Alternative Investments – Gold

Gold

Alternative Investments can provide lucrative returns that are unavailable by investing in the stock or bond market. In earlier posts, we discussed alternative investments in farmland, rooftop solar systemprivate equity, collectibles, and real estate. In this article we discuss investing in another popular form of alternative investment – Gold.

Alternative Investments – Gold

Gold is one of the oldest and most popular forms of investment. Its a precious metal that has proven time and again to be the best hedge against inflation.  However, with the reputation also comes a lot of speculation and volatility. Over the course of last couple of decades, the price of gold has risen and has corrected a bit as seen the following 20-yr chart.

gold-20yr

Ways to Invest

  1. Buying Physical Gold – Investors can choose to buy physical gold either as coins or bullions and store them. However, this comes with the issue of storage, safety and insurance costs, transaction fees associated with buying and selling etc.
  2. Buying Futures – Investors can trade futures on the CME Group’s CME Clearing which settles all trades on the exchange and guarantees credit-worthiness while also providing the liquidity desired.
  3. Gold Miners – Investors may also choose to invest in gold via the gold mining companies. Mining stock companies can be volatile as some have observed in the current market. The risk here is that in addition to the gold prices, a company’s operating risk is also assumed by the investors. A good way to mitigate this risk is to own a gold miner’s ETF such as Market Vectors Gold Miners ETF (GDX).
  4. Exchange Traded Funds (ETFs) – Possibly the easiest way to invest is to buy and hold a gold exposure ETF such as SPDR Gold Trust (GLD) or Horizons Gold Yield ETF (HGY.TO). However, some skeptics have raised concerns on GLD’s secrecy surrounding its hoard of gold in HSBC’s London vault.

Current Market

There is a lot of speculation on why the price of gold – which rose fast during the financial crisis did not see the price return to pre-crisis levels now that the economy is stable. Most commentators point to the fact that the zero interest rate policy (ZIRP), and the money-printing methods of the US Fed have permanently set the price of gold for the next leg up. The price has pulled back from its peak – which is attributed to the strong US$ causing deflationary pressure on all commodities and includes gold prices.

An interesting aspect is the pace of gold buying and repatriation seen by countries across the world. Countries such as Russia and China have been buying and hoarding massive amounts of gold for the previous few months/years and some states and countries have repatriated or intend to repatriate their gold from the United States. For e.g.: Texas wants to repatriate $1B of its gold from New York Fed; Germany and Netherlands repatriated tons of their gold back from US and France last year. There have been a lot of transfers and repatriations in the recent few months that have been a first in the industry.

Another interesting point to note is that while spot gold has corrected by ~40% from its peak, the gold mining companies have fallen ~80% and present some very attractive valuations. A majority of the gold miners have been running in losses over the last few quarters, but analysts expect the earnings to turn positive and grow by a large margin in the coming quarters and years.

Conclusion

Gold is one of the oldest form of investing and storing value over long periods of time. It has stood the test of time and has undergoes massive amounts of volatility and speculation. The shiny metal may be called barbaric by some, but is still regarded as an ultimate guarantee for any monetary system. There are multiple ways to invest in gold depending on the investor’s risk appetite, but with the introduction of ETFs – some very simple and easy methods have been introduced, while also providing the benefit of immediate liquidity.

Do you invest in gold? What are your thoughts on gold in the current market and its future? Share your thoughts below.

 

13 thoughts on “Alternative Investments – Gold

  1. I think gold will become a good contrarian play come September as overvalued stocks fall much like they did in 2000 when gold was unloved at 253/ounce. The key though is dollar strength which is here to stay that will keep a lid on major upside in the metal complex at large.

    • I think you are right, rajveer. Late summer is usually a busy period for gold and once this dies down in September, it might turn into a good contrarian play. Again, agreed that the strong US$ will provide some resistance for major upside.

      Thanks for stopping by and sharing your thoughts
      R2R

  2. I do not invest in gold to be honest. It produces no income, and has no economic utility. If I wanted to invest in a “hard asset”, I would likely buy farmland and then have the fruits of the land/rental revenues/ feed the DGI clan for generations to come.

