While major economic factors driving gold prices have been mixed of late, a direct investment in gold continues to give many investors pause. Essentially, the lack of an impact of the recent - and stronger than expected - U.S. jobs report on the strength of the U.S. dollar was negative for the price action of the yellow metal. Rather than either taking a new position in gold at current levels or holding current investments at a time where a rebound may be uncertain, there are a variety of alternative investment ideas that are preferable and should be considered for your portfolio. Each of the below ideas offers an alternative - often better on a risk-adjusted basis - option to taking a position in gold.
While many of the same factors that impact the price of gold also drive the price of silver, over the past two years silver prices have dropped far more significantly than gold prices. Using the two most heavily traded exchange-traded funds (ETFs) as proxies for the two commodities, silver is down about twice as much in that period. Over the last two years, the SPDR Gold Shares (NYSEARCA:GLD) is down about 15% while the iShares Silver Trust (NYSEARCA:SLV) is down about 30%. This relationship has stabilized over the past 6 months, but this means that a reversal in precious metals will likely to reward silver investors more generously than gold investors.
A study by Claude Erb and Campbell Harvey calculated the fair value of gold at $825 per ounce. While this prediction came near the end of the summer, nothing since has invalidated its findings. Conversely, silver may have already experienced a fall to near fair value, making its risk profile and downside protection more attractive. Ultimately, silver remains a more attractive metals investment than gold.
Similar to silver over the past two years, the stocks of gold mining companies have fallen significantly more than the price of gold over the past year. Gold mining stocks can be invested in individually, but investing in the gold miners ETF provides built-in diversification. Over the last year, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) is down nearly 25%, while GLD is down roughly 12.5%. During downturns in the price of the underlying commodity, the stock prices of those companies in the industry tend to fall more sharply. If and when the price of gold finally reverses, the price of the gold miners will reverse more rapidly (an alternative investment approach to simply buying GDX is discussed as a separate option below).
Dennis Leontyev, President of InterMarket Edge explains: "The gold miners have been hit far harder than the commodity for a variety of reasons. With prices as depressed as they are at current levels, buying GDX makes a lot of sense and has an extremely attractive risk profile. While it is difficult to predict when commodity prices will bottom, the gold miners are going to outperform significantly when the reversal begins."
Silver Wheaton (SLW)
An alternative to buying silver directly through SLV is to take a long position in silver streaming company Silver Wheaton. Silver Wheaton makes money by entering into offtake agreements with various miners to purchase some or all of those miners production of silver and gold at a predetermined price. The company earns the spread between what they pay for these streams of precious metals and what they can sell them for in the open market.
In order to enter into these streaming deals, Silver Wheaton often provides financing to miners as an inducement to enter some kind of arrangement. The stock has been hit particularly hard as precious metals prices have fallen. When the ultimate reversal in prices occurs, Silver Wheaton should be expected to significantly outperform the commodities themselves. This offers plenty of upside for investors. In the interim, the stock offers a 1.43% dividend yield, meaning that an investment in shares of the stock will provide a modest return while you wait for a reversal.
The last argument for buying into Silver Wheaton at current levels is the structural position of the precious metals markets overall. With prices as depressed as they are, the company has a great opportunity to find attractive new streaming relationships under current conditions. The value of these will take time to materialize and be fully realized in the stock's price, but the company has demonstrated significant expertise in this area over the years. Leontyev adds that "stocks like Silver Wheaton offer a unique type of exposure to the metals markets and at currently depressed levels have very attractive investment profiles."
Ultimately, the position for gold looks uncertain at current levels and any of the alternatives above should be considered more attractive by investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.