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Taming the Barbarous Metal
Gold recently traded for an all-time high price of $1,254 per ounce, though the roughly $850 an ounce that the yellow metal briefly hit in early 1980 would be worth around $2,300 in today’s dollars. The price fell to $252 an ounce in 1999 when economic times were very good and governments were selling gold. Since then, gold mine output has declined; production costs have risen; and demand for gold for jewelry and industrial and dental uses has increased with the world’s population. With new resources ever deeper and/or smaller, new mines will probably not be brought on stream if gold sells for much less than $800 an ounce. But the recent highs in the precious metal probably results more from investment demand for gold as a port in a stormy world.
The recent recession, with its nasty effects on equity and house prices has been succeeded by fears that Europe will not be equal to the huge burden of restoring fiscal health to several of its members. Both traumas have increased investors’ interest in precious metals as stores of value. And fears of renewed inflation remain, despite low current interest rates, since the worldwide efforts to restore the economy could turn into an inflationary expansion of the money supply.
Precious metals include gold, silver, platinum, palladium, and rhodium (exceedingly rare), though most interest and volume revolves around the yellow metal. Individuals can invest directly by buying the metals in bullion form, which can be done through several dealers on the Internet, and the metals can be kept in bank safe deposit boxes. Markups over the value of the metal depend on the amount purchased: one dealer recently was charging $1269.30 for a one ounce bar of gold and $6306.50 for a five-ounce bar when the price of gold was $1243.30. Thus, the markup over the value of the gold is fairly modest, but investors will also receive less than the metal’s value when they sell. Moreover, selling bullion is cumbersome.
Investors can also buy gold, silver, and platinum coins from several countries, including the U.S., Canada, South Africa, Austria, and Australia. The most popular coins are U.S. gold buffalos and gold and silver eagles; Canadian gold and silver maple leafs; Austrian gold and silver Vienna Philharmonics; and gold krugerrands. Here the markups over metals prices are higher than for bullion. For example, the dealer cited above was charging $1330.33 for a gold U.S. buffalo, Canadian maple leaf, or South African krugerrand when the gold price was $1243.30 an ounce. And the discount from metal value when an investor sells is also higher than for bullion. Too, coin buyers must pay for safe keeping, either at a bank or a dealer/custodian; using the latter would make it easier to sell but deprive the owner of the pleasure of ever seeing his collectible.
Investors may also gain exposure to precious metals through exchange traded funds (ETFs). There are a number of ETFs that own gold and other precious metals, by the largest being SPDR Gold Shares (GLD), which currently owns over 1,200 tons of gold bullion. GLD is thus the sixth-largest gold owner in the world, ranking behind only five countries. One GLD share represents about .097% of an ounce of gold and is priced accordingly. Note that some ETFs, called exchange traded notes (ETNs), do not own bullion, but invest in precious metals through ownership of futures contracts and other derivatives. That could expose them to losses if a counterparty should fail.
A large number of mutual funds specialize in precious metals stocks. Some funds are designed to track indexes of the major precious metal stocks, including Agnico-Eagle Mines (AEM), AngloGold Ashanti (AU), Barrick (ABX), Goldcorp (GG), Newmont (NEM), and Silver Wheaton (SLW), while most are actively managed. Major investors, such as American Century - American Century Global Gold (BGEIX); Fidelity - Fidelity Select Gold (FSAGX); Franklin – Franklin Gold & Precious Metals (FKRCX); and Vanguard – Vanguard Precious Metals (FGPMX) all offer precious metals mutual funds; some mutual funds can invest in bullion as well as securities of mining companies. Values of mutual funds, of course, depend not only on the prices of metals but also on the decisions of corporate executives; some of the latter hedged gold at far less than recent prices and have decided to buy in many of those hedges at great cost, depressing earnings.
While the price of gold recently hit a record in real dollar terms, except for a few weeks in 1980, it has still increased far less than the U.S. gross domestic product or the Consumer Price Index. Growing demand for jewelry in India and elsewhere also should buoy gold prices, even if demand for gold as a safe haven abates and global financial concerns subside. Each precious metals investment vehicle has benefits and costs, including fees, trading premiums and discounts from metal values. Let’s also not forget the pleasure of seeing the shiny piece of gold in your shelf.