In a time when economies around the world all seem unsettling and debt crisis and potential currency-inflation concerns keep grabbing headlines, investors wishing to look for a safe exit may want to have certain exposure to the forever valuable gold. Gold hasn’t had any trouble to keep setting record highs, about doubling its price since the recession began, while all else, especially equity, have yet to climb back to their pre-recession levels. There are different ways that investors can use to gain gold exposure, but certain indirect gold investing may not be as effective and beneficial as direct gold holding.
Direct gold investing normally involves buying gold futures, which requires a trading account with a futures broker, something likely not so familiar to retail investors. So we often hear business media talk about getting gold exposure by investing in gold mining companies’ stocks. Indeed, everyone can conveniently invest in stocks with an online brokerage account, and such a recommendation does seem to make sense at first thought. As the gold price rises, gold mining companies will be able to sell gold at a higher price for more profits, increasing stock value for their shareholders. Upon further investigation, however, it may not be so true.
Like businesses in every sector and industry, not every gold mining company will be successful to fully take advantage of the rising gold price. There may be management issues, unsustainable production cost structures or difficulty to expand underground gold reserves, which all can plague a company’s revenue and profit, despite the presence of a high level of gold price. In fact, some gold mining companies haven’t seen their stock value increase as nearly parallel to the price increase in gold. Moreover, investors should know that gold mining companies make their sales based on previously entered contracts that often stipulate a fixed gold price at the time of the deal. Investors who are encouraged by current high level of gold price may purchase shares of a gold stock, but to expect that the stock will earn them as much as the price appreciation in gold itself, they are bound to be disappointed.
Is there a better alternative of indirect gold investment to investing in gold stocks? The answer is to invest in certain gold ETFs, or exchange traded funds. A gold ETF that directly invests in gold futures contracts passes over gold value appreciation from rising gold price to its ETF shareholders. This also eliminates the challenge faced by individual investors to invest in gold futures themselves.
Have a golden ride and may the gold futures shine!
Direct gold investing normally involves buying gold futures, which requires a trading account with a futures broker, something likely not so familiar to retail investors. So we often hear business media talk about getting gold exposure by investing in gold mining companies’ stocks. Indeed, everyone can conveniently invest in stocks with an online brokerage account, and such a recommendation does seem to make sense at first thought. As the gold price rises, gold mining companies will be able to sell gold at a higher price for more profits, increasing stock value for their shareholders. Upon further investigation, however, it may not be so true.
Like businesses in every sector and industry, not every gold mining company will be successful to fully take advantage of the rising gold price. There may be management issues, unsustainable production cost structures or difficulty to expand underground gold reserves, which all can plague a company’s revenue and profit, despite the presence of a high level of gold price. In fact, some gold mining companies haven’t seen their stock value increase as nearly parallel to the price increase in gold. Moreover, investors should know that gold mining companies make their sales based on previously entered contracts that often stipulate a fixed gold price at the time of the deal. Investors who are encouraged by current high level of gold price may purchase shares of a gold stock, but to expect that the stock will earn them as much as the price appreciation in gold itself, they are bound to be disappointed.
Is there a better alternative of indirect gold investment to investing in gold stocks? The answer is to invest in certain gold ETFs, or exchange traded funds. A gold ETF that directly invests in gold futures contracts passes over gold value appreciation from rising gold price to its ETF shareholders. This also eliminates the challenge faced by individual investors to invest in gold futures themselves.
Have a golden ride and may the gold futures shine!
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