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Best Ways to Invest in Gold Lombardi Letter 2017-09-07 02:08:31 gold bullion investing in gold best way to invest in gold gold price forecast 2017 Analysts are bullish on gold prices in 2017. For investors, there are a number of different ways to invest in gold. Commodities

Best Ways to Invest in Gold

Commodities - By John Whitefoot, BA |
Investing in Gold

Investing in Gold in 2017

How to invest in gold? There are a number of different ways for gold bugs to either add bullion to their portfolios or to further diversify their holdings. And now is the perfect time for precious metal investors to take a second look at gold.

Why? Gold is currently trading in a great range, and the underlying fundamentals are getting better. Gold is often used as a hedge against economic and political uncertainty, and there are a lot of factors that could send gold prices significantly higher in both the near and long term.


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These Factors Could Send Gold Significantly Higher in 2017

In the first half of 2016, gold prices soared on growing concerns about the health of the global economy. Gold got an added boost in late June, due to growing uncertainty around the Brexit vote. Between January and July, gold prices increased approximately 23%, to around $1,380 per ounce. By comparison, the S&P 500 was up around four percent.

In the second half of 2016, however, gold prices slipped, due to somewhat encouraging U.S. economic data. Then gold prices fell hard after Donald Trump won the U.S. presidential election. Many believed that Trump’s economic plans will help kick the U.S. economy into high gear and send stocks even higher. Gold ended the year up around 8.5%, near $1,150 per ounce.

What’s the gold price forecast for 2017? Most analysts are still bullish on bullion and expect it to climb around 13%. That would put gold at around $1,500 per ounce come December 2017. That forecast might be a little conservative though. There are many factors that could propel gold prices seriously higher in 2017, and here are four big ones.

1. Fragility of the U.S. Economy

For starters, the U.S. economy remains fragile. Unemployment is at 4.7%, but most of the jobs being created are low-paying part-time jobs. For an economy that is supposed to be in recovery, there is a real shortage of well-paying, secure jobs. Moreover, household debt levels continue to soar, and almost half (47%) of all U.S. households would have to resort to borrowing money if they were faced with an emergency expense of just $400.00.

Wall Street might be talking about stocks being at record levels and the economy being in recovery mode, but that is lost on most Americans. In fact, most Americans probably wouldn’t even notice that the economy has recovered.

2. Future of the U.S. Dollar

Gold is the ultimate investment as a hedge against the U.S. dollar. Gold has an inverse relationship with the Greenback. If the dollar falls, gold prices rise. Conversely, a strong dollar tends to mean a strong economy, and investors don’t need to hedge that.

With the U.S. dollar doing so well against virtually every other currency, many don’t see the point in taking a position in gold. This could be a mistake.

Yes, the U.S. Federal Reserve raised interest rates, which is a vote of confidence for the U.S. economy, and a blight against gold, but history is on the side of gold. The Fed has introduced five major rate increases during recoveries and, each time, it results in a lower dollar.

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3. Overvaluation of the Stock Market

Third, the stock market is seriously overvalued, and nothing gets an investor’s attention like plunging stocks. This kind of situation last occurred in early 2016: stocks tanked and gold prices soared. It’s looking more and more likely that the same kind of scenario will happen in 2017.

The Case Shiller cyclically adjusted price-to-earnings (CAPE) ratio currently stands at 28.2 times average earnings. This implies that stocks are overvalued by 76% (the 10-year average is around 16). The Case Shiller P/E ratio has only stayed higher twice, for longer: in 2000 and 2007. Crash, crash. (Source: “Online Data Robert Shiller,” Yale University, last accessed January 16, 2017.)

A stock market crash, even a correction, will send investors flocking back to gold.

4. Economic Uncertainty

Lastly, gold prices move on uncertainty. Again, gold moved considerably higher at the beginning of 2016 and in June 2016. In 2017, investors can expect gold prices to soar on the heels of any number of Black Swan events. A trade war with China, Mexico, or the European Union (EU) would make gold an attractive play, as would ongoing tensions in the Middle East, terrorist attacks, and sabre-rattling from the pudgy leader of North Korea. Any number of events could send investors running for gold in 2017.

The 5 Best Ways to Invest in Gold

There is no one-size-fits-all approach to investing in gold. But, based on your experience and familiarity with the following products, one or more of them should provide you with an easy way to invest in gold.

1. Physical Gold

When it comes to investing in gold, nothing says ownership like physical gold. Fiat currency will come and go, but gold is eternal, and gold is an excellent defensive asset that holds its value.

When you buy gold bullion, it’s going to cost a little more than what you see quoted online. What you end up paying when you buy a physical ounce of gold over the spot price is called the “premium.”

