The One Gold Investment to Make Now

07/22/2011 8:30 am EST

Focus: ETFS

Richard Young

Editor, Young's Intelligence Report

There are plenty of ways to get into the Midas Metal, but one way beats all the rest, writes Richard Young of the Intelligence Report.

I have followed the gold market since the late 1960s. At one point, I even owned a small private gold company.

To invest in gold back then, it was either gold shares or gold coins for most. Today, there are many more options for investors looking to add a gold component. There are gold futures, gold shares, bullion coins, numismatics, ETFs that invest in gold futures, and ETFs that invest in gold bars.

How should you buy gold? Let me first tell you how not to buy gold…

The first gold investment you can cross off of your list is futures. Futures are a hassle, and they don’t achieve what you should be looking for in a gold investment, which is ownership of physical gold. Futures are paper contracts.

And you can’t just buy a gold futures contract and forget about it. There is margin to worry about, and that little issue of contract expiration.

If you want to maintain a futures position in gold, you have to roll your futures contracts (sell expiring contracts and buy longer-dated contracts) before expiration. No thank you.

My position on gold futures stands for gold-futures-based ETFs as well. Though the ETF structure simplifies the management of a gold-futures position, you are still just investing in paper contracts.

You can also knock gold stocks off your list. I invested in South African gold miners back in the ’70s when they pumped out big dividends, but the current crop of gold miners pay scant dividends. Without a steady stream of dividends, you are speculating on a hole in the ground that could collapse.

The gold-stock bulls argue that gold miners are a better buy because they are leveraged to the price of gold.

Yup, as long as your gold stock hasn’t hedged production for decades into the future. And as long as your gold company can profitably extract the gold it claims it has. And as long as the country where your gold miner operates doesn’t decide to nationalize their gold mines, or jack up their royalty rates, as some nations have recently done.

But yes…in theory, gold stocks should offer greater leverage to the price of gold. In practice, it doesn’t always turn out that way.

Over the last five years, gold stocks have lagged gold prices by 95 percentage points. Physical gold is your better bet.

Your choices for physical gold are coins and gold-backed ETFs. I own both. Most investors will want to stick to ETFs that own physical gold.

If you go the coin route, stick with bullion coins. Stay away from numismatics. Though I advised the rare 1982 and 1984 Gold Pandas years ago, I’m not recommending these with new money. If you own any Pandas, you should of course continue to hold them, as I do.

Gold coins, especially numismatics, are not to be traded. The dealer markups on numismatics are stiff, and liquidity is poor.

Even on bullion coins you’ll pay markups of 3% to 5%. That equates to as much as 10% on a round-trip trade. You should buy coins with the intention of passing them on to future generations.

For bullion, I like the American Buffalos, South African Krugerrands, Canadian Maple Leafs, and American Eagles. I presume if you are buying gold coins, you have an interest in collecting them. If you don’t, there are better ways to buy gold.

And if you are thinking that in some sort of a doomsday scenario, your gold coins will serve as a form of currency, you are likely to be disappointed. If you are looking for a doomsday currency, stock up on bullets and Bud.

The majority of my gold holdings are in my strongly advised SDPR Gold Shares ETF (GLD). GLD offers convenience, liquidity, and security all in a fund that you can hold in your Vanguard or Fidelity brokerage account.

GLD’s gold is held in London vaults. The custodian is HSBC Bank. The gold can be audited twice per year by the trustee, and the trust’s independent auditors may audit the gold as part of their financial statement audit. Every bar held in the trust is posted on the ETF’s Web site daily.

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