All That Glitters: An Introductory Guide to Gold
There has been a lot of hubbub lately concerning gold in the marketplace. Even CNBC has joined in the gold talk after online groups have been discussing heavily for the last year. But, why gold? Is it just because it is so shiny? I would like to outline an extremely brief history so as to give context to why gold may be a place for you and then move on to how you can get in on the 21st century gold rush.
History – Gold is Old (School)
The fundamental difference between gold and the US dollar is that gold is a nonrenewable commodity. Unlike the US dollar, which is considered a fiat currency because it can be printed out at will – whether on a press or a computer – gold can only increase in quantity if more is discovered in the ground. Throughout history, gold has been seen as a very reliable source of money in exchange for goods for several reasons:
- It is limited and cannot be counterfeited easily
- People see it as having intrinsic value because of its natural beauty and scarcity
- It is malleable and can therefore be made into various shapes, such as coins for easy transportation
- It does not corrode or tarnish easily
The United States dollar was backed by gold up until 1971, when Nixon closed the gold window. By having a fiat currency, backed by a commodity, the dollar was able to remain very stable over decades. I believe the Consumer Price Index historical chart is all that is necessary to show why it is valuable to have a commodity backed currency. (CPI measures the price of a basket of common good consumers purchase – i.e. this graph shows how prices have exponentially increased since 1971)
United States CPI growth from 1800 to 2005
Oddities of this Commodity
If you have been thinking about investing in the market of gold, but have been unsure of how, let me first explain a few oddities with gold as compared to other standard investments (stock, bonds, ect.).
Gold is not a true investment – it will not generate any income over time such as through dividends or interest. The reason to own gold is more as a safety net when the fiat currency system is unstable. Because gold is a commodity, like we learned earlier, it holds the relatively stable value over time. It only truly changes value in relation to how strong or weak the fiat currency is at the time. A very recent example of gold’s stability is in Zimbabwe, where hyperinflation has wiped out most of the wealth for the average citizen. This video shows villagers panning for gold in an attempt to have something to exchange for bread and grain. It would take them billions of Zimbabwe currency to afford the same grain.
Also, be aware that buying gold stocks is not buying physical gold. If you would like to have your money stored in gold, I suggest buying bullion coins. The following websites can provide current spot prices for gold and have links to gold merchants (you will always pay above spot). You can also buy gold off of eBay. Click here to see average closing bids paid for gold recently so you can get a good idea of a fair price.
Note: Please be advised that if you are paying for gold online and handing over your money in advance, make sure that you are buying from a reliable source. There have been many stories of people being scammed lately with purchasing online.
All Wagons West – How to Get Into Gold Without the Dysentery
Now, if you made it through all of that and would still like to invest in the stock market through gold, you have two different choices – Exchange Traded Funds (ETF’s) and Individual stocks.
Exchange Traded Funds, known commonly as ETF’s, are a group of stocks that have a related feature – in this case gold. A gold ETF could include stocks from companies that handle gold in several ways, such as mining or purifying. ETF’s are a very popular option, and are growing in popularity every day, because they allow an investor to be more diversified by essentially owning a piece of several stocks at one. ETF’s also have the advantage of being sector focused, so you are not buying into stocks that you would not necessarily want, as you may with a mutual fund that includes stocks from various sectors.
Popular gold ETF’s include streetTRACKS Gold Shares (NYSE: GLD) and Market Vectors Gold Miners ETF (AMEX: GDX). In terms of daily volume and the amount of internet chatter I have heard, GLD is by far the most popular of gold ETF’s. In my personal opinion, this ETF is also nice because it usually trades in the range of 1/10 the value of gold spot on any particular day. This means that if you know the value of gold that day, you can just divide by 10 to get a very rough estimate of how much GLD is worth. By no means a scientific method, this is just a useful trick I picked up. Please visit the links to find out more information about each ETF and what group of stocks they contain.
The other method of getting into the gold rush of late is with individual stocks, particularly mining companies. The benefits of investing in individual stocks is that there could be a larger upside for certain companies that are more sound financially or more competitive in the market than broad-based ETF’s. Of course, it is essentially to note that a larger potential upside usually means more volatility and the potential for a larger downside. When investing in individual stocks, the fundamentals of the company are the most important aspect, so investors should pay careful attention to the companies cash on hand (especially during a financial downturn), how they compare to direct competitors and if they have any dividends that could provide some steady income.
For recommendations on specific gold stocks, I would suggest reading the following links. As mentioned, there are so many factors that go into buying individual stocks, I strongly encourage thorough research before putting any money into one company.
Gold Stock Analyst – Top 10 recommended gold stocks
Motley Fool article on 4 gold stock suggestions
Please stay tuned later this week for the reasons why the ETf’s GLD and TBT could be your safest bet in a time of complete market turmoil.
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