If you are into gold, you’re not alone – gold is easily one of the top two most popular commodities to trade (the other being oil). Stocks associated with gold are also enormously popular. The meteoric rise of gold lately has sent assets like gold stocks and gold stock ETFs through the roof, simply because everyone wants to get in on a massive uptrend in the value of this shiny yellow metal that everyone wants.
You too can benefit from exposure to gold by buying shares of gold stock companies, gold stock mutual funds, and gold stock ETFs – all ways to get in on the action without actually buying gold. This is not as direct a way to capitalize on gold as purchasing coins and bullion, but it is a way to gain indirectly from the market while protecting yourself from the possibility of a collapse in gold over time.
Here, I’ll explain how you can get into the gold stock business in today’s market.
Gold: It’s Not Just for Coins
To understand how you can gain exposure in gold through stocks, it helps to understand how gold is used today and how various companies are involved with its manufacture and production.
Gold is commonly used as a store of value, which basically means it takes on an identity as something that has considerable value. This means people desire gold in and of itself, not necessarily because of any industrial or practical application. Being a store of value means that gold is a currency metal, which is why you have gold coins and gold bullion.
Gold is also heavily used in industry, though. Gold is an excellent conductor of electricity that doesn’t tarnish and is very malleable (it can be flattened to very thin layers) and ductile (meaning it can be stretched out into very thin wires, making it perfect for electrical wiring). As a result, it is useful for various technological purposes; you can find it in supercomputers, jet engines, spacecraft, and delicate communications equipment. (You can also find it in peoples’ teeth.)
You can also, of course, find gold in jewelry. Roughly 70% of all gold manufactured is used in jewelry. Close to 12% is used in industry, and 13% is used for investment purposes. The rest goes toward various other uses.
Gold, then, is always in high demand for a variety of reasons. The price jump over the last five years, however, has been almost exclusively due to a faltering global economy. Whenever the economy suffers and stocks and currencies go down, gold goes up because people turn to gold as a safe haven from economic turmoil (and to combat inflation).
Buying Gold Stocks
To get exposure through stocks, you can purchase shares of companies that have some important connection to gold.
The obvious company is the one that actually mines the gold and brings it out of the ground. Barrick Gold (ABX) is the largest company of this type. They currently produce gold from mines in the United States, Canada, Australia, Peru, Papua New Guinea, and Argentina. Another large gold mining company is Goldcorp (GG), which produces mostly from Canada, Mexico, and various locations in Central and South America.
Not every gold producer is a massive company like Barrick Gold or Goldcorp. You can find plenty of small to mid-cap producers with greater risk but greater upside potential – companies like Royal Gold (RGLD), a company based in Denver, Colorado that owns mines in Nevada, Austrlaia, Canada, Burkina Faso, and other global locations.
Buying Gold Stock Mutual Funds
If you don’t have the time to pick out the right individual stock for you, or want some assistance, you can go with an actively-managed mutual fund that is heavily exposed to gold. One example is First Eagle Gold (SGGDX). One thing that stands out about First Eagle is that it is almost purely focused on gold, unlike other mutual funds that have some play with gold but also have stocks in silver, aluminum, and other metals. This particular mutual fund focuses on larger mining companies, but also holds a substantial amount of bullion.
The Central Fund of Canada (CEF) is another type of mutual fund that holds roughly 95% of its holdings in gold and silver bullion. This represents a pure play on the value of gold itself, without going through companies.
Buying Gold Stock ETFs
If you want the tradability of a stock with the broad exposure of a mutual fund, go with an exchange-traded fund.
Arguably the most well-known gold ETF is SPDR Gold Shares (GLD), an ETF that has over $63 billion of assets and is physically backed by gold stored in London through HSBC Bank. This ETF has a pretty low expense ratio, too, at 0.40%.
Another ETF has an even lower expense ratio, though: iShares Gold ETF (IAU). IAU is also backed by physical gold. This means IAU and GLD closely track the actual value of gold as it is determined by a daily spot price.
You can find ETFs that aren’t backed in gold but purchase shares of gold stocks, such as the Market Vectors Gold Miners ETF (GDX). This particular ETF invests in stocks and ADRs of gold mining companies, with an emphasis on large-cap companies.
There are several ways to get exposed to gold without actually having to buy and store it (or mess with futures). These methods listed above can help you incorporate gold into your portfolio and benefit from any future rise in the shiny metal’s value.
On a final note, a big thanks to Sweatingthebigstuff for including me in the latest carnival.