    • I dont hold any bullion, but have some exposure in a gold mining company…although the tough times mean that the dividends were cut. Still, the fundamentals look ok – the company holds more cash than the share price is worth. Hopefully, it’ll bounce back eventually.

      Farmland is an interesting investment which ive been looking at as well. Couple of issues I see there are the climate changes and drought issues, but I think farmers are the last to lose rights to the water table as we’ve seen in Calif lately.

      Thanks for stopping by and sharing your thoughts. Appreciate the input.
      R2R

    • Although it is possible to profit greatly from the rise of gold, it really shouldn’t be compared to other investments such as dividend growth stocks.

      Yes, it’s true that gold doesn’t pay a dividend… it’s not intended to. Gold isn’t an investment… it’s money.

      For comparisons, gold should be compared to fiat currencies such as the dollar, yen, euro, yuan, etc. Depending on how one feels about those, it may or may not be reasonable to hold an allocation in gold.

      I view gold as an insurance policy and hedge against central bank printing. In the current landscape, I can’t see why an investor wouldn’t want to own some physical gold in their portfolio.

      Of course, land is great too!

      • Excellent point, FIFighter. We all start comparing different asset classes as if they are intimately related or same. 100% agreed that gold should be viewed as an insurance policy and more of an alternative to fiat currencies.

        R2R

  3. I’m with DGI, for the most part. I’m not vehemently owning physical gold, but gold securities are seething I’m not interested in. If that gold only exists on paper, then that defeats the purpose of owning gold (which is owning a hard asset).

    Investing in gold mining companies I would also be in favor of (provided good fundamentals and valuations can be found in the sector). That’s because you would be owning businesses that hopefully grow in intrinsic value and send cash income my way. Direct gold securities such as gold futures don’t have those advantages.

    If it’s on paper, I would buy a gold mining company and stay far away from gold itself. If we are talking physical assets that I can touch, I don’t think gold is necessarily a terrible idea.

    I like DGI’s idea about investing in farmland. You know what I like even better? Dividend growth stocks.

    Sincerely,
    ARB–Angry Retail Banker

    • Hi ARB,
      Yeah owning gold on paper kinda defeats the purpose. There have been some theories on why gold under pressure – in addition to the strong US$, also the theory goes that there is too much gold on paper, even though its not really backed by real gold.
      I agree that owning a gold mining company gives a good exposure – I just finished writing an article on the gold miners…will be posting tomorrow.

      cheers
      R2R

  4. I do own gold and silver. I have the physical bullion in my possession and own it both as a hobby and investment. I realize that it produces nothing, no interest, no dividends, etc. but having a decent amount can provide you with a little safety net should times become really bad. I’m not a gold/silver bug by any sense as I mentioned I do enjoy the collection of coins and rounds from all over the world too. Call it a hobby with some investment mixed in.

    • Interesting DH. I dont own bullion or coins myself, but have contemplated about it. I think its a nice way to mix a hobby and investment. True that it doesnt produce interest, income, dividends etc.

      Thanks for sharing
      R2R

  5. Hey R2R,
    I don’t have much in the form of gold (other than jewelery and some small items) but have started collecting silver (it’s much cheaper to get started in). Like you said gold has provided a decent backstop against rampant inflation. There were even some articles about Russia this past winter when the ruple? Ruble? Plummeted and people began searching for gold and other commodities to protect their wealth.
    I have some pictures of my silver collection at http://redeemedfinance.com/do-you-hold-precious-metals/ (shameless plug) if you wanted to see.
    Cheers,
    Rich

    • Interesting, Redeemed Finance. Thanks for stopping by and sharing – I am not familiar with your blog. Will be sure to stop by and check it out.

      Gold sure is going through some interesting times – with the peak and now a 40% correction. The emerging economies are buying a lot of gold – whenever theres a problem, ppl run to gold…history tells us that having some gold exposure is good for your portfolio.

      cheers
      R2R

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