Shiny Metal

Reasons To Invest In Gold

• The U.S. dollar is weakening. That makes the metal, typically denominated in dollars, cheaper to buy in other currencies. (Euro-denominated investors think gold still looks cheap.) Gold traditionally rallies as the dollar falls.
• Inflation fears. Only a few months ago, Bernanke was openly fretting about the possibility of higher inflation – and saying the Fed’s bias was toward tightening rates. Yet he has cut rates dramatically to lessen the credit crunch resulting from a meltdown in mortgage-based securities. Needless to say, the Fed’s action was inflationary. And gold is an excellent inflation hedge.
• The emergence of China and India. A flourishing middle class in both emerging giants is increasing the demand for gold. (Jewelry fabrication was up more than 50% in India alone last year.) People everywhere like gold watches, gold coins, and gold wedding bands.
• Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower grade base metals.
• Geopolitical instability. There are plenty of hotspots around the world today. But gold is viewed as a safe haven during times of political or economic calamity. (That’s one good reason we own it in our Oxford Anti-Terror Portfolio.
• The trend is your friend. Good traders know better than to fight the broad trend in an asset class – and clearly gold is on the rise right now. So it looks like an excellent time to own gold. But how?

Safe Ways to Invest In Gold

The physical metal – especially in the form of bullion or numismatic coins – is lovely to behold. But keeping a large quantity of the metal at hand is risky. If you store it safely, there are costs associated with that, too. Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment.

As a result, many investors are turning to the safety and convenience of exchange-traded funds or ETFs. Two examples are StreetTRACKS Gold Shares (NYSE: GLD) and iShares Comex Gold Trust (AMEX: IAU). These funds hold, store and insure the physical metal. But the ETFs trade like stocks so they offer easy liquidity. (Both have relatively low expenses of .4% a year.)

The tax impact of these funds may surprise you, however. If you sell a gold ETF for a long-term gain, you won’t owe the bargain 15% tax rate you’d owe on a stock. You’d owe 28% on that gain. That’s because gold ETFs are taxed like collectibles, which have special rules.

Another alternative is to own gold shares in an ETF. Why? Historically, gold stock moves are three to five times as much (up or down) as the price of the metal itself.

That’s because gold-price movements create larger moves in the profitability of mining companies, due to their largely fixed costs.

Market Vectors Gold Miners (AMEX: GDX) are good choices.

The annual expense ratio is one half of one percent. The shares can be margined or sold short – and there are options available for traders who prefer to play gold more aggressively. The top 10 holdings include Newmont, Freeport McMoran, Barrick Gold, AngloGold, Harmony Gold, Kinross, Yamana, Gold Fields, and Agnico.

Don’t overdo it, of course. Gold is volatile and often trades unpredictably in the short term.  But the long-term trend is already in place. And there appears to be plenty of upside ahead.