Buy yourself gold for portfolio protection?
By Tom Petruno, Los Angeles Times Staff Writer
December 16, 2007
Financial advisors often try to discourage clients from such investments, but some individuals consider the metal to
be insurance against the U.S. dollar. Learn four common ways to invest, and the pros and cons of each.
Gold is one holiday gift that has kept on giving for the last seven years.The metal's market price, which last month
surged above $800 an ounce for the first time in nearly three decades, has risen every year since 2000. It has
trounced the U.S. stock market in that period, rocketing 190%, compared with a 26% total return for the Standard &
Poor's 500 index. After mostly being out of favor in the 1980s and 1990s, gold has found a new, and global, investor
audience -- including the emerging rich in booming Asian economies.
Fresh interest in gold also has spawned an array of gold-related securities, providing more options for people who
want to own the metal without having to take physical possession of it. Yet professional financial advisors often try to
discourage their clients from gold investing in any form. Many say they don't believe it has a place in a modern
portfolio. In part, gold and other precious metals -- platinum and silver -- suffer from their long-standing image as
havens for survivalists, conspiracy theorists and flakes.
"That's for the guys we don't want as clients," said Michael Glowacki, head of financial planning firm Glowacki Group
in West Los Angeles. Some fans of gold, however, say the bad rap is outdated and ignores the metal's powerful
performance in this decade. Martine Pham, a 45-year-old Bay Area investor, says she likes gold as a way to protect
her purchasing power if the U.S. dollar continues to lose value, deepening its slide of the last six years. But she also
says she was drawn to the commodity in recent years by basic investment analysis. "If you just look at it based on
supply and demand, I could make a good fundamental case for the price to go up," Pham said.
Some individual investors say they simply consider gold to be a modest bit of insurance for their portfolios of stocks
and bonds. "In a worst-case scenario, you might be glad you had it," said Orvis Adams, an 82-year-old Los Alamitos
investor who said his gold holdings amounted to less than 2% of his total investment mix.
If you're thinking about adding gold to your portfolio, how best to do it?
Here's a primer on the pros and cons of four common ways to invest in gold:
Gold bullion
Coins and bars from government or private mints are the classic way to own the metal itself -- and also the most
cumbersome. Coin dealers like to say that nothing compares to the weighty feel of real gold, one of the heaviest of
the elements. There's a "warm, fuzzy feeling" people get when they hold a gold coin in their hand, said Ken Edwards,
a partner at California Numismatic Investments in Inglewood. That's part of the marketing, of course. And
government mints have tried to outdo one another in the last two decades in designing coins to catch the public's eye
-- and bring in revenue from mint sales. Thirty years ago the South African Krugerrand had the global gold coin
market largely to itself. Now, the Krugerrand competes with the American Eagle, the Chinese Panda, the Canadian
Maple Leaf and other government-minted coins. One current favorite of some coin dealers is the Austrian
Philharmonic, which on one side is adorned with the images of musical instruments including the harp and the violin.
Ultimately, gold is gold: The value of a minted coin depends mostly on its weight and the market price of the metal,
plus the dealer commission (the markup or markdown, depending on whether you're buying or selling). Dealer
commissions typically range from 2% to 4.5%, depending on the coin. So it's worth shopping around. All of the coins
contain 1 ounce of gold. But some, including the Krugerrand, contain small amounts of alloys, such as copper, to add
strength (because gold is relatively soft). Others, including the Maple Leaf and the relatively new American Buffalo,
are virtually pure gold.
It's a matter of personal preference, Edwards says. "Some people just prefer solid gold." Some investors also prefer
gold bars to coins. The bars, in sizes as small as 1 gram, also are produced by government and private mints.
Michael Carabini, who manages gold dealer Monex Precious Metals in Newport Beach, sells bars and coins. But he
recommends coins for most investors because they are easier to sell, he says.
"The liquidity is better with coins," he said, in part because they're easily recognizable around the world. Besides
1-ounce gold coins, some mints produce smaller sizes, down to one-tenth of an ounce. But you may pay a bigger
percentage premium to buy smaller coins, and dealers may charge a bigger markdown when you sell, compared with
1-ounce coins. The reason: Smaller coins trade less frequently. "On a typical day, I'll trade 100 times more 1-ounce
coins than smaller coins," Edwards said. Even so, smaller coins may make sense for some investors, Carabini said.
For example, if your plan is to eventually split the coins among heirs, smaller sizes could make that easier.
Thinking about your exit strategy is important for another reason: The tax man isn't friendly to bullion. Hard assets
like gold coins are subject to a higher long-term federal capital gains tax rate when you sell -- 28% versus a top rate of
15% for securities such as stocks. For some investors, the biggest potential drawback to owning coins or bars is the
need to store them somewhere secure. Under the mattress isn't recommended -- not at about $800 an ounce for
something so easily fenced. Storage will cost you money, whether you use a bank safe deposit box, a home safe or a
safekeeping program offered by some gold dealers. Monex, for example, charges $5.50 a month to store 20 ounces
of gold, Carabini said.
