Alternative Investments can provide lucrative returns that are unavailable by investing in the stock or bond market. In earlier posts, we discussed alternative investments in farmland, rooftop solar system, private equity, collectibles, and real estate. In this article we discuss investing in another popular form of alternative investment – Gold.
Gold is one of the oldest and most popular forms of investment. Its a precious metal that has proven time and again to be the best hedge against inflation. However, with the reputation also comes a lot of speculation and volatility. Over the course of last couple of decades, the price of gold has risen and has corrected a bit as seen the following 20-yr chart.
Ways to Invest
1. Buying Physical Gold – Investors can choose to buy physical gold either as coins or bullions and store them. However, this comes with the issue of storage, safety and insurance costs, transaction fees associated with buying and selling etc.
2. Buying Futures – Investors can trade futures on the CME Group’s CME Clearing which settles all trades on the exchange and guarantees credit-worthiness while also providing the liquidity desired.
3. Gold Miners – Investors may also choose to invest in gold via the gold mining companies. Mining stock companies can be volatile as some have observed in the current market. The risk here is that in addition to the gold prices, a company’s operating risk is also assumed by the investors. A good way to mitigate this risk is to own a gold miner’s ETF such as Market Vectors Gold Miners ETF (GDX).
4. Exchange Traded Funds (ETFs) – Possibly the easiest way to invest is to buy and hold a gold exposure ETF such as SPDR Gold Trust (GLD) or Horizons Gold Yield ETF (HGY.TO). However, some skeptics have raised concerns on GLD’s secrecy surrounding its hoard of gold in HSBC’s London vault.
There is a lot of speculation on why the price of gold – which rose fast during the financial crisis did not see the price return to pre-crisis levels now that the economy is stable. Most commentators point to the fact that the zero interest rate policy (ZIRP), and the money-printing methods of the US Fed have permanently set the price of gold for the next leg up. The price has pulled back from its peak – which is attributed to the strong US$ causing deflationary pressure on all commodities and includes gold prices.
An interesting aspect is the pace of gold buying and repatriation seen by countries across the world. Countries such as Russia and China have been buying and hoarding massive amounts of gold for the previous few months/years and some states and countries have repatriated or intend to repatriate their gold from the United States. For e.g.: Texas wants to repatriate $1B of its gold from New York Fed; Germany and Netherlands repatriated tons of their gold back from US and France last year. There have been a lot of transfers and repatriations in the recent few months that have been a first in the industry.
Another interesting point to note is that while spot gold has corrected by ~40% from its peak, the gold mining companies have fallen ~80% and present some very attractive valuations. A majority of the gold miners have been running in losses over the last few quarters, but analysts expect the earnings to turn positive and grow by a large margin in the coming quarters and years.
Gold is one of the oldest form of investing and storing value over long periods of time. It has stood the test of time and has undergoes massive amounts of volatility and speculation. The shiny metal may be called barbaric by some, but is still regarded as an ultimate guarantee for any monetary system. There are multiple ways to invest in gold depending on the investor’s risk appetite, but with the introduction of ETFs – some very simple and easy methods have been introduced, while also providing the benefit of immediate liquidity.
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