In November 2005, long-time contributor to Motley Fool.com, Rick Munarriz, posed a question: which was likely to be a better investment - a share of Google common stock or an ounce of gold. Back then an ounce of gold was nearing the $500 mark, while high-flying tech stock Google was just over $400 a share. Although both Google and gold closed 2008 below their all-time highs, gold was selling at almost $900 an ounce, while Google shares were below $300, as Mr. Munarriz noted in a recent followup Fool article on March 19, 2008.
What Investing in Gold Can and Can't Do
Inflation expectations influence prices of commodities, including "hard assets" like gold. When investors anticipate a prolonged period of inflation, they often set off a gold rush, hoping it will hold its value. Demand for gold also rises during periods of economic, political, social or currency-based upheaval.
However, gold doesn't pay interest or dividends; it can fluctuate widely in value; people who buy physical gold have to find somewhere safe to store it ... and so on. Although well-managed gold mining companies may be able to grow revenues over time, gold nuggets are washed around by the tides of investor sentiment.
Recent Demand for Gold Has Been High
Given the huge quantity of gold stored by banking institutions and governments the world over, the World Gold Council claims that the price of gold is more influenced by sentiment - for better and for worse - than by changes in annual production that influence other commodities. For example, according to the Gold Council, demand for gold was especially high in the second half of 2008, when turmoil in the world's financial markets mounted, stocks crashed and prices of oil and gas declined on reduced consumer demand. The Gold Council notes that in 2008, demand for gold rose by 64 percent over 2007.
Gold ETFs Offer an Affordable Way to Participate
Investors who lack the cash and safe storage facilities to buy gold bullion have other alternatives, including buying shares of mutual funds that invest in gold, or trading gold futures or options. One of the most affordable ways to invest in gold is through gold ETFs. Most of these specialized ETFs are designed to track the price of gold indexes. Trading costs for ETFs are lower than for bullion and there are no minimum investments in most cases. Gold ETFs are also listed on stock exchanges so you can buy and sell shares whenever the markets are open.
All Gold ETFs Are Not Created Equal
Most gold ETFs track an Index composed of gold mining companies, like the Philadelphia Stock Exchange Gold and Silver Index (ticker symbol XAU), an often-cited index of gold market activity. However, there are only nine gold mining companies in the index. Several of them mine copper and other metals as well as gold, and some use derivatives and other strategies to hedge against market volatility.
The largest gold ETF listed on the New York Stock Exchange is SPDR Gold Shares (ticker symbol GLD). Its objective is to reflect the performance of gold bullion, but it does so through investments in gold mining companies. Because the Index's performance is not impacted (up or down) by derivatives, GLD is relatively volatile, but it may track the price of gold more precisely than XAU or other indexes.
Some gold ETFs give investors direct exposure to bullion. ETFS Securities offers shares backed by identifiably unique gold bars held by a UK bank. The firm also offers private investors exposure to other metals, or to such unusual commodities as lean hogs.
Caveats
Market reversals: In the investment world, what goes up also goes down. For long-term investments, this factor can be beneficial, but investors need to expect setbacks.
Fine print: Since some gold ETFs include derivatives and other investments, investors should research to find out what they own. See lists of ETFs and their indexes.
Taxes: In the United States sales of a gold ETF are treated as sales of the underlying commodity and thus are taxed at the 28% capital gains rate rather than the 15% long-term capital gains rate for non-collectibles. Buying and selling gold coins generally is not taxable, since coins are considered currency.
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