Over the past decade, gold has trounced stocks across the board.
No big secret there, of course.
But the margin of the beating might surprise you…
- S&P 500: The index kicked off the 21st century at 1,469 points. But it ended the decade at 1,115 points on December 31, 2009 – a drop of 24%.
- Gold: The contrast in fortunes couldn’t be more marked, with the yellow metal sweeping to a total gain of 275% over the same 10-year period – an annualized return of 14.1%. And if you shorten the time period to gold’s performance since the collapse of Lehman Brothers in early 2008, the price has soared by 76%.
Let’s get one thing straight, though: Despite the fact that gold prices recently broke through the $1,400 per ounce barrier and the mainstream media keeps referring to “all-time highs,” this is off the mark. Adjusted for inflation, the real gold price record was set 30 years ago at $2,318 per ounce.
Nevertheless, the current scorn over paper currencies and their assorted woes is fueling the gold rally. However, two key questions remain:
1.Will gold continue to sparkle?
2.Are there better alternatives than gold as a hedge on inflation and instability?
Case for gold’s mojo
Let’s deal with Question #1 first by considering the catalysts that could keep the price of gold surging…
- Inflation: Gold and other precious metals serve as a legitimate hedge on inflation.
- Insurance: Gold is a form of “disaster insurance” if/when global geopolitical events spin out of control.
- The Anti-Currency Investment: Holding gold serves as a vote of no confidence in the world’s reserve currencies.
- China: Many are banking on China to invest more in gold and take prices to the next level. The country only holds 2% of its dollar-heavy foreign reserves in gold.
So what if – like me – you think that gold prices will keep chugging higher? You have a couple of options…
Follow the big boys into this easy gold investment
The easiest way to gain exposure to the gold market is to buy shares in an exchange-traded ETF like the SPDR Gold Trust (NYSE: GLD). This fund replicates the price movement of gold bullion, which is up 23% this year.
The pros are all over the map with this ETF, too.
According to SEC filings, the fund run by former Goldman Sachs trader Chris Shumway added 2.1 million shares of GLD during the third quarter, while Dan Loeb’s Third Point LLC bought 115,000 shares.
Highfields Capital was also bullish, buying call options worth 1.6 million shares.
By contrast, George Soros sold over 500,000 GLD shares to finish the quarter with 4.7 million shares, while Eric Mindich reduced his Eton Park Capital’s stake by two million shares to 4.6 million. Guru John Paulson maintained a 31.5-million share holding through the quarter.
But what if you want a more specific investment?
Go gold mining with a pick and shovel
In this case, many investors prefer to buy individual gold-mining shares. But there are pros and cons…
On the plus side, the gold-mining industry has large fixed costs and higher gold prices go straight to a company’s bottom line.
Balanced against that, however, are regulatory risks. Revenue-hungry governments are targeting mining companies to fill budget holes. For example, Australia recently tried to impose a 40% “super tax” on resource companies like BHP Billiton(NYSE: BHP) and it resulted in a significant haircut for mining shares.
In addition, keep in mind factors like mining accidents, labor issues, management mistakes and particularly volatility. While gold prices held up fairly well during the global financial crisis, mining shares tumbled.
I suggest you take a “shotgun and rifle” approach here:
- Shotgun: For an aggressive shotgun approach, go for a basket of mining stocks like the Market Vectors Junior Gold MinersETF (NYSE: GDXJ). It has more than $1 billion in assets and offers more indirect exposure to gold through ownership of equities that generate at least 50% of their revenues from mining.
- Rifle: One company I like is Canada’s Eldorado Gold (NYSE: EGO), which operates mines in Turkey, China and Brazil. During the first quarter of 2010, its gold revenue exceeded Q1 2009 sales by $129 million, or 248%, mainly due to production increases and the acquisition of two mines from Sino Gold.
That’s the gold story. But what about its partner in crime – silver? I believe it could fare even better than gold at this point. So let’s check out a couple of good silver investments…
Could silver fare better than gold?
The headlines tell us that silver prices have climbed to a two-year high. But if you adjust for inflation, the price remains more than 60 times cheaper per ounce than gold.
Adjusted for inflation since 1980, silver prices should be trading at roughly $128 an ounce. And budget-conscious jewelry shoppers and investors alike are taking note. “People who can’t afford gold will buy silver,” says Seshan Ramakrishnan, head of retail products at HDFC Bank.
Investment-wise, in addition to the main ETF – the iShares Silver Trust (NYSE: SLV) – take a look at Coeur D’Alene Mines (NYSE: CDE). It offers more revenue growth and better value compared to its financially stronger rivals Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM).
Remember this tip, though – one that goes for any investment: When everyone is talking about a sure thing, be skeptical and diversify. For example, Abu Dhabi’s Emirates Palace Hotel recently opened a vending machine that dispenses gold bars! Choose your investments carefully and be sure to distribute your capital into other hedges like cash, silver and oil.
Disclosure: The author does not own positions in any of the stocks mentioned