold prices are what the U.S. dollar is doing and also jewelry demand, and that we are about to enter the wedding season in India which is the biggest source of demand for gold jewelry.

2008 Jul 30 09:41 AM

[John Pseudonym:]

I'm a chartist, and looking at the charts in this post does not me want to invest in gold.

The GLD is at a critical point of $90 a share.

Do we bounce up or fall down?

Given the downtrend in oil, the "Crisis" mentality will be subdued at least for the short term, so I'm betting GLD is going negative.

2008 Jul 30 10:29 AM

[John Pseudonym:]

Oh, the next stop will be $85 with major support at $80.

If we get to $80 and oil turns to the up side, that's the time to buy GLD.

2008 Jul 30 10:30 AM

[Emerald:]

John is correct. As to those who say the long term chart of gold shows weakness, they are correct. However, in periods such as this where the major currency (USD) is being debased on a regular basis, GLD is a good buy around $85. I have made money here, buying at $65 and selling in the $90's. Once a retrenchment to say $85, GLD will move above $100. We are printing paper to bail out the banks. The Fed will not allow a decent recession to clear the tables and start fresh.

2008 Jul 30 10:41 AM

[jimmy46:]

main problem with bullion coins is the tax.
cap gains tax on collectables is 28%

2008 Jul 30 12:08 PM

[novice inve...:]

An excellent article.

2008 Jul 30 01:33 PM

[mr bubb:]

if all collapses--how do you monetize the metals?

2008 Jul 30 05:22 PM

[AuGod!:]

mr bubb has an excellent point, namely "if all collapses -- how do you monetize the metals?" To that, I remind everyone that Gold is already money, not just in coin form but in bullion form it is the oldest money that comes without any counterparty liability. If all collapses, I mean reallly hits the fan, then good luck and God save us. But Gold will always act as an effective medium of exchange and in ANY jurisdiction, as it has since 3000bce. That is one of its strengths. It is not just the choice of tinfoil hat wearing weirdies who are bunkered down surrounded with tins of spam and AK47s. I don't recommend everything being cashed in in favor of Gold but some in your portfolio - held in physical form - is a great comfort not only to me but many. That is why it has gone from $230 to $900 in seven years. Don't trade or sell physical Gold - buy the dips and hold because it makes sense and pleases you - like "collectible dolls". Good luck.

2008 Jul 31 01:05 AM

[atotonilco:]

Najdorf has a point, but with the sale of the metal for worthless paper, the gold miners buy more mines and own more metal. That is a net plus for companies like ABX who now also own their own oil company, cutting out the cost of long term increasing oil prices.

2008 Jul 31 05:08 AM

[relmor:]

Najdorf has no points. I can contradict what he says 100 ways.
1. Mines are dehedging their positions(I like the future!!)
2. Gold demand for physical is till rising. Banks have said they will stop sellling this year.(THey have too, they cover the difference EVERY year between demand and supply)
3. Gold mines sell for paper, because paper pays their bills.
4. Inflation has NEVER been higher.
5. Dollar has NEVER been more worthless.
So go ahead and wait for 850 or 800, it will never get there.

2008 Aug 05 11:19 AM