How to Invest in Gold and Other Precious Metals

Investing in Precious Metals Mining Stocks

One way to invest in gold is to invest in gold mines. This is by far a more speculative way to take advantage of a gold bull market, since you’re buying shares in a company and betting on the ability of its management to deliver the goods rather than investing in the metal, per se. Although the rewards of this kind of investment can prove spectacular if your timing is right, the market value of your shares can sink appreciably if your timing is wrong.

To understand these precipitous spikes and drops in a company’s share price, it’s important to understand the dynamics of mining stocks. When you buy shares in a mining company, you take on all the burdens that particular company may have to endure: strikes, poor management, and floods, to name a few. Any of these events or conditions is a distinct possibility whether the metal which that company mines is experiencing a bull or a bear market.

Another stark reality a mining company must confront is the possibility of depletion. What if there’s less ore in the ground than the company had initially anticipated? Or what if a particular mine is near an end to its proven reserves?

Mining companies handle these kinds of challenges in several ways. One way is for them to hedge their production. They hedge by shorting (or selling off) gold on the futures market. Such hedging offsets shareholders’ losses due to any of the above conditions (e.g. flooding, depletion) if the price of the mined metal rises.

If, on the other hand, the price of the metal increases, hedging will reduce the profits the company earns. Investors should view hedging as the rough equivalent of the mining company’s purchase of an insurance policy to help protect investors against loss due to a negative event.

One way a mining company provides against depletion is through consolidation. The acquisition of smaller companies can buttress the strength of a larger company. Also, stockholders in the acquired companies will often benefit since, upon merger or consolidation, their shares will acquire a value well in excess of their market price.

Since the majority of mining companies are Canadian, fledgling mining company investors in the United States would be well advised to begin their investing through the Toronto Stock Exchange (TSX) or the TSX Venture exchange. A convenient way to follow stock prices of mining companies listed on these exchanges is through msn.com. TD Ameritrade and SCOTTRADE are two sources for trading these stocks.

Once again, it is important to remember that investing in these stocks can be a much more speculative venture than investing in the raw metal per se. This holds true for investing in silver, platinum, and palladium as well as gold.

Index Funds and ETFS

Still, other ways to trade the precious metals market is to invest through an index fund or ETF. An index fund is tied to or “indexed” to specific items. For instance, Vanguard Precious Metals and Mining (VPMX) consists of over 95% mining stocks; whereas a fund like Permanent Portfolio (PRPFX) consists of stocks, bonds, precious metals and cash. These funds operate pretty much like a mutual fund, and at the end of any trading day, reflect a net asset value.

ETFs, or exchange-traded funds, while also representing a traditional group or basket of entities, can operate more like a stock, the value of which fluctuates from minute to minute on the trading floor. A fund like Market Vectors Gold Miners ETF (NYSE: GDX) consists of the stocks of noted mines like Agnico Eagle Mines (AEM), Barrick Gold (ABX), Newmont Mining (NEM) and many others.

While the diversity of recognizable mining industry names may seem reassuring, the very nature of an ETF necessitates that an investor remain alert on at least a day-to-day basis.

how to invest in gold

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