Golden Opportunities for Investors
Corrected on 1/2/08: An earlier version of this story incorrectly reported that appraisals are always needed when selling gold bullion. They are needed only in certain cases.
Investing in gold is not a one-size-fits-all proposition. Indeed, investors can choose from several different options. Here is a guide.
Bullion. The most straightforward option is to simply buy gold bullion—in the form of bars or coins—from a broker. This approach, however, presents practical hurdles.
First, bullion holders need to store their loot in an appropriately fortified safe and have the investment insured. Furthermore, when it's time to sell, investors may need to hire an appraiser to calculate its value in certain cases. Finally, the IRS treats gold bullion as a collectible. As such, realized profits are taxed at rates as high as 28 percent, well above the 15 percent capital-gains rate that applies to stocks and mutual funds. This eats away at the total return and makes buying gold bullion a significantly less attractive investment. "It doesn't make any sense," says Michael Metz, the chief investment strategist at Oppenheimer.
ETFs. For investors looking to get direct exposure to gold minus the headaches of owning the hard asset itself, exchange-traded funds are a great alternative. Each share of streetTracks Gold Shares represents approximately one tenth of an ounce of gold. In exchange for insuring and storing the gold in an HSBC Bank vault, the fund takes a management fee of 0.4 percent of the holdings' daily net asset value. A second ETF, iShares COMEX Gold Trust, offers a similar arrangement. Shares of both ETFs, which can be traded as easily as stocks, are up some 25 percent this year.
But gold ETFs do have drawbacks. The IRS treats gold ETFs the same as bullion itself, so if an ETF is held for more than a year, realized gains are also taxed at rates up to 28 percent.
Stocks. Shares of mining company stocks provide another way for investors to get into the gold market. While the industry faces stiff headwinds from the rising costs of production—everything from higher energy prices to more expensive chemicals has hit the bottom line—the increased price of gold has been able to sustain profitability so far. The Standard & Poor's 500 gold mining index, which tracks only one company, Newmont Mining, is up roughly 10 percent this year. Meanwhile, the S&P diversified metals and mining index is up about 77 percent over the same time period. Unlike bullion or gold ETFs, gains on the sale of gold-mining shares (and mutual funds made up of those shares) are taxed the same as other equities.
One leading company in the sector is Barrick Gold, which has a market capitalization of about $35 billion and is based in Toronto. Although its most recent quarterly income slipped 15 percent, to $345 million, from the same period last year, its efforts on the cost side should help it grow future profits. Barrick's production costs have increased 31 percent from last year, well below the industry's average increase of 41 percent, according to Barry Allan, an analyst at Research Capital. The stock is up about 32 percent so far this year.
An attractive smaller option is Yamana Gold, a Canadian-based company that operates copper and gold mines in South America and the United States. With a market capitalization of about $4.6 billion, Yamana has been able to keep overhead costs low while bringing new projects online. "They've got a pretty attractive pipeline of projects," says Ron Coll, an analyst at Jennings Capital. "That should insure growth, not just this year but over the next five to six years." Yamana's stock is roughly flat for the year.
The key risk to investing in mining companies is the volatility of the price of gold. Although analysts expect the trend to remain favorable for the next couple of years, a precipitous fall in the price of gold would put these stocks in the house of pain.
Mutual funds. A precious-metal mutual fund can help investors dilute the risk of investing in the mining sector, but not all funds take the same approach. American Century Global Gold invests in companies that primarily mine gold—such as Barrick, Newmont Mining, and Goldcorp—making it a fairly straightforward gold play. So far this year, the fund is up about 13 percent.
Other funds provide exposure to a broader selection of precious metals. The Oppenheimer Gold & Special Minerals fund, for example, invests in companies that mine gold, platinum, silver, copper, and other metals. This diversity has helped boost the fund's year-to-date return to approximately 27 percent.
Both funds, however, help take some of the risk out of investing in the sector. "A fund gives you a lot more diversity," says Katherine Yang, a Morningstar analyst specializing in precious-metal funds. "These stocks are really volatile. If one mine goes under, the whole stock can get hurt."
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