Invest Like A Billionaire: Gold Rush

photo: BullionVault

It’s the latest gold rush. On September 22, gold traded at a record $1,300 an ounce and holdings in gold-backed exchange-traded products were an all-time high.

So far this year, gold is up 18%: ahead of global equities, treasuries and most industrial metals, leading billionaire financier George Soros to state, “Gold is the only actual bull market currently.”

Soros’ hedge fund–Soros Fund Management LLC–holds 5.24 million shares of the SPDR Gold Trust (GLD), a stake worth about $650 million today, as well as equity holdings in miners of gold like Kinross Gold (KGC), Great Basin Gold (GBG) and Barrick Gold (ABX).  Soros was the third-largest fund in the Gold Trust ETF at the end of the second quarter of 2010.

But should you consider investing in gold now that its price is at an all-time high? If prices continue to climb, then an investment might pay off, even though common wisdom now may tell you to stay away from the hot yellow metal.

“There are arguments both ways for the direction of the price of gold,” says Janet Yang, a mutual fund analyst at market research firm Morningstar. “But if inflation goes up, then gold will go up — and that’s a big argument for gold.”

Chris Berry, the founder of metals and mining research firm House Mountain Partners, points out that today’s gold price is nowhere near its 1980 high: $2,300 in inflation-adjusted terms. “Gold is a safe haven,” he says.

Why Gold Now?

At a recent Morningstar conference, Fred Jheon, head of product and investment strategy for ETFS Marketing, which provides marketing and investment research for London-based fund manager ETF Securities, suggested three reasons gold is set to maintain high levels in the short-term.

The first is the devaluing of the U.S. dollar and other paper currencies. “Gold is being used almost as a hard currency for investors,” Jheon said.

Second is pervading economic uncertainty. Recent data from the Federal Reserve indicates that U.S. household wealth fell by $1.5 trillion in the second quarter of 2010, with declines in the value of financial assets like stocks and mutual funds making up the bulk of the fall. Stocks alone were down $1.9 trillion to $14.9 trillion.

And even though the National Bureau of Economic Research recently declared that the Great Recession ended in June 2009, our recovery so far has been far from a success thanks to a high unemployment rate, among other factors. Add geopolitical uncertainty like the recent tiff between China and Japan, or threats from North Korea and Iran, and gold becomes an attractive alternative to owning equities or currency.

Third, albeit a short-term factor, is the September through December Indian wedding season. India is the world’s largest consumer of gold; and according to Jheon, gold jewelry, not gold investments, accounts for most gold purchases.

William Rhind, the strategic director for business development at ETF Securities, adds a fourth reason: falling mine supply. With actual production down, price is bound to go up. (Granted, both Rhind and Jheon have good reason to be bullish on gold: ETF Securities offers a line of commodities ETFs, including a gold one.)

How to Invest

Investors interested in taking the plunge have several different vehicles to choose from: which works best for you will depend on your portfolio strategy and risk tolerance.

One immediate way to own gold, for example, is to buy gold coins at a local coin shop or via a coin dealer like Monex. But be careful: with the exception of bullion coins like the U.S. American Eagle, Canadian Maple Leaf or the Krugerran, whose value and pricing tracks that of gold closely, numismatic gold coins (the Franc French Rooster, for example) have an inbuilt price premium that appeals more to collectors rather than investors.

Owning physical gold, such as gold bars, on the other hand, may be price prohibitive for many investors because of storage expenses.

That’s why the majority of investors choose to invest in gold exchange-traded funds, which allow them to own gold at the wholesale market rate, with no premium or discount to the gold price.

“The whole reason for a gold ETF is to provide investors a better way to invest in gold,” says Rhind.

ETFs are also liquid and efficient, and a good alternative for active investors who want to get in and out of the market quickly.

ETFS Physical Swiss Gold Shares (SGOL) holds its cache of gold in Switzerland; a third party specialist audits the vaults and the results are published, so investors see what they actually hold. The ETF is about a year old and has accumulated approximately $850 million in assets under management.

Gold Trust ETF, which Soros owns, is the largest, currently with over $54 billion in assets under management.

Investors with slightly more cash on hand and a longer time horizon may also consider so-called pooled accounts, which help investors put money directly in precious metals (including gold). With a minimum $5,000, for example, you could buy gold through Everbank Direct. The bank will hold the metal for you so you don’t incur any storage costs.

Mining Gold

Another way to invest in gold is to target gold miners. The world’s richest man, billionaire Carlos Slim, is digging for gold. His miner, Grupo Frisco, a division of holding company Grupo Carso SAB, plans to open more mines this year after ramping up gold production more than ninefold in 2009.

To temper the risk of owning individual company stocks, gold mutual funds allow a leveraged play on gold. They focus on companies that mine, distribute or process gold, not those that own gold. According to data from Morningstar, gold funds with an average market capitalization below $5 billion have experienced double-digit appreciation over the past year, with Dynamic Gold & Precious Metals (DWGOX) and Tocqueville Gold (TGLDX) leading the pack. The caveat: gold mutual funds are more volatile than owning gold.

So how much of your portfolio should be dedicated to gold? With a well-diversified portfolio, a 5% allocation to the yellow metal would be about right, according to Morningstar’s Yang.

As usual, be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

Tatiana Serafin, a former staff writer at Forbes, now heads Global Markets and Ideas.