Not All Gold Investments Are Equal

November 20, 2012 at 08:30


Financial advisers are going for the gold, positioning client portfolios to capitalize on what could be record highs for the precious metal in 2013.

But which gold-related investments advisers choose can make a big difference in how much of that upside clients capture.

Gold prices experienced a slight rise after the election, then trailed off a bit to leave them basically flat since the election, he said.

Neither gold-mining stocks or funds give investors direct exposure to the price of gold, and it’s unlikely that the stock of a gold-mining company will directly replicate the price of gold. Junior miners, which focus on exploration, typically rely heavily on credit and are more risky than major miners, which are typically already in the mining and production phase, said Mr. Osborne.

In contrast, major miners offer the possibility of operational leverage through gold-price appreciation, he said. While some believe their costs are relatively fixed, however, they can increase due to taxation and energy costs, Mr. Osborne said. In addition, many of these companies don’t focus exclusively on gold.

Steven Medland, a partner with TABR Capital Management LLC in Orange County, Calif., which oversees about $160 million in assets, said mutual funds that invest in gold-related stocks are currently one of the most undervalued asset classes. He has 2.5% of his clients’ portfolios in Van Eck International Investors Gold Fund (INIVX), and said he’s looking for a better valuation before boosting that exposure.

In the last 10 years, gold mutual funds have underperformed gold bullion, Mr. Medland said. “If history is any indication, this relationship will eventually revert to the mean,” which means gold stocks will outperform gold bullion and likely the overall stock market, he said.

Advisers seeking more of a pure play on the price of gold often turn to exchange-traded funds–such as the SPDR Gold Trust (GLD)–which typically hold physical gold within a trust structure. Those wishing to make tactical, short-term plays may use leveraged or inverse ETFs. But investors should be aware that their volatility is much greater and they may over time exhibit large tracking errors.

Robert Schmansky, founder of Personal Financial Advisor, a registered investment adviser in Bloomfield Hills, Mich., said he looks to gold and other real assets as a diversification against fiat currencies. He wants to hold the metal in the most liquid and inexpensive manner so he invests in ETFs and the Central GoldTrust of Canada (GTU), a closed-end trust.

Closed-end gold trusts, like the Central GoldTrust of Canada and Sprott Physical Gold Trust, alleviate the concern some investors have about whether the physical gold is actually held, said Mr. Osborne. Central GoldTrust, for example, holds at least 90% of its net assets in gold bullion in vaults at the Canadian Imperial Bank of Commerce. The holdings may not be loaned, pledged, subjected to options or otherwise encumbered. Holding the gold in Canada is important to investors concerned that gold could once again be confiscated, Mr. Osborne said.

Janet Briaud, president of Briaud Financial Advisors in College Station, Texas, has up to 10% of client portfolios invested in gold, depending on their objectives. She began purchasing gold bullion in 2003 at $350 an ounce, originally in the form of Krugerrands, the South African gold coins. She still has the coins and now also has investments in SPDR Gold Trust.

Ms. Briaud is concerned about a possible decline of the dollar, and also reasons that gold may appreciate as a result of growth in India and China. She’s expecting a near-term decline in gold prices, and said she’d consider buying at about $1,300 to $1,500 an ounce.