With all of the recent hubbub about gold’s return to greatness and its phenomenal returns, is it too late to add a little gold exposure to our portfolios?
According to a recently released report by the Thomson Reuters Proprietary Research team, there appear to be a many factors that support continued momentum for gold. Since 2000 gold bulls have pushed the price of the yellow metal up 404%, making it one of the best performing asset classes for the decade. However, we heard the same espousals during the tech run-up of the late ’90s—only to be deeply disappointed when the bubble burst. So, is this just another bubble getting ready to burst, or are there continuing opportunities to profit from the forces that are pushing values higher?
Given the continued uncertainty in the global economy, the falling dollar, greater Fed easing, high unemployment, and ongoing Eurozone debt concerns, it is not beyond anyone’s imagination that gold and other commodities have a fair shot of continued success. However, as in 1999 during the tech craze we need to be prepared and have a plan for a drastic change—just in case.
Déjà vu—Let’s keep in mind that gold hit a record price of USD 850 per ounce in 1980 as a result of the international crisis arising from the Soviet Union’s invasion of Afghanistan and from the Islamic Revolution in Iran. By 1983 the price of gold had fallen to around USD 300 per ounce and didn’t find its way back to the USD 850 mark until 2008—25 years later!
So, if you believe prices are going higher and you want a little gold in your portfolio to gain the benefits of investing in an uncorrelated asset class, keep a keen eye on your purchase, set a reasonable amount of decline you are willing to experience, and be ready to make that sale. Or even better—if you’re using exchange-traded funds (ETFs), implement a stop-loss order to minimize any untoward decline. Used sparingly in your asset allocation model, precious metals can help immunize your well-diversified portfolio against both fear and inflation.
There are many routes one can take to expose a portfolio to the price movements of gold and other precious metals (platinum, palladium, and silver). Investors can purchase gold coins or even gold bars, but the transfer and storage costs and illiquidity of those investments make them less attractive. Banks and other entities sometimes offer their clients access to gold certificates or gold accounts, which investors can hold instead of storing actual gold. And of course there are the derivatives markets, for those who understand futures and options trading.
Probably the easiest way for us to invest in precious metals is via ETFs and mutual funds. By investing in some of the newer ETFs (for example, SPDR Gold Shares [NYSE: GLD]), one is more likely to invest in the physical commodity of the various precious metals or in forward and futures contracts.
Using mutual funds or some of the older more established precious metals ETFs, one is more likely to invest in gold mining corporations. Each type of investment has it pluses and minuses. Investments in the physical commodity are considered more of a safe haven, whereas investments in gold mines are considered more risky because the funds’ value is based on the profitability of the underlying firms and of course on the price of the commodity. Unhedged mining operations are inherently more risky than hedged mining operations, so there are varying risk levels even among the mining stocks. These are subjects you should discuss with your financial planner or research in the funds’ prospectus.
Recently, investors’ appetite for precious metals funds has been on a tear. Year to date through November 11, 2010, investors have injected some USD 11.6 billion into Lipper’s Precious Metals Funds category, with Precious Metals ETFs attracting USD 8.2 billion and Precious Metals mutual funds gaining USD 3.4 billion. Year to date the Precious Metals Funds category has posted an eye-popping return of 40.53%—the best category performance in the equity fund universe. Funds in this group invest in equity securities and non-equity-related instruments of the precious metals market, which can include investments in the mining, exploration, or distribution of gold and other precious metals and in the physical commodities.
We have identified three precious metals funds that rose to the top of their peer group for the three-year period ended November 11, 2010. We used the Lipper Leaders rating for Consistent Return to identify the top-performing risk-adjusted funds within their category for the period.