MONEY MATTERS: Going for the gold - different ways to invest

By Christopher Raby

The Daily Record Newswire

With the Summer Olympics rapidly approaching, you may be wondering how you can get your hands on your own gold -- metal that is. Gold has served investors well over the past 10 years. Through March 31, the spot price of gold has appreciated 18.5 percent annualized for the trailing 10 years. During the same time period, the S&P 500 has returned a mere 4.11 percent. With gold off 12 percent from the high established in late 2011, many investors are looking at the recent gold prices as a buying opportunity.

The official Olympic Charter requires a gold medal to be made of a minimum of six grams of pure gold -- the rest silver -- putting the actual monetary value of the metal in the medal at around $825, depending on market price fluctuations. So before donning your Speedo and hitting the pool for a few laps, consider these alternative ways to invest in gold:

Bullion -- The most traditional way to invest in gold is to take physical possession of gold bullion, typically in bar or coin form. Available in a variety of weights, gold bullion is purchased directly from a mint or dealer at a slight premium to the market price. Dealer markups on small quantities are significant, so direct bullion investments should be large in size. However, problems arise with larger bullion purchases.

Storage and security costs can impact an individual investor's return and add a degree of impracticality to the investment. To counter this, internet-based exchanges such as BullionVault have been developed recently. These exchanges will purchase and store gold on an investors behalf.

Exchange-traded funds -- Purchasing a gold-linked ETF is an easy way to gain exposure to the price of gold without the problems arising from physical storage. For example, iShares offers the COMEX Gold Trust (Ticker: IAU) and SPDR offers the Gold Trust (Ticker: GLD), which both seek to correspond to the daily price movement of gold bullion.

As shares are created or redeemed in the ETF, the fund advisors purchase or sell actual gold bullion within the fund. GLD recently reported over 1,200 tons of gold held in the trust. A downside to investing in gold ETFs is the .40 to .50 percent annual management fee charged to investors. Investors also may incur a brokerage commission upon purchase or sale of the shares.

Closed-end fund -- A second exchange-traded option is a closed-end fund, the Central Fund of Canada (Ticker: CEF). The fund's primary objective is to hold gold and silver bullion. Currently, the fund owns 53 percent gold and 45.9 percent silver (1.1 percent cash). However, unlike ETFs, closed-end funds typically trade at discounts or premiums to their actual net asset value. Currently, CEF trades at a 3 percent premium to the NAV of the fund. However, if that premium dropped to a discount, investors would have the opportunity to purchase gold and silver bullion at a below-market price.

Gold as an investment requires careful consideration of the objectives of the investment. Short-term investors may be better off using exchange-traded or closed-end funds to invest in gold, whereas longer-term investors may prefer to take physical delivery of bullion. Experienced investors may use more exotic strategies involving forwards, futures and options. Whatever strategy you choose, gold can provide investors with hedging or diversification opportunities not available in other asset classes.

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Christopher Raby is an analyst/portfolio manager for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534; phone (585) 586-4680.

Published: Thu, Apr 26, 2012