Gold certificates
These programs allow an investor to hold gold in certificate form. The certificate represents ownership either in gold
held specifically for you or a stake in a pool of gold with other investors. The firm that issues the certificate handles
the safekeeping and typically is obligated to produce the gold upon demand or redeem it for cash. When investor
Martine Pham decided she wanted to own physical gold two years ago, she said, she considered buying coins but
didn't want to deal with storing them herself. She bought into the certificate program of GoldMoney, a Britain-based
gold certificate company. The company stores its gold in vaults in London and Zurich, Switzerland.
She chose the program over others, Pham said, because of the ease of transferring funds. GoldMoney promises
24-hour access to its program. Other companies offering certificate programs include EverBank in Jacksonville,
Fla., and the Perth Mint in Australia. It's worth shopping around to compare minimums and fees for the programs.
GoldMoney says that it has no minimum investment and that its storage and insurance fee is a flat one-tenth of a gram
of gold per month (about $2.60), regardless of the amount of gold owned. EverBank has a $5,000 minimum for
pooled accounts but doesn't charge a storage fee on them. Also compare purchase and sales fees. The Perth Mint
charges a commission of 1.75% on purchases. EverBank charges 0.75%.
Exchange-traded funds
These funds provide a simple way for investors to ride a rally in gold's price -- or bet on a price decline.
Shares of the funds, the streetTracks Gold Trust (ticker symbol: GLD) and its rival, the Ishares Comex Gold Trust
(IAU), trade on the New York and American stock exchanges, respectively. A central idea behind the funds is that
their daily price changes closely track changes in the price of bullion. That's because the funds' shares are backed by
the metal itself, held in storage. StreetTracks Gold Trust, created in 2004, has a market capitalization of nearly $16
billion. Ishares Comex Gold Trust, created in 2005, has a market cap of $1.4 billion. Both stocks trade for about
one-tenth the market price of bullion. On Friday, for example, the streetTracks Gold Trust closed at $78.50 a share.
It's up 24% this year, compared with a 25% rise in the New York futures price for bullion.
The funds also can be used to bet on a falling gold price, because they can be "shorted" -- meaning, the shares can be
borrowed from a brokerage and sold, with the expectation that the price will drop and the borrowed stock can be
repaid later with shares bought at a lower price.
One potential drawback of the funds: You'll have to pay a trading commission each time you buy or sell. And the
stocks pay no cash dividends because gold itself doesn't generate any income. Also, the Internal Revenue Service
considers these a direct investment in gold, which means they're subject to the 28% hard-asset long-term capital gains
tax instead of the 15% maximum on most stocks.
Some investors who prefer owning physical gold point to another potential negative with gold securities: When the
stock market was closed for four days in 2001 after the terrorist attacks, owners of gold securities had no way to sell
what they owned, or buy more.
Larry Heim, who operates a business in Portland, Ore., that buys gold bullion for clients, said he didn't recommend
gold securities for that reason. "I don't want to take that risk," he said.
Mining stocks and funds
Shares of gold mining companies and mutual funds that invest in them offer a way to buy into the business of gold as
opposed to just the metal itself. The performance of a gold mining stock may be tied in part to the metal's price
performance, but in the long run the stock's rise or fall may well depend more on how well the business is managed.
Consider: The price of gold is up 25% this year. Shares of Barrick Gold Corp., one of the industry's titans, are up
24%. Shares of the much smaller Yamana Gold Inc. are down 5%. In general, gold mining stocks are "notoriously
volatile," warns Katherine Yang, an analyst at investment research firm Morningstar Inc. in Chicago. The point
being, if you're going to buy a gold stock, you ought to be prepared to do some homework -- and cross your fingers.
Overall, a Philadelphia Stock Exchange index of 16 major gold mining stocks is up nearly 17% this year after rising
11% last year and 29% in 2005. Some mining-stock experts worry that a broad slide on Wall Street could drag
mining stocks down as well for a while, even if the price of gold holds up. "We could be coming up on a time when
mining stocks could decouple from the price of the metal," said Frank Barbera, who writes the Gold Stock
Technician newsletter in Los Angeles. Decoupling could occur, he said, if a stock market plunge drives investors to
sell their winners as well as their losers. In sharp market declines, "you sell what you can," Barbera said. But longer
term, he said, he favors smaller mining companies that could be takeover targets if the industry continues to
consolidate and the metal's price continues to rise. Investors who want to own a basket of mining stocks can pick
from more than a dozen mutual funds that focus on gold stocks. "For people who aren't that interested but want some
exposure, that's probably the way to go," Barbera said.
But as with any mutual funds, shop around. Some gold funds charge high management fees that will dent your
returns.
Morningstar's two favorite fund picks are American Century Global Gold and the Vanguard Precious Metals and
Mining fund.
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