Kevin Feldman's  Instablog

Taken from iSharesblog.com

If you follow economics and investment issues, you probably know that gold has been generating a lot of investor conversation lately. With the price of gold hovering around $1400 an ounce, some financial advisors warn of a bubble, while others argue that there’s still upside to gold. But what’s often less discussed is the question, “How can you actually invest in gold?”

In previous columns I’ve written about reasons for investing in gold and the effect that central banks, through gold sales and purchases, have on the international market for gold. This time I’d like to talk about how investors who want to allocate part of their portfolios to gold can actually do so.

Though there are more ways to invest in gold than there used to be, for most buyers the options are limited. That’s not necessarily a bad thing: Because the investment vehicles for gold are limited, they’re relatively easy to learn about and understand. Here are three ways for any investor to buy gold.


 

1. Buying the physical commodity – The first way to invest in gold is to buy the physical commodity, either in the form of bullion—gold bars or coins that are not used as a country’s currency—or currency coins such as South Africa’s Kruggerand. For people who want to be able to look at and touch their investment, buying gold bullion and currency may be appealing. But they’ll pay added costs for the satisfaction of taking physical possession of their gold: Currency and bullion buyers generally have to pay a premium to the seller and pay fees such as insurance, shipping, and storage. Buyers of physical gold should also know that tax laws regarding its ownership vary from state to state, and should investigate which state might be the most economically advantageous place in which to store one’s gold. That’s assuming, of course, that they don’t want to store the gold in their home. Some gold owners might find that reassuring, while others might feel concerned about loss and theft.

2.  Purchase stock in a gold mining company – A second option for the individual investor is to buy stock in gold mining companies either individually or through exchange traded funds and mutual funds that hold those shares. The plus side: When the price of gold rises, the value of stock in gold mining companies can also rise. Also, some mining company stocks pay dividends.

But many factors beyond simply the price of gold can affect a mining company’s stock price—management turnover, labor costs, political issues and more. The stocks of mining companies generally have a correlation to the price of gold, but that correlation is by no means automatic or total, and historically the share prices of gold mining companies are more volatile than the price of gold. Anyone considering investing in gold mining companies should be aware of those facts.

3. Buy shares in a gold ETF – A third option for investors considering adding gold to their portfolio is to buy shares of a gold ETF. Backed by physical gold, ETFs are accessible and investors may purchase and sell shares through a traditional brokerage account. The shares are listed and typically trade on a major stock exchange and are available to be bought and sold throughout the trading day.  ETFs are considered a cost-efficient alternative to investments in physical gold for investors not in a position to participate directly in that market. Price and NAV are available daily for investors.  There are ETF providers that conduct vault inspections and issue inspection certificates.  ETF fees are typically cost-efficient and ETFs lack the added costs of buying physical gold such as transport, insurance and storage. Finally, gold ETFs correlate directly to the price of gold, without the added factors that can affect the price of a gold mining stock.

One factor that investors in gold should be aware of: Because the IRS considers gold “a collectible” rather than a traditional investment, the long-term capital gains tax rate for gold bullion, coins and ETFs are taxed at 28%, considerably higher than the current 15% rate for other investments. Short term gains are taxed as ordinary income. Because of that tax rate differential, investors considering buying gold might also consider buying it for non-taxable IRAs and 401(k) retirement accounts.

For the most sophisticated and/or larger investors, there are other ways to invest in gold, such as buying gold futures and options. But for most individual investors, the three choices above are the simplest way to add gold to a diversified portfolio.

Sources: The Street, Bloomberg, BlackRock

iShares Gold Trust (“Trust”) has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus and other documents the Trust has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting www.iShares.com or EDGAR on the SEC website at sec.gov. Alternatively, the Trust will arrange to send you the prospectus if you request it by calling toll-free 1-800-474-2737.

Investing involves risk, including possible loss of principal. The iShares Gold Trust (“Trust”) is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Because shares of the Trust are created to reflect the price of the gold held by the Trust, the market price of the shares will be as unpredictable as the price of gold has historically been. Additionally, shares of the Trust are bought and sold at market price (not NAV). Brokerage commissions will reduce returns.

Shares of the Trust are created to reflect, at any given time, the market price of gold owned by the trust at that time less the trust’s expenses and liabilities. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by them. If an investor sells the shares at a time when no active market for them exists, such lack of an active market will most likely adversely affect the price received for the shares. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.

The amount of gold represented by shares of the Trust will decrease over the life of the trust due to sales necessary to pay the sponsor’s fee and trust expenses. Without increase in the price of gold sufficient to compensate for that decrease, the price of the shares will also decline, and investors will lose money on their investment. The Trust will have limited duration. The liquidation of the trust may occur at a time when the disposition of the trust’s gold will result in losses to investors. Although shares of the iShares Gold Trust may be bought or sold on the exchange through any brokerage account, shares of the Trust are not redeemable from the Trust except in large aggregated units called Baskets.

Taken from iSharesblog.com

Many non-professional investors know that the price of gold has been climbing in recent years due to demand from hedge funds, institutional investors and individual investors looking for a hedge against inflation and seeking to diversify their portfolios. Probably fewer people know of another reason why gold has risen from about $600 an ounce to over $1300 in the last decade: For reasons not unlike those of other investors, central banks around the world have also been buying gold. If you want to understand the market for gold and the reasons underlying its value, you have to understand their role.