The two best ways to buy physical gold are gold coins and gold bars. Gold coins are the easiest and most popular way for investors to purchase precious metals. You can find gold coins that are 1/10 of an ounce, 1/2 ounce, 1 ounce, and larger.

The best way to buy gold coins for their gold value alone is to go through a mint. For example, you can purchase a 1-ounce American Eagle gold coin from the U.S. mint. Or, you can purchase from other trusted mints around the world, including Canadian Maple Leafs, Australian Gold Nuggets, and South African Krugerrands.

If you have more money to spend and don’t want to deal with rolls and rolls of gold coins, you could opt for gold bars. Gold bars almost always have a smaller premium over the spot price of gold.

You can buy gold bars in several weights. While you can get smaller gold bars that weigh less than an ounce, the most popular weights for gold bars are 1 ounce, 10 ounce, 500 gram, 1 kilo, 5 kilo, and 400 ounce.

2. Gold Exchange Traded Funds

Exchange Traded Funds (ETFs) are an excellent way to invest in gold.  ETFs trade on the stock market like an ordinary stock. But an ETF, instead of following one gold stock, is made up of a number of gold stocks. It’s the best way to get access to a wide variety of stocks that you may not otherwise be able to afford as individual stocks.

No matter what aspect of gold investing you’re interested in, chances are good that there’s an ETF that tracks it: physical gold, mining companies, gold bull, gold bear, etc.

Three of the biggest physical gold-backed ETFs include: SPDR Gold Trust (ETF) (NYSEARCA:GLD), which is the largest ETF backed by physical gold, with total gold in trust of $30.91 billion; iShares Gold Trust (ETF) (NYSEARCA:IAU), with net asset of $7.58 billion; and ETFS Gold Trust (NYSEARCA:SGOL), with assets under management of $960.0 million.

3. Gold Mining Stocks

Another great way to invest in gold is with gold mining stocks. Admittedly, you don’t actually own gold with a gold mining stock, like you would with investing in physical gold, but this option provides investors with a great growth opportunity that can outpace physical gold prices. Case in point: in 2016, gold prices advanced 8.4%, whereas the Market Vectors Gold Miners ETF (NYSEARCA:GDX) ended the year up 48.5%.

Why is that? If it costs a company $700.00 to mine an ounce of gold, and gold is at $1,000 per ounce, the profit is $300.00. If gold rises to $1,200, the profit is $500.00. That’s a 66% increase in profits off a 20% rise in gold prices.

Junior gold mining stocks are more speculative than their larger peers, but they also offer greater profit potential. If your tolerance for risk is broad, you may want to do your due diligence on B2Gold Corp. (TSE:BTO), Pretium Resources Inc (NYSE:PVG), IAMGOLD Corp (NYSE:IAG), Alamos Gold Inc (NYSE:AGI), and Endeavour Mining Corp (TSE:EDV).

Those who are more risk-averse might want to start their research by looking at some of the most popular senior gold mining stocks: Goldcorp Inc. (NYSE:GG), Yamana Gold Inc. (NYSE:AUY), Agnico Eagle Mines Ltd (NYSE:AEM), Barrick Gold Corporation (NYSE:ABX), and Newmont Mining Corp (NYSE:NEM).

4. Gold Mutual Funds

If you want exposure to gold but like the idea of investing in physical gold, gold mutual funds might be an alternative worth considering. Gold mutual funds hold a portfolio of well-known gold mining stocks with a profitable track record.

Gold mutual funds may sound similar to a gold ETF, but there are some big differences. Most mutual funds are actively managed; someone buys and sells stocks with the goal of getting investors the best possible return. An ETF is passively managed, meaning the weighting of the securities does not change very often.

Mutual funds are also not listed on the stock exchange. They are bought and sold through brokerage firms or mutual fund companies. ETFs, on the other hand, are purchased and sold like a stock. And the price fluctuates during the day.

Gold mutual funds and gold ETFs also differ with regards to investment costs. Mutual funds charge an annual management fee, which can be quite steep. The management fees for an ETF can be quite low, although you will also pay a trading fee when you buy and sell your ETF.

5. Gold Options and Futures

If gold mutual funds are for more conservative, risk-adverse investors, then gold options and futures are for more sophisticated, experienced investors. Options allow investors to speculate on the future price movement of gold, either up or down.

When you buy a “call,” you are long on gold, and believe that the price will rise. When you buy a “put,” you are short on gold, and you believe that the price of gold will fall.

Gold options are not designed for inexperienced investors. It takes a lot of discipline and a comprehensive understanding of the markets to trade options. But, if you are aware of the risks associated with investing in options, they can provide a big hedge for profits.

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