Central banks stockpile gold to help stabilize their currency; the value of gold isn’t affected by inflation, as paper money is, so gold reserves promote confidence in a country’s economic foundation. Its price unaffected by any domestic crises, gold is there if you need it. Gold also inspires confidence in a country’s credit-worthiness: Lendors feel better knowing that the money owed them is backed by gold. Finally, gold is one element in a portfolio of a country’s financial reserves, along with, usually, the dollar and the euro. That’s why central banks are estimated to possess about 15% of the world’s “above-ground” (mined) gold. “National gold reserves,” explained Germany’s Bundesbank in a 2008 statement, “have a confidence and stability-building function.”

 

Which doesn’t mean that countries’ central banks simply stash tons of gold bars in the basement because it helps government officials rest easy. Depending on whether they’re feeling conservative or feeling confident, central banks buy and sell gold all the time. If, say, the board of a central bank is concerned about domestic inflation or volatility in the world economy, it might purchase gold from other central banks or financial institutions such as the International Monetary Fund, which has gold reserves of its own. If a central bank feels comfortable with the health of its currency and economy, it might sell gold to generate revenue and liquid assets. After all, it’s not easy to invest in something by handing someone a bar of gold.

For most of the past two decades, central banks sold more gold than they bought, a sign of confidence in the growth of their national economies and the international economy generally. But since the financial crisis of 2008, that trend has reversed itself, and in 2009—for the first time since 1998, a year of currency crises and economic upheaval around the world—central banks bought more gold (425.4 metric tons) than they sold (246 tons). Among the largest buyers: Russia, China, Saudi Arabia, India and South Korea. “There’s clearly been a renaissance of gold in central bankers’ minds,” Nick Moore, an analyst at Royal Bank of Scotland Group in London, recently told Bloomberg News.

What’s behind this shift? Well, pretty much the same things that have fostered such interest in gold among individual investors, just on a much larger scale: worry about potential declines in the value of the dollar and the euro due to inflation; a hedge against downturns in domestic and international economies; and a means of stabilizing internal financial affairs. In uncertain times, gold helps everyone, from average investors to governments, sleep better at night.

iShares Gold Trust (“Trust”) has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus and other documents the Trust has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting www.iShares.com or EDGAR on the SEC website at www.sec.gov. Alternatively, the Trust will arrange to send you the prospectus if you request it by calling toll-free 1-800-474-2737.

Investing involves risk, including possible loss of principal. Because shares of the Trust are created to reflect the price of the gold held by the Trust, less the Trust’s expenses and liabilities, the market price of the shares will be as unpredictable as the price of gold has historically been. The Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.

Sources: Bloomberg, BlackRock

 

Taken from iSharesblog.com

Back in early 2006, Timothy Middleton, a financial writer for MSN Money, predicted that gold was toast. The price of the precious metal, he argued, had peaked at $570 an ounce. “If you own gold,” he proclaimed, “this looks to me like a swell time to sell it.”

Proving the fallibility of financial prognosticators, that prediction couldn’t have been more wrong: In the almost five years since, the price of gold has soared to about $1400 an ounce, an increase in value of over 150% .Gold vastly outperformed the stock markets during that time, and likely helped to offset other declines in investors’ portfolios (assuming they did not follow the financial writer’s advice).

Call it Gold Rush 2.0. But why has the price of gold risen so dramatically in recent years? Because of the upheavals in the US and global economy. Traditionally, professional investors have seen investing in gold, a commodity of limited supply, as a means of hedging against either declines in stock prices, or against falling currencies. And we’ve seen both.

In 2008 and early 2009, of course, stock markets plunged, and concerned investors looked to gold to diversify and stabilize their portfolios. Despite the fact that the price of gold has historically been volatile—as Money magazine financial writer Walter Updegrave has pointed out, in 2008, a year when volatility reigned, the price of gold rose and fell by as much as 26%—investors saw gold as a haven from stock prices which seemed to be going only one direction: down. And for many small investors, the psychological reassurance of owning something tangible also played a part: Gold was something one could see and feel, and a time when wealth seemed to be simply vanishing, the physical reality of gold inspired confidence.



Index and gold spot returns are for illustrative purposes only and do not reflect any fees or transaction costs. One cannot invest directly in an index or benchmark. Past performance does not guarantee future results.

But gold is not only a potential hedge against drops in the stock markets, it can also be a hedge against a decline in the value of a currency, either relative to other currencies or because of inflation. The former is exactly what has happened with the US dollar, which has been steadily falling in value against the yen, pound and Euro. And while the US inflation rate, at slightly above 1%, is almost non-existent—some commentators argue that deflation is a more likely possibility—many investors fear that, thanks to government spending, inflation looms in the years ahead. And for investors who believe that inflation lies ahead, the price of gold isn’t high—because they believe that whatever the price is now, subsequent inflation is only likely to further increase the demand for, and value of, gold.

So for investors looking to diversify their portfolio, hedge against a decline in stock prices, and protect themselves from a decline in the value of the dollar, gold may be a smart investment.

In my next blog post, I’ll look at another key factor in the price of gold: its purchase and sale (mostly purchase) by central banks around the world.

iShares Gold Trust (“Trust”) has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus and other documents the Trust has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting www.iShares.com or EDGAR on the SEC website at www.sec.gov. Alternatively, the Trust will arrange to send you the prospectus if you request it by calling toll-free 1-800-474-2737.

Investing involves risk, including possible loss of principal. Because shares of the Trust are created to reflect the price of the gold held by the Trust, less the Trust’s expenses and liabilities, the market price of the shares will be as unpredictable as the price of gold has historically been. The Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.

Sources: Bloomberg, BlackRock